October 08, 2008
Back to the Great Depression Debates
Or...Salt Water/Fresh Water Redux!
Figure 1: Log GDP (1996$), 1900-1967 (blue line), and linear trend (red line). Source: S.B. Carter, S.S. Gartner, M.R. Haines, A.L. Olmstead, R. Sutch, G. Wright, Historical Statistics of the United States, Millenial Edition (CUP, 2006).
From Greg Mankiw's blog, an argument against the New Deal policies.
Lessons from the Past
There are many historical precedents of bad policies following crises. The worst case was after the stock-market crash in October 1929, which produced a truly perfect storm of bad policies. Tax rates rose, tariffs rose (reflecting special interest groups attempting to insulate domestic producers from foreign competition), and both Presidents Herbert Hoover and Franklin Roosevelt strongly promoted industry-labor cartels that were designed to stifle domestic competition.
In the absence of these policies, the Great Depression would almost certainly have been like every other U.S. recession -- short-lived and relatively mild. Normal recovery didn't begin until the most onerous of these policies were reversed, a process that didn't begin until the end of the 1930s when antitrust activity was resumed, and during World War II when the National War Labor Board reduced union bargaining power by limiting negotiated wage increases to cost-of-living adjustments only....
I am particularly concerned about bad policies because significantly higher taxes have been proposed by Barack Obama. His plan would raise the marginal tax rate on the most productive workers more than 10 percentage points -- an increase that would bring us near Western European levels. His plan would also raise capital income taxes, taxing capital gains and dividends at 20%, compared to a 15% rate under Sen. John McCain's plan. A five percentage-point difference might strike you as small, but it is not. I have calculated that a five percentage-point difference in overall capital income taxation over the long haul is equal to a difference in the nation's capital stock of about 18%. This means a 6% difference in GDP and a 6% difference in the average wage rate. This means that real GDP and the average wage would fall, gradually but persistently declining about 6% after 25 years. That's not quite a Great Depression, but a significant step towards one.
Here's a link to the Cole-Ohanian paper (ungated working paper version) which is the basis for the view that the New Deal policies exacerbated the decline in output during the Great Depression.
While the types of macro models that Ohanian uses to analyze the New Deal policies are not the ones I work with, I have always wondered how robust the results are. Here's one paper which suggests the results are not robust. From the abstract to Gauti Eggertson, "Was the New Deal Contractionary?"
Can government policies that increase the monopoly power of firms and the militancy of unions increase output? This paper studies this question in a dynamic general equilibrium model with nominal frictions and shows that these policies are expansionary when certain "emergency" conditions apply. These emergency conditions -- zero interest rates and deflation -- were satisfied during the Great Depression in the United States. Therefore, the New Deal, which facilitated monopolies and union militancy, was expansionary, according to the model. This conclusion is contrary to the one reached by a large previous literature, e.g. Cole and Ohanian (2004), that argues that the New Deal was contractionary. The main reason for this divergence is that the current model incorporates nominal frictions so that inflation expectations play a central role in the analysis. The New Deal has a strong effect on inflation expectations in the model, changing excessive deflation to modest inflation, thereby lowering real interest rates and stimulating spending.
So, a lot hinges upon one's feelings regarding the stickiness of prices. As a person who taught graduate students the Mankiw menu cost model from Mankiw and Romer's, New Keynesian Economics (MIT Press, 1991), I'm on the side of nominal rigidities, and hence the model that re-establishes the conventional wisdom regarding the New Deal policies. But, if you feel that prices are fully flexible (i.e., somehow you've missed the fact that the prices at your local restaurant are not moving around day by day), then you should side with Cole and Ohanian's perspective.
Regarding Ohanian's calculation of the tax impact, it's not clear from the text exactly what assumptions are made to obtain these effects. We do know that assumptions regarding whether deficits are run are not when taxes are cut yield drastically different results for output -- see this point illustrated in sharp relief in the context of the 2006 Treasury study .
