Obama is Correct but for the Wrong Reason

In a recent interview with 60 Minutes’ Steve Kroft, President Obama was asked if he felt he overpromised during the last presidential campaign when it came to fixing the economy.  The President responded:

“I didn’t overpromise. And I didn’t underestimate how tough this was gonna be…Reversing structural problems in our economy that have been building up for two decades — that was gonna take time. It was gonna take more than a year. It was gonna take more than two years. It was gonna take more than one term. Probably takes more than one president.”

It is uncommon, but I must admit that I totally agree with Obama.  However, my agreement with him is for a reason that he did not intend with his remark.  He was espousing the view that it would take many more years of Keynesian economic policies to dig ourselves out of the economic ditch.  I am saying his position is precisely why it will take many years to recover from the Great Recession.  Essentially history proves that Keynesian economic theory does not work.  In fact, it has been proven to make things worse.

An often forgotten (either intentional or not) economic depression took place in 1920.  It was in 1920 that the spending of Congress and the inflation of the dollar by the Federal Reserve in order to fight World War I finally caught up with the U.S. economy.  After the artificial boom brought on by government policy busted, unemployment increased from 4 percent to 12 percent.  At the same time, GNP contracted by 17 percent.  Relatively speaking, the depression of 1920 was as severe as any in U.S. history.

In those days America still believed in free market capitalism.  President Harding’s response was to slash the federal budget almost in half between 1920 and 1922.  He also reduced tax rates for all income groups and decreased the national debt by one-third.  Additionally, the Federal Reserve did not use its powers to increase the money supply to fight the contraction.

No, the federal government and the central bank’s response were to let the economy liquidate the mal-investments that had built up during the spending and inflating of the war years.  It wasn’t to try to “stimulate” the economy back to growth and the Federal Reserve did not attempt to re-inflate the economic bubble.

By 1922, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923.  Recovery occurred within two years of the onset of depression and opened the gate for a decade of enormous economic growth.

 

Now fast forward to the Great Depression of 1929-1946.  The common myth is that Franklin Roosevelt brought us out of the Great Depression with his New Deal policies.  The New Deal represented the first time in our country’s history that the federal government attempted, in a robust way, to remedy an economic downturn with “stimulus” spending and other bureaucratic interventions.  Roosevelt’s program included make work schemes, industrial codes of fair competition, guaranteed trade union rights, the regulation of working standards, minimum price fixes on agriculture, petroleum and other products, and other assorted welfare programs.  Essentially Roosevelt had taken over the U.S. economy and then over time he found it necessary to raise excise taxes on business to pay for his schemes.

The result was a prolonged depression.  The New Deal did not allow the mal-investments of the previous boom to liquidate.  It discouraged entrepreneurs from investing and the artificially high prices it imposed squelched consumer demand.  It was such a failure that in 1939 Henry Morgenthau, Roosevelt’s confidant and Secretary of the Treasury, proclaimed:

“We have tried spending money. We are spending more than we have ever spent before and it does not work…We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started.…and an enormous debt to boot.”

And this is why Barack Obama was correct in his statement that it will take many more years to turn the economy around.  History proves that government intervention in an economic downtown only worsens the situation.  Since taking office in 2009, Obama has spent trillions through make work projects, Cash for Clunkers, First Time Homebuyers’ credits, extensions to unemployment benefits, and other schemes.  He reappointed Ben Bernanke to Chairman of the Federal Reserve precisely because he favors the Fed’s long term quantitative easing program which has pumped trillions more new cash into the economy.

What do we have to show for it? – an economy still in shambles 4 years after the downturn with real unemployment north of 16 percent, a lackluster GDP, 46 million Americans on Food Stamps, and $4.3 trillion more in debt.  Obama is right, it will take years to undo the damage caused by his policies.  The question is, why doesn’t Timothy Geithner have the same honesty that Henry Morgenthau Jr. did?

Article first published as Obama is Correct But for the Wrong Reason on Blogcritics.

Rothbard as Prophet – Part 2

As documented in Rothbard’s classic piece America’s Great Depression, the similarities of the 1920s and 2000s did not end with the beginnings of each crisis in 1929 and 2008 respectively.  It gets much scarier than that.  Washington responded in very similar ways to both crises.  As we know, Hoover/Roosevelt policies made the recession of 1929 into a depression and prolonged recover for at least a decade.  Time will only tell how bad Bush/Obama policies will make our current economic depression.

