The Tale of Two Depressions
Depression vs Depression
Most of us who are too young to have lived through the Great Depression have either listened to our parents and grandparents tell us stories of what it was like, whereas others simply studied the cause and effects from as young as grade school. Yet more and more economists over the years have taken a closer look at some of the policy responses that came from the Gov’t during this era and have come to very different conclusions than those of political historians. One recent look was that of the 2003 book authored by Jim Powell…”FDR’s Folly”
1929
The Great Depression which began in 1929 produced numerous policy responses. For years, FDR was credited for guiding the nation through these challenges quite successfully. In reality there were few differences between the policies of Hoover and his successor FDR. FDR simply applied these ideas on a much larger scale. The evidence points out that it is more likely both FDR and Hoover's policies prolonged the recession into a long lasting Depression. This is just some of the analysis done by Powell which points out the following:
Hoover
During the depression, about 10,000 US banks failed between 1929-1933. During this time many states had banking laws that prohibited the banks from having branches. This lack of diversification made financial institutions far weaker. The vast majority of these failed banks were single office rural banks. During this global crisis countries like Canada had no such restrictions and saw NO bank failures.
Hoover was president during the onset of the depression in 1929. Hoover had tried to encourage industry in the US to keep employee wages high despite falling prices. He signed the Davis-Bacon Act to require local governments to pay union wages, which helped to keep labor costs artificially high.
In 1930, Hoover signed the Smoot-Hawley Tariff which raised prices on goods that were imported to the US. In return, many countries retaliated by raising prices for American goods that the US exported and US exporters suffered.
Hoover passed laws that limited the short sale of stocks, which caused price distortions. Simultaneously he passed laws to revise bankruptcy and limited the rights of creditors.
Many new taxes were created by the Revenue Act of 1932.
FDR and the New Deal
In 1933, FDR took office and continued many of these policies on a much larger scale. One of his actions was the creation of the Glass Steagall Act, which prevented investment banks from engaging in commercial lending. Many point to the repeal of this act in 1999 as a contributing factor to the 2008 crisis. This is hardly the case since the act was not enforced for decades while financial institutions simply participated in both business models through separate holding companies. In fact, during the 2008 banking crisis, it was the banks that had a diversified model that did NOT need Gov’t assistance. Yet those with a pure investment-banking model were in desperate shape (Lehman Brothers/Bear Sterns).
One of his first actions was to declare a series of national bank holidays. As Powell notes, this actually contributed to bank runs. In the days before ATM’s and credit cards, individuals would have to pull their deposits from the banks earlier and in larger numbers out of fear that the banks would be closed.
FDR instituted dramatic tax increases to Federal Income, dividends, and estates, then subsequently limited deductions. The Undistributed profits tax of 1936 raised the corporate income tax and limited deductions for business losses incurred. Tax rates in excess of 90% greatly reduced incentives to invest capital and take risk. Disincentive was particularly high when there were limits on deductions on the potential loss of business investments.
The National Industrial Recovery Act (NIRA) of 1933 created a number of central planning measures, set minimum wages, minimum prices and instituted production quotas. This made it easier for workers to unionize. Then the Wagner Act of 1935 created closed shops and banned in-house unions. The effect of these acts was to artificially increase wages. This coupled with price controls forced many companies to cut more workers. This was particularly harmful to minorities, as many of them were not permitted to join labor unions at that time. The US Supreme Court eventually deemed NIRA unconstitutional.
The Civilian Conservation Corps (CCC) and the Public Works Administration (PWA) recruited huge numbers of Americans for public projects. However, these programs concentrated the vast majority of the work in western states which were considered swing states at that time for the purpose of FDR’s re-election. Furthermore, most of these jobs were exclusively for skilled labor. Therefore, those that were largely excluded were at the lower end of the economic spectrum and saw no benefit.
In 1934, the Frazier Lemke farm bankruptcy Act limited the rights of creditors in an attempt to reduce farming foreclosures. The result of the rights of creditors being limited was to actually reduce the available credit to borrowers.
Other attempts by FDR to fix prices and reduce competition were the Robinson-Patman Act of 1936. This made it essentially illegal for wholesalers to give cheaper prices to larger chain stores making the cost of goods to the consumer more expensive. Then the Miller-Tydings Retail Price Maintenance Act of 1937 required minimum prices on products sold through smaller chains, which also artificially inflated prices for the consumer.
The Agricultural Act of 1936 had more price controls as well as production limits designed to reduce the supply of food and keep prices higher. Amazingly under this program, as millions across the nation were literally starving, the Federal Gov’t was actually DESTROYING perfectly good food. Over 10 million acres of crops and 6 million farm animals were ordered to be destroyed. This not only influenced the food supply, but also costs jobs to those in the farming industry. Eventually this act was also declared unconstitutional. It was quickly replaced by the Soil Conservation and Preservation Act. This essentially reduced the acreage for food crops by actually paying farmers to grow grass and NOT food all in an attempt to keep prices high.
