RSS Feed MenuA major storyline of the 2008 election was that it was the Great Depression all over again: George W. Bush was the hapless Herbert Hoover and Barack Obama was the FDR figure, coming in on a wave of popular resentment to clean things up. The stock market crash made the parallels pretty direct. One could continue the analogy, with Bill Clinton playing the Calvin Coolidge role, mindlessly stoking the paper economy and complicit in the rise of the stock market as a national sport. Public fascination with various richies seemed very 1920s-ish, and we had lots of candidates for the “Andrew Mellon” of the 2000s. Obama’s decisive victory echoed Roosevelt’s in 1932.
But history doesn’t really repeat itself–or if it does, it’s not always quite the repetition that was expected. With his latest plan for a spending freeze (on the 17% of the federal budget that is not committed to the military, veterans, homeland security and international affairs, Social Security, or Medicare), Obama is being labeled by many liberals as the second coming of Herbert Hoover — another well-meaning technocrat who can’t put together a political coalition to do anything to stop the slide. Conservatives, too, may have switched from thinking of Obama as a scary realigning Roosevelt to viewing him as a Hoover from their own perspective — as a well-meaning fellow who took a stock market crash and made it worse through a series of ill-timed government interventions.
I can see the future debates already: was Obama a Hoover who dithered while the economy burned, too little and too late (the Krugman version) or a Hoover who hindered the ability of the economy to recover on his own by pushing every button he could find on the national console (the Chicago-school version)?
In either storyline, it’s 1930, not 1932: rather than being three years into a depression, we’re still just getting started and we’re still in the Hoover-era position of seeing things fall apart but not quite being ready to take the next step.
Anyway, I’m not claiming to offer any serious political or economic analysis here, just pointing out that the 1932 election was a full three years after the 1929 stock market crash, so Obama’s stepping into the story at a different point than when Roosevelt stepped into his.
Or maybe we’re still on track for Obama to “do a Reagan,’ ride out the recession in the off-year election and sit tight as the economy returns in years 3 and 4.
WillyP // Jan 27, 2010 at 6:08 pm
sinz,
Simple exercise in logic:
Total purchasing power of money = 100x. 100x = 100% It is divided among 3 parties:
Party
A) 33x (33%)
B) 25x (25%)
C) 42x (42%)
Now, the government print money, an additional 100x. It distributes it in such a way that the allotment looks like this:
Party
A) 100x (50%)
B) 35x (17.5%)
C) 65% (32.5%)
In this example, nobody lost any X – more was printed (this paraphrases you). Yet 2 parties lost purchasing power, and one gained. Hence, printing money leads to the redistribution of wealth. To offset this necessary effect, you’d need to distribute the same amount to every person – which would have no effect except, distorting production.
It’s a simple example and not fully fleshed out. If you’re still interested, read some Bastiat:
F. Your reasoning is apparently sound, I grant you, and that is why the allusion it conceals is so common. However, let us examine it a little. Ten persons were at play. For greater ease, they had adopted the plan of each taking ten counters, and against these they each placed a hundred dollars under a candlestick, so that each counter corresponded to ten dollars. After the game the winnings were adjusted, and the players drew from the candlestick as many ten dollars as would represent the number of counters. Seeing this, one of them, a great arithmetician perhaps, but an indifferent reasoner, said: “Gentlemen, experience invariably teaches me that, at the end of the game, I find myself a gainer in proportion to the number of my counters. Have you not observed the same with regard to yourselves? Thus, what is true of me must be true of each of you, and what is true of each must be true of all. We should, therefore, all of us gain more, at the end of the game, if we all had more counters. Now, nothing can be easier; we have only to distribute twice the number of counters.´´ This was done; but when the game was finished, and they came to adjust the winnings, it was found that the one thousand under the candlestick had not been miraculously multiplied, according to the general expectation. They had to be divided accordingly, and the only result obtained (chimerical enough) was this; — every one had, it is true, his double number of counters, but every counter, instead of corresponding to ten dollars, only represented five. Thus it was clearly shown that what is true of each is not always true of all.
B. I see; you are supposing a general increase of counters, without a corresponding increase of the sum placed under the candlestick.
F. And you are supposing a general increase of dollars, without a corresponding increase of things, the exchange of which is facilitated by these dollars.
B. Do you compare the dollars to counters?
F. In any other point of view, certainly not; but in the case you place before me, and which I have to argue against, I do. Remark one thing. In order that there be a general increase of dollars in a country, this country must have mines, or its commerce must be such as to give useful things in exchange for money. Apart from these two circumstances, a universal increase is impossible, the dollars only changing hands; and in this case, although it may be very true that each one, taken individually, is richer in proportion to the number of dollars that he has, we cannot draw the inference which you drew just now, because a dollar more in one purse implies necessarily a dollar less in some other. It is the same as with your comparison of the middle height. If each of us grew only at the expense of others, it would be very true of each, taken individually, that he would be a taller man if he had the chance, but this would never be true of the whole taken collectively.