By the way, the deterministic trend line (red) in Figure 1 has no meaning aside from highlighting the movement down in GDP during the Great Depression. For a statistical analysis of the time series properties of real GNP over a long span, see Cheung and Chinn, "Further investigation of the uncertain unit root in GNP," Journal of Business and Economic Statistics, 1997 (NBER Technical WP version) (We find that over a long time span, GDP does appear to be trend stationary.) .
Posted by Menzie Chinn at October 8, 2008 10:18 PMdigg this | reddit
Economic crises will unavoidably happen from time to time. What I find odd is how few people are prepared to survive during an economic downturn. It looks as if everyone is gambling on a growing economy, without having any kind of backup plan in case their expectations don't reflect the reality. Perhaps everyone should stop and ask themselves: have I overinvested in a growing economy? should I focus more on savings and stability?
Posted by: NSK Nikolaos S. Karastathis at October 8, 2008 10:36 PM
Can you draw parallels between the current Treasury and Federal Reserve actions and those of the BOJ during the 1990's?
My understanding of the Japanese situation was that the BOJ pushed rates to 0% (resulting in a liquidity trap) that froze monetary policy, while also failing to recapitalize the banking sector until the mid-1990's. The resulting effect was not a failure of liquidity, since banks had plenty of access to cash, but that of bank balance sheet health. Since the banks had operating cash, but no way to remove their bad liability from their books, there was a net contraction in credit available to the economy.
Given the array of monetary policy tools that the Fed is using now (TAF, etc.) with little effect, is the only way to resolve the current crisis to off-load the bad debts onto the public balance sheet?
As for Dr. Ohanian's concerns, neither presidential candidate has a viable solution to our current situation. Where Obama taxes, McCain seeks to "bail out" individual mortgage holders, seeking to prop up an asset class (homes) that has no long-term supply & demand justification at this price.
Posted by: Matthew Wolff at October 8, 2008 11:29 PM
Great book on the subject: The Roosevelt Myth by John T. Flynn. I think it's available online for free...
Posted by: Daniel at October 9, 2008 01:21 AM
"The most productive workers' indeed! Worse, the graph is a fine example of how these 'most productive workers' justified handing out subprime loans to anyone with a pulse.
Our GDP is headed for the basement, where it will stay since our economy doesn't have an engine!
What is truly baffling is the total failure of this economist to recognize the most basic problem, that most of the money in our society is concentrated at the top (similar to the situation we had in 1929)
If money fails to circulate throughout the economy, you end up with a revolution.
Posted by: Gegner at October 9, 2008 01:52 AM
What is fundamentally different today from 1929, is notwithstanding the depth of the financial crisis, in 1929 the world economy was paralysed by social convulsion and the world market constrained within the old pre-WWI colonial system.
So the governments of the world reacted to the crash with sanctions and economic nationalism - as the paper quoted above points out - world trade slumped by 65% between 1929-32.
The situation today could not be more different and so therefore will be the result.
Posted by: bill j at October 9, 2008 04:36 AM
What, there are people out there who weren't convinced by Milton Friedman that the GD was a monetary phenomenon? ;)
There was so much going on during the GD that we all can point to at least one thing to explain it that jibes with our own little ideological enthusiasims.
Mercantalism, unionism, cartelism, higher taxes, a declining money supply, etc. etc. etc. It's all there. None of it is good, can we at least agree on that?
Posted by: Buzzcut at October 9, 2008 05:40 AM
It is a very strange how ahistorical conservative economists like Mankiw and Ohanian are, and how willing they are to cherry pick data and create abstract models of an unknown future to make their arguments.
Obama merely wants to return tax rates the levels they were from 1993-2000, and they predict economic disaster. Funny, but I did not notice any disaster in those years (yes, there were some bad policy mistakes that laid the seed for future disasters, but all those errors arose out of the attachment of Rubin and Sommers to neo-liberal ideas and were mistakes that folks like Mankiw and Ohanian cheered).