The Commodity Credit Corporation was created to make loans to farmers while they used their land as collateral. If the price of the crop dropped in value, they could keep the money and forfeit the crops. The primary beneficiaries were wealthy farmers with more land, while the smaller farmers were impacted negatively. Most of these deals were also concentrated in swing states for votes. All the while, the foreclosure rate on farms remained high throughout the 1930’s.
One of the most positively regarded programs was the Tennessee Valley Authority (TVA). The purpose was to build dams and bring electric to more rural areas. Yet in doing so, the TVA seized private property through the laws of “eminent domain” in many cases for less than fair market value. Another theoretical benefit was that these dams were to help prevent the cycle of flooding. Yet in fact, the areas permanently flooded by TVA lakes covered and even larger area than those that flooded naturally by rivers.
The Social Security Act was passed in 1935. As originally passed, it was designed as a program where the funds would go into an old age retirement account and benefits would start to pay the beneficiaries in 1940. This would give the accounts time to build and begin paying benefits to recipients. Accept by 1940 FDR and congress had already spent all the funds that were to be used for Social Security. It was then modified to a pay as you go program. Today it is still an unfunded liability. The act itself immediately depressed wages for most Americans since employers were paying a SS tax on behalf of each employee and this made hiring more expensive. The employees paid a SS tax as well, so the implementation reduced the take home pay and the purchasing power of each individual
Numerous other programs were declared unconstitutional. In FDR's frustration with the Supreme Court of the United States refusing many of his mandates, he took an unprecedented step towards a power grab and tried to alter the separation of powers. In 1937 he proposed the Judiciary Reorganization Bill. Through this bill, he would have been permitted to simply add more judges to the court which he would appoint, who would be more friendly towards his constitutional violations. The bill was not passed. However, it was successful in that many of the justices, particularly Justice Hughes and Justice Roberts were greatly intimidated by his actions that they simply stopped opposing him.
The cost of these programs had grown so out of control that the gov't could no longer finance them as the US used the Gold Standard in regards to the US dollar. If people were to see an increase in inflation because of his reckless spending, it would be a political disaster. People would simply trade in their paper fiat dollars for gold. So to avoid this FDR amended the Trading with the Enemy Act of 1917. Under this authority, he issued Executive Presidential Order 6102 which forced people to turn over all but a small amount of gold they had in their procession at the price of $20 per troy ounce. After he had seized all the nations gold, he then set the price at…$35 per troy ounce !!! This was one of the largest thefts in modern history.
With all of these unprecedented spending measures being implemented, what was the result ??? By 1938, nearly a decade later, the US had entered a Depression within another Depression. The Treasury Secretary Henry Morgenthau testified before congress in 1939 and said “We are spending more money than we have ever spent before and it does not work…I say after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot”
In reality, the New Deal polices favored labor unions and ignored non-union labor. This kept prices artificially high and led to numerous labor disruptions via union strikes. Business owners felt so threatened by these policies that capital investment went on strike. Those of means hoarded their wealth rather than invest in any new enterprise. The public concern for the attack on the private sector was so great that in 1941 fortune magazine conducted a poll that showed that 91% of those that responded believed the US was potentially headed for some form of a dictatorship or the loss of private property rights. While that may not have been FDR’s intent, he essentially panicked the marketplace.
The conventional wisdom was that WW2 and all the massive production that was required is what eventually ended the depression. It did put people to work, but only for a limited time. The price was a soaring out of control national debt. Once the war ended, the gov’t stopped spending, the jobs went away, and private capital went back into hiding. By the end of the war, Truman was the new US President. He proposed more New Deal like spending policies. Instead a Georgia Senator named Walter F. George, who chaired the US Senate Finance Committee stonewalled them. Congress had seen enough. The top marginal tax rates dropped nearly 10% while the amount of earnings that would be exempted from taxation was increased. 12 million Americans would no longer be subject to taxation. The excess profits tax was repealed. The corporate tax rate was dropped from 90% to 38%. All of the FDR price controls were abolished and Gov’t spending was slashed. The revenue to the treasury went higher under the lower rates as private investment was stimulated. The increased revenue meant budget deficits were gone and replaced with a budget surplus. The Depression had ended.
The Forgotten Depression 1920-1921
The depression we rarely hear of is the Great…Great Depression. Shortly after WW1, there was an extremely sharp economic contraction. Wholesale prices declined by about 36%, unemployment spiked quickly from 5% to over 8%, the stock market declined by 47%. The rate of business failure more than tripled. Companies that survived saw a 75% decline in profits. Total industrial production declined by 30% nationwide. The Consumer Price Index fell by over 15%. In contrast, the deflationary pressures of the 1929 depression at its worst point was 11%. The severity of the sudden price deflation can be seen in the below chart.
By any economic measure, this was a calamity. The sudden shock was just as impactful, if not more so than the eventual would be events of 1929. The US was faced with a crushing debt due to the financing of WW1. So what were the policy responses of the day ???
The president and congress took steps that today would be regarded as heresy by the academics. The Federal gov’t slashed the budget from 18.5 billon to 6.4 billion…an astonishing 65%. The next two years the budget was further slashed to 3.3 billon by 1922. Furthermore, the top marginal tax rates were reduced from 73%-56%.
