Wednesday, January 28, 2009

So Much for Bipartisanship

Well the stimulus bill passed today, without a single Republican voting for it. I am not sure what is scarier, a $350 billion TARP package in the hands of a man who can't figure out how to use Turbotax properly, or $900 billion in the hands of Democrats eager to buy off votes.

Well for a refreshing breath of reality, the National Review has an excellent article on the failed history of Keynesian stimulus. I actually have a copy of the awkwardly named The General Theory of Employment, Interest and Money, sitting on my shelf, that I have been meaning to read. I will have to move it up in priority, so I know what woes are in store.

Using quaint Keynesian arguments to rationalize heavy spending is nothing new. But its resurgent popularity is somewhat surprising. Democrats and their favorite economists spent the past 25 years bemoaning the “twin deficits” of the 1980s and then claimed that the strong economy of the late 1990s was the result of President Clinton’s fiscal restraint — the precise opposite of “fiscal stimulus.” Also working in the anti-Keynesian mode, former treasury secretary Robert Rubin co-authored a 2004 paper with forecaster Allen Sinai and Peter Orzsag of the Brookings Institution, who now has been tapped by Obama to lead the Office of Management and Budget. They argued that “budget deficits decrease national saving, which reduces domestic investment and increases borrowing abroad.” Big budget deficits, warned Rubin, Orzsag, and Sinai, would “reduce future national income” and risk a “decline in confidence [which] can reduce stock prices.”


Lonnie Bruner said...

I'm equally nervous about what will happen if the stimulus package passes Congress as I am if it doesn't.

Wow, that sounds indecisive.

James B. said...

Well unfortunately that is the nature of economic crises. Everyone wants to feel that the government is doing something, but just about everything they do is likely to make the problem even worse.

Lonnie Bruner said...

What do you think of this? -->

James B. said...

It took nearly a decade for unemployment to fall to a mere 14.2%, that is hardly something to brag about. One thing people forget is that increased federal spending was not just FDR's idea, it started under Hoover, FDR just increased it even more.

This is not entirely the fault of Keynesian economics of course, there were plenty of other policy mistakes that the Hoover and Roosevelt administrations made to prolong the Depression. Many of which we will probably repeat, unfortunately.

Lonnie Bruner said...


I think you misread the Economist post. It didn't take a decade for it to fall from 25% to 14.2%; it took FOUR YEARS.

"In 1932 and 1933 ... the official unemployment rate rose to 24.75%. That rate fell throughout Franklin Roosevelt's first term, to 21.6% in 1934, 20% in 1935, 16.8% in 1936, and 14.2% in 1937..."

A decade would've been if it was 14.2% in 1943, and that would've have been due to FDR's spending; it would've been because of WWII.

Bringing unemployment from 25% to 14% nothing to brag about? Ok ...

Also, some beautiful artwork for you released today by Gallup.


Lonnie Bruner said...

Sorry, I meant "wouldn't have been due .."

James B. said...

Did you even read what I said? Large increases in government spending starting under Hoover, not FDR. The Great Depression started in 1929, that is 8 years, or almost a decade.

And yes, decreasing the unemployment rate from 25% is nothing to brag about. Really, it had no where to go but down. The economy is cylical, even if FDR had done nothing but sit on the porch of the White House and play bridge, it most likely would have dropped to 14%.

You are also conveniently omitting that this was a high point. By 1938 that unemployment rate was up to 19.1%.

If you want to read up on the subject I suggest:

The Great Contraction by Milton Friedman and Anna Schwartz

Manias, Panics, and Crashes: A History of Financial Crises

By Charles Kindlberger.
The Forgotten Man: A New History of the Great Depression by Amity Shlaes

I haven't actually read the last one yet though, it is on my list somewhere too.

Lonnie Bruner said...

I read what you said about Hoover. I suppose you're right, however '29 was the crash, but not the lowest point -- '33 was the worst, right? Sounds like a good enough point to begin.

"if FDR had done nothing but sit on the porch of the White House and play bridge, it most likely would have dropped to 14%" -- most economists would disagree, I think. Sounds like propaganda to me.

In all honesty, I do need to read up on all this. It just seems like there's a very loud minority out there trying to re-write the history of the Great Depression to make it sound like it was the fault of too much government, rather than runaway, unregulated capitalism (which it was).

James B. said...

I don't know any economists who claim "too much government" caused the Depression. There are, however, numerous economists who believe that the government made it worse through their response. With good reason too, there had been numerous panics and bank runs before this, none of them ever this severe and long lasting. In those cases, the government intervened very little.

Friedman, in the book I mentioned argues that Fed was a major cause by contracting the money supply. Ironically this subject has been a leading area of research for none other than Ben Bernanke, the current Fed chairman, who has written extensively on the subject.

Lonnie Bruner said...

Well James, you may be correct. Good points.

James B. said...

Well James, you may be correct. Good points.

Well that pretty much goes without saying. ;-)