Further, it appears that the period from 2001-2009, the period when their preferred group of "investors and most productive workers" received such a strong benefit of this tax policy, will see the lowest annual economic growth and employment growth since the 1930s. They need to explain what went wrong and they don't.
Further, they deliberately misrepresent the New Deal period, since most of the decline and policy mistakes occurred under the Republican Hoover (and of those policy mistakes those that allowed the destruction of the banking system played a far greater role then the trade nationalism, as documented by both Irving Fisher and Milton Friedman's books on the period document. Finally, the substantial decline of economic activity in the period after 1929-1933 probably accounted for most of the decline of trade.
Finally, FDR was always essentially a free trader himself, that being a long time plank in the pre-New Deal Democratic Party. He would slowly reverse the (popular) protectionist policies of his predeccessor through reciprocal trade agreements throughout his administration, culminating in the Bretton Woods agreements.
Posted by: Rick Kane at October 9, 2008 05:44 AM
Flynn was a little bit of a bomb thrower concerning Roosevelt. The Roosevelt Myth by John T. Flynn while mostly factual is not very good economically. Let me suggest Economics and the Public Welfare by Benjamin Anderson. It is an outstanding analysis of the time leading up to the Great Depression and then what happened during the Great Depression.
Posted by: DickF at October 9, 2008 06:59 AM
Gauti Eggertson, "Was the New Deal Contractionary?"
Can government policies that increase the monopoly power of firms and the militancy of unions increase output? This paper studies this question in a dynamic general equilibrium model with nominal frictions and shows that these policies are expansionary when certain "emergency" conditions apply.
I must say that this is a very amusing statement. There is little doubt that the beginnings of Stalin's reign resulted in a huge expansion of the Soviet Union. This is what pulled the architects of the New Deal to Russia. But such policies are self defeating.
Just as the current credit crisis began with bad policy that took 16 years to grow into out current mess the Great Depression began much earlier than 1929. The foolish policies of Hoover turned an economic correction into the horrible economic decline, policies that Roosevelt in large part enacted into law through Presidential directives and a compliant congress.
I am amused when people use econometric analysis to prove that the Depression only lasted until 1933. Ask you grandparents. Read books on the era. It may surprise you that reality is in direct contrast to such conclusions.
If you still question the foolishness of Rooseveltís policies just consider The Blue Eagle, burning crops in the field while there are bread lines in the big cities, paying farmers not to plant and businesses not to produce in a period when everything was in short supply. I could go on but myths are rarely countered with facts.
Posted by: Anonymous at October 9, 2008 07:17 AM
It is obvious that you are not a student of the Great Depression. I would ask of you two things. Study the literature of the time, not what has been written about the time. Second, please do not misuse Milton Friedman's Monetary History of the US. In the very beginning of the book Friedman admits that his book is biased toward monetary policy and should not be taken as more than that. If you understand Friedman his book is a masterpiece. If you attempt to use Friedman to describe the Great Depression you fall into the trap of narrow-minded tunnel vision.
Posted by: DickF at October 9, 2008 07:23 AM
1929: for a period of three years leading up to, investment trusts issue massive amounts of securities backed by little more than leverage in the belief that equity is a one-way trade. this has the effect of rapidly expanding money-like credit, fueling massive growth focused in a particular subset of the economy, particularly banking. in the subsequent collapse, this credit is utterly destroyed, banks are destabilized and a deflationary depression results.
2007: for a period of three years leading up to, securitization trusts issue massive amounts of securities backed by little more than leverage in the belief that housing is a one-way trade. this has the effect of rapidly expanding money-like credit, fueling massive growth focused in a particular subset of the economy, particularly banking. in the subsequent collapse, this credit is utterly destroyed, banks are destabilized and a deflationary depression results.
the extent of the problem becomes apparent in examining the debt-to-income series. i suspect if one had had a similar chart of equity-issuance-to-income in 1929, it would have looked similar. the subsequent collapse of income and systemic equity-to-debt swap is clearly visible in the 1930's on veneroso's chart, followed by its slow resolution.
economic orthodoxy aside, it seems to me the differences are primarily 1) the underlying asset which was levered up, and 2) the possible modes of reaction. we live in a different paradigm than did hoover, with different assumptions, and can react more readily to debase the currency. of course, we are also massive net debtors going into the crisis -- and that will play a part before this is over, i suspect.