On the Monetary side the Federal Reserve actually raised interest rates, which many cite as one of the causes to the economic contraction. After this extreme contraction, the monetary base collapsed worse than anything seen in 1929.
So what was the result ??? Within 18 months the depression was over and along came the roaring 20’s, probably the most prosperous decade of growth in modern U.S. history. The recovery did not require another subsequent monetary expansion by the Federal Reserve. And there were no massive fiscal stimulus programs. This quick recovery is precisely the opposite result of what should have happened based on the policy responses at the time if we listen to either the Keynesian or the Monetarist viewpoint.
The New Deal spending induced fiscal stimulus has been the conventional wisdom of the policy makers since the experiments of 1929. Is it possible that these policies are designed more to empower those in Washington rather than those whom they govern ??? With each passing crisis, Gov’t gets bigger. With each period of prosperity, Gov’t gets bigger. In the natural business cycle there will be expansions and contractions. Markets are not perfect, they often develop imbalances and need time to work these imbalances out. Markets are also largely self-correcting. Yet with each passing crisis, the Federal authorities grab for more power and authority.
Perhaps the economic models of neither the Keynesians or the Monetarists are correct. In my view economic policy is something that should be addressed on an ad hoc basis. However, the fundamental principal that seems to tie directly to quick recoveries is the limiting of Gov’t intervention, while allowing markets to self correct any misallocation of capital. The alternative seems to be more of a slow bleed while the Gov't simply delays and prolongs the agony. This does not mean that there is no role for Gov't in a crisis. But that role should not likely be taking away additional profits, setting price controls, or determining what industries receive greater investments through taxpayer dollars.
The failure of fiscal stimulus to create sustainable growth can be summed up with a basic example... If you owned a small motel in a sleepy town, you may employ a few people to help. But what if the Gov't decided to throw a convention in your town for the week. You might be forced to hire some individuals on a temporary basis to service the need. Both you and those hired recognize it is temporary. As a result, when the convention is over, they are let go. Those employees know full well it is temporary. They will take the work because they are in need of the money. However, they are not likely to alter their behavior of spending knowing the work is temporary. Nor would you as the employer build a new wing on the motel since you also realize the demand is artificial and temporary. At the end of the week/stimulus, nothing has changed.
Since economic contractions across the business cycle are inevitable and unavoidable, In more simple terms...would you prefer to peel the band aid slowly...or just rip it off ???
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Comments
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Loss of purchasing power does not have to be intrinsic to growth. If the productivity increase is a cause of the inflation, one balances the other. The 1-3% recent rate is fictional in my view. For the reasons I mentioned prior, we already have significantly higher inflation than that today as an example. The horse and buggy analogy is partially correct. But that is not what is happening in Washington and the way the BLS has been influenced. This is a complex topic, but the site a mentioned has a very good explanation, which is much more than I have the energy to type about how misrepresented this data has become in recent years. Please read attached at your leisure.
http://www.shadowstats.com/article/no-438-public-c...
I don’t see the right being obstructionist, accept in the case of the areas of military spending. The conservative wing in the house as proposed numerous sensible entitlement reforms. The problem is that most of the republicans in the house and almost all in the Senate are not real fiscal conservatives. Nor was either President Bush’s from a spending perspective. I am not by nature a true libertarian, but I am closer to the Ron Paul mindset in terms of fiscal policy than that of most republicans. I tend to believe that policy should be applied ad hoc with the framework of limiting the role of Gov’t always at the forefront. These manipulations in data I mention are the result of the fact that both parties have advocated for bigger Gov’t. One through a massive entitlement state, and the other through corporatism. Neither is good for the US citizen. I am a true pro-business free market advocate. Yet I am opposed to the unholy alliance that exists between business and politics that has made life harder on the small business entrepreneur and stacked the deck in favor of the larger entities. I never blame a company for looking out for their best interest and lobbying to do so. I blame the politician for not following through on representing the interest of their constituents. Much like the husband who cheats on his wife is the guilty party, not the unattached mistress he cheats with. If your experience is in the DOD, then you know full well the inefficiency of gov’t . This is not directed at you personally. But how many times were those in charge incented to come in under budget and get rewarded for it. If you happen to come in under budget, how many times would they look for some place to spend the money to insure the following year was not a reduced budget. I am a very big believer in a strong national defense. But the republicans have their sacred cows as well. And there is no reason the pentagon who a few years ago couldn’t account for nearly 2 billion in spending can’t accomplish the same goals in a more efficient way. I get frustrated when I hear all the phony so called conservatives on TV who don’t really want to cut spending, but rather spend it elsewhere. They are as guilty as those on the left who are pushing for a European style social democracy.
I will agree that the pent up demand, it is there. I disagree that big business will take advantage of it until the Republicans and Democrats can come together with some sort of compromise as to what long-term policy is going to be that sets the way forward. Othewise, they can't risk making the wrong bet on which way government policy is going to fall. I am not sure that business really cares what that policy is, they just want something they can make long-term plans with. Fortunately, my business is small enough and in the right niche where we are somewhat immune to the foibles of Congress.