Kanzeon // Jan 27, 2010 at 7:04 pm
WillyP
“No, government spending cannot stimulate anything, because government necessarily only has what it takes away.”
If you’re suggesting that fiscal policy has minimal effect on economic growth, I agree that there are those who share that view, but not on such simplistic analysis. But I would mention a couple of things:
First, why do you think that tax cuts will work? Tax cuts also run deficits. Deficits reduce available capital.
Second, the question is whether fiscal policy can have short run effects on economic growth. The question isn’t whether you can fill a bucket with its own water. Nothing to do with buckets. Buckets aren’t economies: I might as well say it’s impossible for a recession to occur because water doesn’t just disappear from a bucket all by itself.
Third:
” I am, here, only addressing your claim that a government can spend its citizens out of depression.”
But that is a rude mischaracterization of the claim. The question is whether government spending can spur the economy: the private economy, once spurred, repairs itself more quickly than it might otherwise. This is an important distinction, because Keynesians aren’t socialists. Got that? If someone is arguing that the free market needs an assist in times of trouble, it is profoundly dishonest to pretend they believe in planned economies.
To me, the countervailing simple question is: how can the economy grow at all? No one can do anything but take money from one pot and put in it another. In other words, I can get a $10 million line of credit and hire a crew to build a road. My access to credit crowds out other borrowers. Yet I think most would agree that building a road spurs economic growth and employment. But if the government borrows $10 million to build a road, suddenly it’s just taking money from one pot and putting it into another, and it can have no net effect. Now, there are reasons to believe that the growth caused by government programs is offset by the transaction costs and inefficiencies of government involvement – but this isn’t a question of only spending what it takes away, per se.
In other words, I think that very few ascribe to the pure Treasury view: that government spending crowds out an equal amount of private investment. Instead, I think there are some that believe that the effect of fiscal policy on unemployment and growth is minimal, not nonexistent.
“oh yes, it’s complex. that’s the excuse. always so complex”
I haven’t made any excuses. But, honestly, you can’t think about these things very clearly in terms of buckets or ten people with $100 each, or even the example I give of building a road. Macroeconomics, in my experience, involves a lot of graphs and formulas, and testing of theories, not parables. There are a number of answers to the Treasury view – the one I best remember has to do with the velocity of money. I can flesh that out a bit more if I have time. Except, of course, that I don’t know that the velocity of money is the “right” answer. I don’t have the answer. That’s why I defer to experts. For some reason, you think you have all the answers, and any opinion that deviates from yours in any measure is ignorant. Such certainty is, in my book, usually incompatible with deep understanding.
Kanzeon // Jan 27, 2010 at 8:01 pm
WillP:
“Now, the government print money, an additional 100x. It distributes it in such a way that the allotment looks like this”
Except this isn’t how monetary supply is increased. Instead, the Fed controls bank reserves through loans and discount rates, and the reserves affect the amount of cash in the economy. There are economic winners and losers when when money supply is increased or decreased, but the markets largely anticipate them, so the redistributive effect is hardly dramatic.
I could be wrong about that, certainly. Can you point to any statistical evidence that increasing the money supply has a significant redistrubutive effect?
WillyP // Jan 27, 2010 at 8:03 pm
kanz,
Yes, I know you defer to experts, and this is why you remain duped.
I do have a relatively deep understanding economics, but I typically do not espouse very detailed and nuanced opinions because, quite frankly, I don’t have the time to carefully qualify everything I say. However, since you apparently think I merely ramble populist rants, perhaps I could endure expounding one detailed refutation, specifically speaking to counter-cyclical fiscal policy.
First, let me build a little background:
Economics is not parables, of course. But parables are powerful because they are (most of the time) logically irrefutable; they hold true regardless of time or place, regardless of particular scenario. So when I posit that government can only spend what it first takes, it is plainly true.
Government has 1 or 2 products, so to speak: laws and force. The force is used to implement the laws – or you may say that government decides on edicts, and then uses force realize compliance. When government says: we are spending $1 billion to build a road!, government must first confiscate the money, or borrow it – in which case it would need to confiscate later to pay back its creditors, or print it, which, as I demonstrated above, is another form of redistribution, or tax.
The resources used to construct this road – the people, the machines, the raw materials – are all then tied up in the production of a road. Now, if one thing characterizes the science of economics, it is the analysis of what Bastiat referred to as “the unseen” [What is Seen and What is Not Seen]. What was sacrificed in order to build that road? What could those people have been doing, alternatively? The machines could have been utilized elsewhere, perhaps for a private industry project. The raw materials have limitless alternative applications.