Posted by: gaius marius at October 9, 2008 07:58 AM
The standard forecasting rule of thump is that recession-recoveries are symmetrical-- A severe recession is followed by a strong recovery and a mild recovery is followed by a weak recovery.
It is standard business cycle that the recovery -- the period from the bottom until the previous peak in real gdp is surpassed --is about the same length as the downturn.
Using this rule of thumb real GDP should have surpassed the 1929 peak in 1936, exactly what it did. Yet Cole posits that real GDP in 1936 should have returned to the trend growth rate.
This is something that has never happened in any recovery on record. I can not see how anyone who has ever done any business cycle analysis or serous economic forecasting can accept the Cole thesis that in 1936 real gdp should have been back to trend.
The Cole thesis is completely unrealistic. No business cycle on record has ever come anywhere close to achieving this strong a recovery. I do not see how anyone can accept the premise that in 1936 real gdp should have been back at its long term trend.
I challenge you to defend this premise.
Posted by: spencer at October 9, 2008 07:58 AM
Given the array of monetary policy tools that the Fed is using now (TAF, etc.) with little effect, is the only way to resolve the current crisis to off-load the bad debts onto the public balance sheet?
i certainly can't speak for anyone else, but it's my understanding that the massive bank bailout of 1994 was followed by seven years of deflation.
there is an important difference between recapitalizing banks and getting them to lend to sectors in a serious downturn. japanese banks sat on their domestic liquidity post-bailout and loaned outside the country to a more favorable set of credits. i imagine american banks will do the same, as it is the only rational thing for them to do even if it isn't very nationalistic.
Posted by: gaius marius at October 9, 2008 08:20 AM
Debates about macro economic models or whether the New Deal 'fixed' the Depression? How pathetic and how irrelevant.
All the real issues are now political. What if, as many expect, Obama turns out to be Jimmy Carter in blackface? The subsequent high minded speechifying and dithering beloved by the NYT may make the bien pensant feel good but will it have any other effects? Any bets?
What if one party control of the House and Senate leads only to more of the now familiar venal squabbling, plus some public works and spiteful tax increases?
What if the whole mess is resolved not by a replay of WW II as was the Depression but by a global surge of inflation?
Or what if the rest of the economic world simply doesn't play nice? Or the Israelis get bored with Iran while our chatter plays out?
These are the kind of questions worth considering briefly. Only briefly, because answers will be forthcoming shortly...
Posted by: cthomson at October 9, 2008 08:35 AM
An attack on Obama and his proposed taxes doesn't seem appropriate here. Taxes on the "Most Productive Workers" (are you kidding)? You mean to say taxes on those receiving more than $250K/year for whatever they do. They are not going to shut down if they have to pay their share of taxes. Were you awake during the Clinton years? Tax increases on the richest one percent didn't hurt anything after Bush Senior. If your small business is approaching $250K profit what do you do? You buy more equipment, give out a holiday bonus, invest in America. That helps the economy professor.
What also helps is investing in productive rather than destructive industry. Instead of wars, weapons and oil drilling, we invest in education, infrastructure, technology, hybrids and electric cars. No it's not going to change overnight that's why it's called an investment.
Posted by: Rob W at October 9, 2008 09:13 AM
Obama's plan doesn't increase taxes so much as retarget them. Overall personal income taxes collected would stay at about the same level (unlike McCain's plan, which would increase the deficit by another $300 billion). If Bush had aimed his tax cuts at the working and middle classes instead of the wealthy, Obama wouldn't need a tax plan at all. But Bush didn't, it (predictably) hasn't trickled down or driven much growth, so now's the time to redirect them.