Inflation, loss of purchasing power, is intrisnic in a growing economy, the trick is not to let it get out of hand. It is systemic deflation that bring economic bad times. There has never been a period of good, stable, sustained economic growth without a sustained 1% - 3% annual rate of inflation that accompianed it. Likewise, there has never been a major economic downturn which didn't have deflation as one of its principal factors for becoming a major. Out of control inflation can, of course, disrupt an economy just as badly as deflation can.
Obviously, when we talk of inflation and deflation, we aren't talking about the normal increases and decreases in the price of individual or sectors of goods and services as they follow the general principles of supply and demand in a stable economy. Instead, it is the system-wide effect where many, most, or all of the economic sectors are inflating or deflating.
Yes BLS has, but they have also normalized their numbers to account for any changes in methodolgy. Any changes in the "basket" of goods simply reflects changing times; it wouldn't be good to have the buggy whip in today's mix.
As to litmus test, yes I agree, although I would had the word "shouldn't" to your definition of the role of government as far as the service provided. That just leaves the interpretation of how the federal government complies with the preamble of the Constitution which defines the purpose of government and what is meant by each obligation laid out in the preamble.
Budgets are nice to have, they make things a lot cleaner in Congress for sure. They set definable goals the Authorizers can follow in setting their Appropiation limits. But, in my 20 years in DoD, I have lived without budgets from both Parties; I have lived through no authorizations, but what I couldn't live without are appropriations, the place where the real battles are fought. We probably will never see another budget until you get a Congress where both sides of the aisle understand the word "compromise". Right now, the Right does not, so there is no hope of a budget every getting through both Houses, let alone the Senate.
Agreed, Obama wasted way too much time on Obamacare. Once he saw the Democrats begin to fight each other over it and dragging it through the mud, he should have stepped in then, not nine months later.
- Author
As a side note, I think if you look back in about 6 months I think you will see that even using current forms of measuring economic data, their is a better than 50% chance that the US has already slipped back into contraction as the ECRI as been Predicitng. We'll know for sure when we get all the revsions to GDP. However, I am more optimistic about short term growth. I view the gridlock as a positive. I think the fiscal drag will eventually be offset by the pent up demand built into the economy. The higher taxes will be less relevant because most high earners will avoid it anyway. Fortunately for me such planning methods keep me in business. However, I agree the certainty we both desire will be there. The president doesn't have the votes to pass any sweeping changes in the next few years. The fact that the gov't will be able to do less will be a big improvement. The problem is it will not likely be distrubuted evenly throughout society for the reasons I mention above.
- Author
I am not arguing that the downturn would not have been more severe. I agree with that interpretation and most economist. I am arguing how quickly the recovery would be. I am arguing that the recovery is still yet to get under way here in the US with a 14.5% U6 Unemployment number. (Using the old method it is over 20%) I do not believe we have had a recovery. So in terms of your earlier comment on the other link. Obama hasn’t prevented anything. He didn’t create TARP. The expansion had already begun before the stimulus was passed and has been slower than a normal rebound since it was passed. As such, I do not regard this as much of a recovery if any at all. That means we have in reality been in more than a 48 month economic malaise. Quite long in recent historical terms. This resembles the same malaise of the 30’s. A statistical expansion that was just enough to keep the nation miserable for over a decade with high unemployment and nominal growth
The TARP program was not watered down by conservatives. If you recall, they were in late 2008 proposing loaning money to banks rather than simply giving them money as a method to protect the taxpayer. The proposals of just dumping money on the balance sheets of banks was a bad idea, especially since most banks didn’t want, need or ever ask for the recapitalization. This was done in secrecy to protect a select view banks from having their financial stress exposed and causing a run on those specific institutions. And that was only done after Bernake’s original idea of a reverse auction for non-liquid securities was shot down. Furthermore, it was the gov’t regulations of the new “mark to market” accounting methods from Sarbanes Oxley that forced many healthy banks to declare perfectly healthy and performing loans a loss because Fannie and Freddie were no longer available to create the fictional liquidity. So healthy banks were forced to write off good loans as a loss, take a tax deduction on the loss and then eventually recapture the gain when the loan was paid off. Brilliant !!!
There were few prosecutions, because there were few laws broken. The financial crisis is was not the result of a mass crime spree. It was the result of the Gov’t role through GSE’s in manipulating the market for MBS securities. The reality is that financial institutions were simply following the incentives the gov’t laid out for them. And the reality is that incentive matters in economics. The only true significant scandal was that of the accounting methods utilized by Fannie & Freddie to ensure this market distortion, through the protection of congressman in control of these agencies. They are the ones who should have been prosecuted. If you really want to look at the politics of it, let’s go to the video tape and see in their own words who was really obstructing the reining in of these out of control agencies of gov’t that should not have been engaging in this market practice to begin with.
http://www.youtube.com/watch?v=BzCG80Wz4mg
Or perhaps my wonderful Gov here in NY when he was HUD secretary
http://www.youtube.com/watch?v=9TWOPDN5Va0&fea...