So, just what were the policies of the Hoover/Roosevelt administrations that exacerbated the U.S. economy into the 1930s and resemble the policies of the Bush/Obama administrations today?  For one, a blatant misinformation scheme to make Americans believe that the excesses of laissez-faire capitalism were to blame for the economic downturns was launched.  In both cases, this was used to deflect any culpability of the U.S. government for the crisis.  But, also and more importantly, it was used as the rationale for heavier government intervention in the economy.  It is ridiculous that then and now the American public has fallen for this deception.  We did not in the 1920s and we did not earlier in this decade have a laissez-faire economy in the United States.  As Rothbard points out, just prior to the 1920s America went through the so called Progressive Era.  This era introduced enormous regulations on our economy.  There was price fixing, a full blown agricultural policy and interstate commerce regulation through the Interstate Commerce Commission and other government agencies.  Let’s not forget that the Federal Reserve Bank began operations in 1913 with the expressed mission to prevent economic downturns through currency regulation.

Of course, many regulations and regulatory agencies founded during the Great Depression are still with us today.  Because we are no longer on the gold standard, the Federal Reserve has even more power today than in the 1920s to regulate our money supply.  The bottom line is that laissez-faire means no government interference in the economy, but Washington has had its grubby big hands on our financial system for a long time.  Therefore, Washington’s attempt to blame laissez-faire for economic troubles in this country, ever, is highly disingenuous.

But, the politicians have used this pretense since the Great Depression to step in and “rescue” our economy from the “greedy capitalists.”  After the stock market crash of October 1929, the Federal Reserve pumped $300 million into the reserves of the nation’s banks.  It expanded its balance sheet by purchasing $1 billion of government securities and provided $200 million more to banks at discounted rates.  Sound familiar?  These numbers are nothing compared to what the Fed and treasury have spent on the current crisis ($12 trillion), but they were a lot given the nation’s GDP at the time was $100 billion.  The scary thought is that by the time Hoover left office his attempt to re-inflate the bubble produced a 25 percent unemployment rate.  What will $12 trillion produce?

Additionally, government works projects were used by Hoover/Roosevelt and are about to be used by Obama.  Hoover raised taxes on the rich and Obama has threatened to do the same by allowing Bush’s tax cuts to expire. Fortunately, a major policy difference between then and now is that Washington has not passed (came close with “buy America” clauses in the stimulus bill) protectionist measures in the current crisis.  Nonetheless, the comparisons in policy are startling given they didn’t work the first time.

Beyond the policy similarities, there are at least two chilling coincidences between then and now.  In 1931, almost two years after the crash, the unemployment rate was only 9 percent.  One and a half years after the current crisis began unemployment is 8.9 percent.  But, more ominously, given Hoover’s inflating of the money supply banks didn’t lend and consumers were not spending in 1932.  Naturally, the short term deflation that resulted improved the economy for a while since it began to deflate the credit bubble which the economy needed to recover.  However, it was only a matter of time before all the new money hit the economy and caused havoc.  One year later, the unemployment rate soared to 25 percent.

Again, today, in spite of the Fed’s pumping of new money into the economy, banks have been slow to lend and consumers slow to spend.  Prices have declined over the past 12 months – for the first time since 1955.  You might say the economy is showing signs of improvement – the stock market is up 25 percent in the last two months.  However, since government intervention caused the Great Depression don’t be too hopeful that Washington’s current intervention will have any different outcome this time.

It is amazing that in both crises the same folks who caused the problem were called upon to solve it.  The easy money policies of the Fed have been responsible for both the Great Depression and our current economic crisis.  After the 1929 stock market crash, the Fed’s re-inflating policies did not allow the economy to rid itself of the malinvestments caused by its previous inflating.  The economy sank into a deep depression.  According to Rothbard’s writing, we are headed for a similar if not worst fate.  If only Ben Bernanke had read Rothbard as a part of his study of the Great Depression.