Posted by: lilnev at October 9, 2008 10:34 AM
The best argument I've read yet that this is not the same as the 1930s is the following article. I don't know the man but I'm a trader (evil doer).
The Real Great Depression
The depression of 1929 is the wrong model for the current economic crisis
By SCOTT REYNOLDS NELSON
Editor's Note: I caught up with Professor Scott Nelson at his office at the College of William and Mary in Williamsburg, Virginia last week. As I write my book on the economy and where it's headed I'm always glad to talk to a historian to get a professional's perspective and share notes. I assert in my book that as serious consumer demand and financial crisis led depressions go, the one that is developing will be epic.
However, our current period is unlike the pre-1930s depression era. That depression was triggered by the crash of 1929 but primarily caused by bad monetary policy that exacerbated the debt deflation that followed from consumer over-indebtedness. Weakly structured consumer lending and manufacturing sectors led a sudden decline in consumer purchasing power. Demand crashed.
The US depression was then quickly transmitted throughout the world via financial markets, then more slowly through disturbances in trade, which were multiplied by politically motivated disastrous trade policies, and finally war.
Our current episode has more in common with the 1870s depression which, as Nelson notes, was considerably worse. It was primarily caused by over-indebtedness in the commercial real estate sector, which mortgages were based on new forms of financing which were intermingled on the balance sheets of commercial banks with less rarefied assets that the banks added by making business loans. The era, as the poster to the left depicts, was one of broad based public participation in credit financed asset price inflation and speculation. When the commercial real estate market crashed, it took down the banks and caused the market for commercial credit to seize up, much as we are seeing today. Small businesses were hit especially hard. Unemployment spiked and a severe and lengthy depression ensued as financial markets throughout the world suffered, followed by international trade. The crisis emanated from Europe. It was the beginning of the end of Europe's dominance as the center of global economic power. Read on for the full story. Sign up here to be notified when my book is published. - Eric Janszen
As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.
When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.
In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls "the real Great Depression." She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in
1873 and lasted more than four years. It looks much more like our current crisis.
The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.
But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export train loads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America's heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.
As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank ? the interbank lending rate ? reached impossibly high rates. This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track.
Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.
The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States ? those with guaranteed contracts and the ability to make rebate deals with the railroads ? the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire.
As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun.
As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, "economic organization crumbled with some primeval upheaval." Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers ? many former Civil War soldiers ? became transients. The terms "tramp" and "bum," both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25-percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of
1873-74 demanding public work. In New York's Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania's coal fields in 1875, when masked workmen exchanged gunfire with the "Coal and Iron Police," a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.
In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews.
Nationalistic political leaders (or agents of the Russian czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic.
Anti-Jewish pogroms followed in the 1880s, particularly in Russia and Ukraine. Heartland communities large and small had found a scapegoat:
aliens in their own midst.
The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time home buyers who signed up for adjustable rate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-derivative swap, which risk managers imagined would protect their investments. More than two million foreclosure filings ? default notices, auction-sale notices, and bank repossessions ? were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer:
no.) As in 1873, a complex financial pyramid rested on a pinhead.
Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short- term credit to buy raw materials, ship their products, and keep goods on shelves.
If there are lessons from 1873, they are different from those of 1929.
Most important, when banks fall on Wall Street, they stop all the traffic on Main Street ? for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment. Unions (previously illegal in much of the
world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy.
(Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)
The post-panic winners, even after the bailout, might be those firms ? financial and otherwise ? that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.
In the end, the Panic of 1873 demonstrated that the center of gravity for the world's credit had shifted west ? from Central Europe toward the United States. The current panic suggests a further shift ? from the United States to China and India. Beyond that I would not hazard a guess. I still have microfilm to read.
Scott Reynolds Nelson is a professor of history at the College of William and Mary. Among his books is Steel Drivin' Man: John Henry, the Untold Story of an American legend (Oxford University Press, 2006).