In fairness there were a few Republicans who were closely connected to the GSE’s as well. The reality is that those of us working in the financial services field know that this notion of a lack of regulation in the financial markets is a myth perpetuated by the media and politicians looking to cover their own mistakes and pass on the blame to a convenient target. We have been under more regulation, particularly since the implementation of Sarbanes Oxley and the scandal around Arthur Anderson than at any other time. Unfortunately, it’s been bad regulation that has contributed greatly to market dislocations rather than smart effective and efficient regulations that help markets work more sensibly.
The Presidents first two years was spent on healthcare legislation. He had a super majority two straight years and could have passed any form of tax or entitlement reform he chose. The stimulus bill he did pass was riddled with fraud and had little in the way of infrastructure “Shovel Ready” jobs. This is why he faced such opposition. He has simply been out to lunch. Let’s not forget that he has not passed a single budget in 4 years as he is constitutionally required to do. Nor has the Democrat controlled Senate passed one single budget to even propose to the house or the President. Yet the since 2010 the conservative house is the only place a budget has been passed. At a minimum the Senate majority could have taken it up for debate, as it would have eventually been modified for some form of a compromise in committee. You can try to blame the conservative movement, but the Presidents last budget did not get one single vote from his OWN party because it was so off the wall.
There is a slippery slope to things like the FDIC. In my view the term limited should be a simple litmus test. The Gov’t role is to provide that which CANNOT be provided by the private sector in a realistic or efficient manner. I would include things like police, military, courts of law etc. However, what else that is made up of this definition is certainly open to debate.
In terms of the BLS data. Do some research and you’ll find that the inflation formulas have changed more than once. If we used the same formula to calculate inflation today as we did in 1975 we’d have very different numbers. Gold has short term premiums or discounts in its price like any other assets that reflect short term concerns. All markets have inefficiency in the short term. But in the longer term markets are highly efficient. And the price of gold reflects a clear decline in purchasing power.
You are 100% correct about wage stagnation. This is my entire point about pinning the monetary system to some form of a standard to impose fiscal discipline. The more Gov’t attempts to inflate away problems through both fiscal and monetary tools, the greater the divide in terms of wealth we will get. Wealthy people buy stocks and commodities and other tangible assets. Poor people pay rent instead of owning. They consume commodities but don’t own any significant amount to benefit from the price appreciation. The process of Govt induced inflation punishes those on the lower end of the economic spectrum while those on the upper end often benefit from it. This is exactly what we are seeing today. Commodities and stocks have soared since 2009 while poor people are still out of work and more poor. Inflation should be a function of organic growth in the private sector as a result of increases in innovation and productivity. Otherwise we are not really growing our way out of anything. We are utilizing debt to pass on a hidden tax to those on the lower end of the economic ladder. That is the real economic injustice.
BTW, I started looking at your link.
Agreed, there is no formal definition of depression; how many economists are there? Nevertheless, one can agree that it is always much more severe than a recession and normally has the component of sustained deflation associated with it. You can only define it by comparison at the moment and using NBER as a guide, you have 1807, 1815, 1857, 1873, 1893, 1896, 1907(?), 1920, and 1929.
I would argue that you are in the company of a very snall minority of credentialed, established, unbiased economists who believe, if left alone, this downturn would not have equalled or surpassed 1929, 1920, or 1873.
It was the stabilization of the financial institution that was one leg of preventing the predicted meltdown; so, no matter the moral harm, (which was preventable btw if the language had not been watered down by those wanting to either defeat TARP in the first place, conservatives, or keep gov'ts nose out of the financial sector as much as possible- all conservatives) it was a necessary evil. What should have happened, as did with the savings and loan scandal, is that a whole lot high rollers didn't end up bankrupt and in jail; that is one of my major disappointments with the Democratic Congress in its first two years. After that, of course, it would never happen.
Sharp recoveries don't always follow sharp downturns and the political landscape guaranteed this would not be a sharp recovery. In my research, I have found no President that has faced a headwind to his program for recovery from the opposition Party so fierce and focused as Obama has from the conservatives in control of the Republican Party. In all other times, either the dominate Party had long-term domination, not a measly two-years, or the out-of-power Party actually helped rather than make it their political agenda to have their President fail in a time crisis.
With that kind of political scenery, no sane business person is going to make large capital commitments; they will simply sit on their money until the People decide when they have had enough of this crap and pick one side or the other. Personally, of course, I lay this stagnation at the feet of the conservative effort to unseat Obama. Had they used as much energy to help America as they did to destroy Obama, the sky is the limit as to where are growth might be today.
Now down to your second paragraph, lol. Absolutely agree with your comment about FDIC; but many of your conservative peers would say this puts on the slippery-slope of complete gov't take-over and therefore end up wanting to throw that baby-out-with-the-bathwater as well. Like depression, there are many definitions of the term "limited". Thomas Jefferson had one and John Adams had another and they both used the term often; BUT, it meant entirely different things to each in terms of scope. They both believed the Constitution limits the power of Congress, but it is to the degree that it is "limited" which has been at issue since Day One.