In a market economy, the pricing system guides resources into their most valuable utilization. The existence of a large profit in accounting is tantamount to saying that the company provided a very valuable benefit to society, because the purchaser was willing to offer up a relatively large amount of their purchasing power for what they received. Remember, every action implies the decision NOT to act on something else simultaneously. Hence, economists assume that rational, profit seeking people will choose what they believe to be the best use of their time and resources, on whatever value scale they hold individually (subjectively).
It’s not that fiscal policy doesn’t produce tangible results. It does – you can see them everywhere, like the never completed 2nd Avenue subway in Manhattan (ok, a cheap shot, but not unique!). It’s that fiscal policy implies the substitution of a bureaucrat’s preference for a large number of tax payers. I hope that you now see why a market economy works: because it is DEcentralized. If you doubt the truth of my statement, why don’t you imagine someone who knows nothing about you making decision for you, for just one day. Now imagine when this is going on on a societal basis, to the tune of 30% of economic decision. It results in massive dislocation, which is another way of saying we experience a depression.
But let’s go to the next level. You ask – how can the economy grow at all. And this isn’t really that difficult to answer. “The economy” grows by PRODUCTION. There is no mystery. And if you want people to produce more, you give them incentives. Hence, you reduce their tax burden, and you reduce the complications of law. It’s not that government is needed to kick-start production; if people had the resources that government had seized, they’d find the most appropriate use by their own (subjective) standard, rather than be forced to accept the results of a politically motivated (rather than economic) decision.
Have you noticed a lack of mathematics in my reasoning? This should be apparent, since you’re accustomed to “experts.” Well, the plain truth is that mathematics are fine for calculations of financial speculation and manipulation of currency figures, but they are misleading when it comes to economic analysis. The underlying problem with macroeconomics as it is taught today is that it utilizes equations, which is misleading. And I’ll prove this to you now: When you spend $3 on a loaf of bread, what do you value more, the money or the bread? The bread, obviously. And which does the baker value more? The money, obviously. There is a gain realized from trade, yet accounting only registers $3 = $3, which alone lacks all meaning. So you see, the gains from trade cannot be captured by statistics like you assume. National income accounting is simply mathematical tautology – it provides no insight to the fundamental questions posed by economics.
Furthermore, you cannot run hypothesis testing in economics as you can with the physical sciences, because you can never create the same conditions. There are billions of factors that go into interpersonal exchange everyday in this country alone, involving locale, subjective value, speculation about the future, opportunity costs, etc etc etc. When you attempt to limit your variables, as a scientist in other fields does, you cannot – you hit a limiting problem of epistemology, and lack of control.
The velocity of money refers to how often money is exchanged. Here’s a good article on it:
http://mises.org/story/2916
Obviously there is voluminous literature on the topic, but I’ve tried to (rather quickly) to expose some fallacious reasoning.
Kanzeon // Jan 27, 2010 at 8:31 pm
WillyP:
Briefly:
“But parables are powerful because they are (most of the time) logically irrefutable; they hold true regardless of time or place, regardless of particular scenario.”
This is precisely wrong, exactly because there are too many variables. Tales of isolated transactions do not explain how the elements in play intersect. Example: arguments about the minimum wage. Sowell will say that increasing the price of labor decreases demand, hence jobs are lost. But empirical studies show that, at least when there are modest increases in a fairly low minimum wage, there is no net loss in employment, perhaps because of increased purchasing power for the employee.
“So when I posit that government can only spend what it first takes, it is plainly true.”
Except it’s not true, in any way that differs from certain private enterprises. First, as you acknowledge, the government can borrow money before taxing. Second, no one can spend, in this regard, what he or she doesn’t take or borrow. This isn’t just true of the government. The only question with the government is whether fair value is given to maximize economic efficiency. If all you are saying is that government is less efficient than private enterprise, then I would probably agree. But government has other benefits, such as avoiding the freeloader effect for shared services, mobilizing capital for infrastructure, and providing for the losers in the free market system. And taxation isn’t some violent activity like genocide. The economy adjusts for taxation, and again the only question is efficiency.
“you reduce their tax burden, and you reduce the complications of law.”
This doesn’t answer the other question: if deficits crowd out investment, then cutting taxes in a recession is a loser, just as deficit spending is a loser.
“Well, the plain truth is that mathematics are fine for calculations of financial speculation and manipulation of currency figures, but they are misleading when it comes to economic analysis.”
Then you have an unscientific approach to the discipline.
WillyP // Jan 27, 2010 at 11:14 pm
Excuse me. I just puked from that farce of a SOTU.
Actually, your approach is unscientific, strictly speaking, because you are employing erroneous methodology for all the reasons I’ve listed above. You know, Rothbard was a straight-A student in statistics at Columbia University (it was his major). Don’t you think he might know a thing or two about statistical analysis?