Posted by: Jim Goulding at October 9, 2008 11:18 AM
I couldn't help but notice how tiny is the ratio of discussion of assumptions vs. conclusions. I find this a serious flaw in much economic analysis.
Pardon the cliche, but garbage in *is* garbage out.
So, the argument put forth in a nutshell, as I understand it, is that policies restricting production and commerce promote growth.
Nice. Assume in our model that night is day, then when you examine night, you'll see it's day. Q.E.D.
Posted by: Anonymous at October 9, 2008 11:37 AM
Because we are economists in the 21th Century we believe that everything revolves around monetary policy or some other financial indicator. Because of this we actually miss the real reason for the Great Depression and it is being duplicated today. The Great Depression was a failure of governmental central planning. The Great Credit Crisis of 2008 is another failure of governmental central planning.
The only way we can escape the cycle is to escape governmental central planning. The stock market is giving the central planners a real vote of no confidence just as it did in 1929. There is talk now of nationalizing the banks. This kind of action never worked for the failed South American dictatorships. What makes anyone believe it will work for the US?
Posted by: DickF at October 9, 2008 12:53 PM
Posted by: stunney at October 9, 2008 03:12 PM
Sigh indeed. Asserting the sole cause of the depression were policy errors is groundless. Asserting the economy continued to decline under Roosevelt is dishonest. Asserting we would have had greater growth with a second Hoover administration is uncredible.
Posted by: Lord at October 9, 2008 05:57 PM
"2007: for a period of three years ..."
You think it started in 2004?
Posted by: KevinM at October 9, 2008 06:20 PM
earlier, kevin, but it was in 2004 that the SEC allowed the investment banks exemption from the minimum capital rule to turn themselves into security-issuing engines.
similarly to 1929, investment trusts were actually a latecoming aspect of the boom. shenandoah and blue ridge weren't floated until 1928, iirc.
Posted by: gaius marius at October 10, 2008 08:43 AM
Given that one of the three basic elements in Baldwin and Eichengreenís proposal is "coordinated macroeconomic stimulus", which is in line with one of the "urgent and immediate necessary actions" advocated by Nouriel Roubini in his October 9 piece "The world is at severe risk of a global systemic financial meltdown and a severe global depression":
"- a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;"
And given that, given the weight of the economists backing this proposed course of action, it is highly likely that it will be promptly heeded, either with current or new authorities;
It is painfully clear for anyone aware of physical limits to growth - particularly of the fact that fossil fuels are finite, exhaustible resources whose global extraction rate will peak shortly if it already hasn't - that the world is facing a most critical and urgent issue: how smart or dumb, from a Hubbert's Peak-aware perspective, the forthcoming massive public works, infrastructure spending, tax rebates, etc. will be? I.e., are governments going to:
- spend on airports or railways?
- build new roads or electrified urban rail networks?
- offer tax rebates for SUVs or for efficient PHEVs?
- finance residential construction in Las Vegas or wind farm projects?
In a word, using the Easter Island model, are governments going to start a massive moai construction program or a massive reforestation program?
So, this is "the" point, and this is "the" time for all good Hubbert's Peak-aware folks to come to the aid of their country (actually planet because this is global), by speaking out as loudly as possible to influence public thinking to ensure that the forthcoming stimulus packages will be conducive to helping society withstand the oncoming descent from Hubbert's Peak and not to accelerating its collapse, this time due to shortages of physical "liquidity" that no Central Bank can provide.
Posted by: RealThink at October 10, 2008 10:23 AM
SNR nice post - I've long noticed that historians are better writers than economists.
Posted by: don at October 10, 2008 04:13 PM
if you feel that prices are fully flexible (i.e., somehow you've missed the fact that the prices at your local restaurant are moving around day by day
Missing a "not" here? Restaurant prices don't move around day to day -- McDonald's dollar menu, for example.
Posted by: Noumenon at October 13, 2008 01:14 PM
Noumenon: Yes, you are right. Corrected now.
Posted by: Menzie Chinn at October 19, 2008 12:59 PM