In regards to the stimulus, it comes down to "how long are you willing to stand around and watch Americans suffer?" You are right, at some point in time, the private sector will ultimately, in most, but not all, cases, step and start to invest again when THEY feel the conditions are right. That means the welfare of the American people, the same Welfare mentioned in the Constitution from a Progressive's point of view, is left in the hands of a few wealthy individuals. From where I sit, that is definitely not a good thing; it seems from your perspective that you are OK with this.
Common sense and everything else tells you that when the private sector will not invest, then the only entity capable of providing the imputus is the federal government. In terms of will it work, that boat has sailed, all empirical and theoretical evidence says it will. So it simply comes down to one of political philosophy, not economic; should the federal gov't intervene on the Peoples behalf or should it not?
The data I used is from the CPI of the BLS, the "gold" standard, lol. I worked with these my whole AF career as do all economist, right, wrong, or indifferent; there is nothing better. Anything else has even more problems. As to gold itself, because it is freely traded, it is subject to speculation and manipuation, and a lot of it. To me, the change in the price of gold reflects the world-wide consensus about economic stability. Once the world believes our economic situation is stable, the price of gold will plummet.
Finally (at last), as to wage stagnation. Isn't that dependent on which wage level you are looking at? It has only been stagnant for low wage earners, not high wage earners or the wealthy; the latter two groups have done just fine, thank you. There is something else going on that explains the stagnation of wages of the lower income groups.
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In terms of TARP I think you can say it did stabilize the banking industry at that moment and softened the blow. But I believe it has done more harm than good in the long run. Particularly from the stand point of moral hazard. I don’t believe that the stimulus, which was an entirely different venture was effective at all. I don’t believe it would have been depression. Technically there is no formal definition for that. I personally do believe without TARP it would have been much more severe with a much sharper recovery in a dramatically shorter period, much like 1920/21. The problem is that in economic terms we have not been in a recession from June 2009 to today. But we are in an economic malaise of anemic growth that is producing job growth that barely keeps up with population growth. Statistically, the recession is over. But the malaise is not. I don’t consider that a success. I believe it simply spreads out the suffering over a longer period in smaller quantities.
With regard to the fact that there were more contractions of severity more often, much of that had to do with the fact that there were no backstops whatsoever, such as agencies like the FDIC. I am not an advocate of ZERO Govt. Just limited. Meaning there can be smart limited regulatory roles for the govt such as securing minimal deposits to prevent runs on the banking system. But that does not justify in my view actions of direct fiscal stimulus where the gov’t makes direct investments for the express purpose of creating economic activity. That is the role of the private sector. That is what I am primarily opposed to. I don’t think you can assume that the correlation is causation in the case of stimulus programs. I disagree that it is demonstrably better. In fact the expanded role of govt has greatly devalued the currency. The US dollar has declined dramatically over this time. So while you have less volatility, your stability has brought you stagnant wage growth in real terms and reduced purchasing power. In real terms the US labor force has not seen significant wage growth since 1995.
I would challenge much of the inflation data that is put out in recent years. We have altered the formula for inflation to make it look more politically suitable. We don’t measure inflation the same way we did even in the 70’s. The gov’t uses Core CPI for longer term projections, then they use CPI-U for things like Social Security increases. And periodically the weightings are changed. Back to our Gold discussion. Since gold is allowed to trade freely it is the best representation of inflation in my view. In reality, the price never changes. It is the value of currencies that are changing since Gold’s intrinsic value has not changed. So as an example, look at the so called recovery of today. When you look at the decline in purchasing power of the dollar just during this recovery it shows there is no recovery. It is simply a hidden contraction. This has been prominent throughout the century. As we already established Gold has not traded freely during the course of the century. So lets look at the price of Gold since 1971. It’s up nearly 4500%. I don’t believe the govt’s inflation data reflects that accurately. But there is an inherent inverse correlation between the dollar and gold. The market place is telling you that there is a lot more inflation than we are led to believe. I think most American know that anyway because they shop for food and see it. Granted there were long periods where the price remained stable. Interestingly most of which coincided with periods of greater free markets and smaller gov’t. An interesting site that looks at inflation using historical methods to see the difference in how we changed these formulas as well as a number of other metrics is http://www.shadowstats.com/
Yes, the contraction ended in June 2009. The question is, if Obama and Bush had sat on their hands as believers in Austrian-style economics wish they had done, would the recession have remained that and not turned into a depression, as virtually every economist of both political spectrums, except the extreme Right, thought would happen, and therefore, would it have even been possible for the contraction have ended by June 2009.
The contraction period, after all, was only 18 months, with the intervention, 4 months shorter than the average of its peers in the 1800s and early 1900s, or 18 months shorter than the 36 month average of the five major downturns in that period which many think this recession would probably have exceeded.
It is the following world-view I have such a problem with - "However since the 30's the policy has been for the gov't too often to step in and prevent this. I think way too many economist are more afraid of deflation than they should be. The collective conscious of market place will address deflation when value is realized." -
With few exceptions, prior to 1932. the gov't didn't step in and try to mitigate either the crash or the ensuing human misery; just as you counsel, Landmark. The result of this policy were major financial recessions that averaged one every 5 to 6 years, in addition to those caused by other factors. Further, the misery index from each of these economic tsunamis is incalculable. This is history, it is fact.