Kanzeon // Jan 27, 2010 at 11:51 pm
WillyP:
I guess you got me. Rothbard was a great statistician, a head and shoulders above anyone in economics, not a just highly intelligent promulgator of quack utopian schemes. His statistical background is somehow one of his merits, even though statistical analysis is for elitist, pseudo-intellectual suckers like myself who can’t master easy logic. It’s more scientific to discuss a circle of men placing bills under a candlestick than to develop economic formulae and statistical analysis. Keynes can be conclusively refuted by a couple paragraphs of Bastiat, and all the Nobel prize winners who didn’t see that in ten minutes are rank idiots.
Guess I’m boxed in. Pwnd. Defeated. Checkmated. Hoisted on my own petard. Outgunned, outmaneuvered, out-stratergized, publically humiliated. Good night.
WillyP // Jan 28, 2010 at 9:45 am
alright, if you want to be silly, i can be silly…
First of all, it bears repeating that Rothbard was merely one economist in this tradition. You can defame him for ridiculing the statistical/mathematical approach, but you’d be likewise be defaming the approach taken by Cantillon, Smith, Hume, Ricardo, Jefferson, James and J.S. Mill, Menger, Mises, Erhard, Hayek, and Reisman; not to mention countless older Scholastics, including Aquinas, and the entire School of Salamanca. So go ahead and ridicule, but in doing so, at least be aware that you’re repudiating the development of about 400 years of liberal tradition.
If you want to actually understand what you’re conceiving, you have to appreciate that it was Walrus who came up with the framework for modern macroeconomic analysis. He developed the model of equilibrium that serves as the prototypical model taught today. Keynes built on it, as did Shumpeter before him. Econometrics – that is, “measuring” economy by collecting statistics – is a very old discipline. The motto of the Econometric Society is telling: science is measurement. Well, measurement is useful, sure, but we’re not dealing with mechanics, as in physics, and science progresses more accurately by our understanding of cause and effect. There can be no application of measurement when you don’t understand the underlying causality. This, I’d think, is something you would have learned in statistics, which you are apparently so fond of: causation vs. correlation.
You are the genius sitting here defending the Federal Reserve system, which engineered the Great Depression and our current crisis, which as late as 2006 said everything was just peachy (deferring to statistical analysis), and that in response to a crisis caused by rampant consumption and misguided investment, has drastically reduced the incentives to save by lowering interest rates, which will further guide resources into unprofitable businesses. We are NOT experiencing recovery, despite the legions of Ph.D.’s at the Fed, and the impressive algorithmic models they’ve built. Improving one’s material lot does not require mathematical fetishism, but more production and more open trade.
You defend Keynes as a great innovator, though you cannot seem to elaborate on his ideas except that they “stimulate” the economy. You sound like an uneducated, unsophisticated fool. You tell me Hoover did not do enough, when the historical record points to him as the first interventionist president in history. Incredulously, you tell me I don’t understand the topic, and yet you sound like a college freshman who just finished up Intro to Macro, but who has either not taken courses in finance or accounting, or who has not bothered to try to integrate economics into his understanding of either. And you don’t even seem aware that microeconomic principles, which are taught as universally valid through a (albeit weak) introduction to praxeology, are completely controverted once the professor puts on his macro hat.
You’re a statist to the core, and the sad thing you lack the historical circumspection to recognize this fact.
GOProud // Jan 28, 2010 at 11:07 am
No offense intended guys, but you’re sounding more like a midnight chapter meeting of the College Libertarians –in a really, really small college.
We were talking about Obama as the next Hoover. Maybe you guys should get a hotel room, some diet Coke and chips and take this discussion off-thread? Just a suggestion.
Kanzeon // Jan 28, 2010 at 11:22 am
GOProud :
Whacha got against small colleges?
WillyP // Jan 28, 2010 at 11:43 am
GOProud, that’s certainly true. Through the nerdiness, I’m trying to preserve the nation’s stability. But I agree…
It’s much better to talk in popular slogans, get the necessary votes, and forget about recruiting the kanzeons of the world.+
WillyP // Jan 28, 2010 at 11:45 am
Though I should add, you can only call someone a new Hoover who has massively intervened to stop a market correction. Obama is the new Hoover in this regard, and will soon be the new FDR.
Kanzeon // Jan 28, 2010 at 12:48 pm
GOProud:
But since you brought up the topic, the post says:
“was Obama a Hoover who dithered while the economy burned, too little and too late (the Krugman version) or a Hoover who hindered the ability of the economy to recover on his own by pushing every button he could find on the national console (the Chicago-school version)?”
This indicates that Hoover is an all purpose punching bag: either he was too interventionist or he dithered. So, if Obama fails in dealing with this current crisis that has faint echoes of the Great Depression, both sides are probably going to make the Hoover comparison. But it’s a step up, for Obama, from being called the next incarnation of Hitler. Maybe the partisan ice is thawing.