Rothbard as Prophet – Part 1

Federal Reserve Bank chairman Ben Bernanke is touted as an expert on the Great Depression.  Many would say we are fortunate to have him heading our central bank at this time when our economy is suffering through its worst crisis since that dreadful epoch 80 years ago. Yet others believe Bernanke is far from an expert on anything economic given his choice of policies since the current crisis began.  One thing is for sure, Bernanke’s study of the Great Depression did not include reading the works of Murray Rothbard.  For if he had, he certainly would not be pursuing his current policies as leader of the Fed.

Probably the most authoritative work on the Great Depression of Rothbard’s storied career was, America’s Great Depression. Written in 1949, the text is a solid analysis of those policies and personalities that brought on the financial and economic collapse of America in the 1930s.  Rothbard’s work dispels the myths taught in public schools that Hoover was a free marketer and the Great Depression was caused by the shortcomings of capitalism.  Informative for understanding what caused the 1929 recession and for what turned it into the Great Depression, today the book stands as a prophetic manuscript for where we are headed economically. 

Readers of the book will be appalled to realize that there are significant similarities between the decade preceding the crash of 1929 and the decade preceding our current financial and economic crisis.  For one thing, in both time periods the Federal Reserve had well-respected chairman at the helm, Benjamin Strong and Alan Greenspan.  These banking helmsmen were respected because they were both viewed as the great caretakers of America’s economy.  Their policies were revered for the economic booms that they produced.  When things got choppy, administrations of both decades could count on the financial maestros at the Fed to right the ship back on a course to prosperity.

Of course, both maestros used inflationary policies to achieve their ends.  Inflationary used here refers to inflating the money supply.  Strong used banker’s acceptances to inflate the money supply and continually put off downturns.  He also loaned money to brokerage houses, no less onerous than lending to banks, thereby producing the bubble that’s eventual popping is regarded as the beginning of the depression.  Greenspan, on the other hand, was the master of the low interest rate in keeping the boom going.  His lowering of the fed funds rate to practically zero percent for two years after the 2001 recession is regarded as the initial catalyst for the crisis we now face.  He also monetized over $6 trillion worth of federal debt to keep the “prosperity” rolling.  In all circumstances, both Strong and Greenspan pulled off the illusion that prosperity through inflation has no costs.

Indeed, at both times the illusion seemed like reality.  The stock market soared, many companies produced more than was needed in the 1920s and many Americans bought more house than they could afford in the 2000s.  Despite a growing money supply, a general rise in prices (inflation) did not materialize in the 1920s.  Rothbard attributes this to the offsetting effect of the high productivity of the decade.  In essence, too much money was not chasing too few goods as the 20s was a time of great production.

In contrast and more ominously, the inflationary effects of Greenspan’s policies were concealed by government manipulation of the consumer price index (CPI).  The most basic staples of life, food and energy, are no longer a part of the inflation index.  Additionally, the way government statisticians calculated the number changed over time.  For instance, the cost of buying a home increased significantly through the decade due to high demand, yet the CPI was adjusted by bureaucrats to counterbalance the effect this data would have on inflation statistics by increasing the weight of the costs of the depressed rental market upwards in the calculation.  Thus, the inflationary effects of the policies of both Strong and Greenspan were not evident at the time of their inflating, the economy appeared to be growing, and so everyone, politicians, business leaders, and economists were happy.

And the illusions of prosperity were perpetuated because no one in the know ever objected to what was going on.  Presidents, legislators, and economists were silent during both periods about any concern they may have had about the direction of the U.S. economy.  In fact, Hoover and Bush, both liked to say that the economy had “sound fundamentals.”   Yes, as long as the Fed chiefs increased the supply of money and the government statistics were favorable all was well in Mudville.  Thus, in 1929, like in 2008, policymakers were blindsided by their respective crises.

Even Ben Bernanke, the so called expert on the Great Depression, didn’t realize Greenspan was repeating history by egregiously inflating the money supply in the early 2000s.  Even Bernanke didn’t recognize the crisis after it hit.  Makes you wonder what he studied to learn about the Great Depression?  Clearly, it was not the work of Murray Rothbard.

The entire text of America’s Great Depression has been graciously placed online as a PDF file by the Ludwig von Mises Institute.  It can be accessed at:  America’s Great Depression