Why would anyone wish this on society when an alternative is available that has proved it has shorter average contraction periods, fewer average contractions per time period, and smaller contractions per event? Regardless of all of the rhetoric, theory, and guessing, that is the historic outcome of the two economic systems; it is an easily observable, undeniable phenomenon with the demarcation line clearly visible as to when America changed economic systems. Whatever America was doing between 1945 and 2001 was demonstrably better than what it did prior to 1940.
You have mentioned runaway inflation as being a major problem with Keynesian, or its variation, economics; so I took a closer look in that vain. The easiest data to find started at 1914. Breaking that into different time periods for comparison, you get this: 1914 - 1941 -- 1.4% with two depressions and one major recession; 1948 - 2011 -- tada 3.7%; and is with only one major recession. If we look at some data prior to 1914, it appears to be similar the 1.4% that came afterward. Why is this? Because of the frequent deflation periods from major economic collapses. It was only when the economy settled down and stopped collapsing so often did inflation exceed deflation. Further, the overall inflation after 1948 would be a bit lower if it weren't for the hyperinflation driven by the oil crises of the 1970s.
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The marginal rates in 36 went much higher on the higher brackets. I completely disagree with the notion that the stimulus worked at all. Private investment will step in when the prices reach equilibrium. However since the 30's the policy has been for the gov't too often to step in and prevent this. I think way too many economist are more afraid of deflation than they should be. The collective conscious of market place will address deflation when value is realized. This is my point about political altruism. The stimulus was riddled with fraud from top to bottom, yet where are the high speed rail systems that might actually do some good ??? The reason there were few "Shovel Ready" jobs is that gov't is inherently inefficient. In order for the 2009 stimulus to have been effective it would have had to have been spent more efficiently. As GDP data shows, the contraction actually ended in June of 2009, before the stimulus was ever spent. The market was finding equilibrium already. But the spending generated concerns over future tax increases to pay for it, along with an enhanced regulatory environment. When the gov't gives out 30% budget increases to depts like OSHA as part of stimulus bill, business knows they now have a greater compliance burden and spend money to address it in areas which would otherwise be used for more productive distribution. There was certainly areas of infrastructure that could have been improved. But the reality is that Govt doesn’t create jobs. They create liabilities. Some are necessary liabilities. But way too many are not.
https://hubpages.com/politics/Can-The-Government-C...
In terms of capital formation related to higher tax rates. I think there is little evidence that billionaires in the area of venture capital will be deterred if the opportunity it there. But much of that is because they won’t pay the taxes anyway. They’ll defer income with greater flexibility or go off shore. There is a countless number of ways to defer income for the ultra high net worth. For the small business community which is the largest engine of job growth, it is certainly true that it is a deterrent. The cost and risk it takes for that community is substantial relative to their means. The tax benefits are enormous. And most of the job creation comes from a small % of the small business community on the upper end of the income range. The problem with most of these tax increases is they are counterproductive because they don’t increase revenue. As I mentioned earlier, the share of GDP collected by the IRS was the same when we had a 92% top rate as it was when we had a 28% top rate. The changing of these rates are little more than cosmetic legislation designed to make political figures look like they are delivering justice. In reality all they are doing is complicating a tax code that becomes even more inefficient. Way too much is wasted in terms of political and private resources in dealing with the 70k pages of IRS laws.
Ah yes, the ERCA in 1932, that was a Hoover stimulus program, wasn't it; but it didn't crowd out any private investment, for just like in 2009, there was no private investment to crowd out; that is why stimulus' work. The argument about "crowding out" private investment is "situational". Even today, a stimulus might work simply because the private side is not investing, even though now they are fully capable of it. Personally, I think a stimulus, even a small one, would work wonders if the Right and Left agreed to it, simply because the Right and Left agreed to it; ironically, it has nothing to do with the stimulus itself.
You got me to look up historic corp tax rates; turns out they went from 12 to 13.75% in 1932 and to 15% for over $40,000 in 1936; not a huge increases to me. The undistributed profits tax would force the profits to be distributed and put into the economy (hopefully), so, the question is, was much collected?
The theory of impeding capital formation with high tax rates is just that, a theory, one I don't personally buy into. I did a little Googling and found this bit of research, "How responsive is business capital formation to its user cost? An exploration with micro data", which suggests strongly that capital formation and tax policies have a rather low coorelation.
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If you like to read, I would strongly suggest Powells book which is a more detailed chronological look. But also you may want to read The Forgotten Man by Amity Shlaes. I think both take a very good critical look at the policies of the 30's. Enjoy.
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The 1971 act is what ended the actual convertibility of the dollar to gold. Some examples of Hoovers public expansion projects were the Emergency Relief and Construction Act & Reconstruction Finance Corporation. These were just the beginning of the New Deal type spending endeavors.
From a tax perspective Hoover increased the corporate tax in the 1932 act. Also in the 32 Act personal rates went up substatially on the highest earners from 25% to over 60%. As I mentioned earlier there were other taxes along the way througout the 30's that were not traditional income taxes. Payroll tax, undistributed profits tax etc. The problem is the tax increases on the higest earners is what inhibits capital formation. As the results clearly demonstrated. This proof on taxation is demonstrated by the fact that rarely do tax increases on high end earners generate more revenue. In fact since the WW2 era, revenue as a share of GDP never changes regardless of where rates are, because high end earners have greater control over when they realize income. The actually revenue received is always between 15-20% of GDP. Usually around 17-18%. But the attack on capital investment from a tax perspective slows capital formation. That coupled with Gov't spending on public works projects crowds out private investment.
The problem with the federal govt attempting inflation through fiscal policy are many. One is that when govt's intervene to create inflation, prices take longer to find equilibrium, which also inhibits capital investment. Look at the current housing market. Only recently have private investors begun to dip their toe in the water and buy up distressed real estate. This took longer then it should after such a sharp contraction because investors can't be sure of an assets true value when it is supported by gov't intervention. Additionally many of the tactics of the day were just non-sensical as illustrated in the article. Banning lower wholesale prices to large chains while forcing higher prices on smaller chain stores. All these types of government interventions come with unintended consequences that usually cause more problems then they create. You produce inflation without growth. If it's not organic inflation as a result of increased productivity then you simple punish people on the lower end of the income scale.
The actions of the Fed in allowing M2 money supply to contract was likely damaging to the economy as most contend. In terms of Bernake, in 2006-2007. I think he has made many decisions in recent years that enabled poor fiscal policy by being a little overly innovative on the monetary side. However in 2006/2007 I think he was concerned about the bubble forming in the housing market and the increasing rates were a result of an attempt to slowly deflate, which did not work well, I don't think all of that can be laid on the Fed's doorstep. In many ways there was no real monetary solution to the housing crisis. Too much of it was a result of social engineering on the fiscal side.
It was June 5, 1933, when Congress stopped backing U.S. currency with gold by enacting a joint resolution nullifying the right of creditors to demand repayment in gold.
Nixon, in 1971, allowed the value of gold to float in the U.S., as it already was in the rest of the world, by unpegging it to the dollar at $35/tr oz. The differential between the open market price of gold, much higher that $35 and the pegged price was causing economic havoc, opportunism, and rampant market manipulation
I am not aware of any large or even medium sized public works projects in the Hoover administration. I am aware he sent money to the states for such purposes, however; the first time the federal gov't attempted such measures. I not sure where you pull your material about the terrorism aspect from, that is new to me. The tax increase was effective for income earned in 1932; FDR didn't change the bottom rate until 1941 to fund the war and he didn't change the top rate until 1936, and that only affected the top 0.1%.
One of the contributors to the depth of the depression was the fact that the Fed sat on its hands and did nothing with monetary policy (sort of like in 2005 and 2006, everybody but them knew something was going very wrong). They only got in the game very late and when they did, I think I remember reading they screwed it up anyway. About all that was done early on was through fiscal policy by FDR, and yes it was inflationary because there was no money in the system, deflation was everywhere, getting worse, and had to be reversed; inflation does that.
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Also order 6102 was necessary to produce the New Deal Spending. The profit the Gov't realized from the seizure funded the ESF You have to remember that there was already a substantial gov't expansion through public works projects as well as tax increases taking place under the Hoover administration leading into FDR and the New Deal. So the New Deal proposals of FDR, which were larger in nature, where really just a continuation of Hoovers policies, much of which terrified the private sector.
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Powell's book looked more at 1929 than any other period. FDR did not remove the US from the gold standard. Nixon did. The price of gold in relation to the dollar was essentially set by the gov't once they controlled the supply. So in effect they simply imposed one large infaltionary tax on the American people in order to expand the money supply.
The problem with his policies were they created artificial inflation in some areas while we continued to see price delfation in others. I do not personally believe in the govt's ability to effectively artificially created inflation through monetary manipulation. I am very critical of the Central Banks globally in this sense, both then and now. However, I am not a believer in the concept of a pure gold standard. I would prefer a monetary system that is linked to a basket of commodities. It would not be a perfect system either, but it would likely provide enough flexibility for monetary expansion, while at the same time imposing some form of fiscal discipline on the congress and President.
Well written and whole lot to chew on, Landmark, requiring a bit of research. One question before I comment on one assertion you made regarding gold. In "FDR's Folly", did Powell compare 1929 with previous 23 or so major recessions and depressions that were economic in nature as to their causes and course?
In one the paragraphs you make the comment, "The cost of his programs had grown so out of control that he could no longer finance them as the US used the Gold Standard in regards to the US dollar."
- you speak as if FDR manipulated the gold standard "after" he accumulated so much debt; that, of course, wasn't the case. Moving America off the gold standard was one of his first moves after taking office in 1933, following the lead of several other countries. There were extremely good economic reasons for removing gold from the general supply and stockpiling it in the treasury and that was to "inflate" the money supply; FDR was not afraid of inflation, that was his goal!
As to the buying at $20.7o in 1933 and revauling to $35/ tr oz in 1934 in order to create inflation, that is theft only if the price of gold was more than $20.70 when it was turned into the gov't; was it?
It was only "after" these moves did FDR start spending money on his programs.
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