David Beito: Paul Krugman's Prescription for Disaster (Response by Alonzo Hamby)
Paul Krugman calls for Obama and his advisors to push an expanded version of the New Deal (see the link below by Mark R. Hatlie). According to Krugman, they should boldly throw caution to the winds and “figure out how much help they think the economy needs, than add 50 percent. It’s much better in a depressed economy, to err on the side of too much stimulus.”
Obama should reject this advice. If he listens to Krugman, the likely result will be a wave of stagflation that makes the experience of the 1970s look mild by comparison. Such a prescription would both continue and accelerate Bush’s fiscally reckless policy of propping up malinvestments through massive increases in spending, deficits, and easy credit by the Federal Reserve. As the continuing fall of the stock market and the rise of unemployment indicate, more bailouts and more “shock socialism” do not work. Obama made a fatal mistake in failing to oppose the aptly described billionaire bailout.
This call for a hyper New Deal rests on a flawed view of history. According Krugman, the only reason Roosevelt failed to bring recovery was because he spent too little, not too much. At the same time, he tries to have it both ways by stating that the crisis of the 1930s would have been “much worse” without the New Deal.
A key problem with Krugman’s analysis is that it does not adequately explain why the decade-long New Deal era depression lasted so much longer than previous depressions. Prior to the 1930s, depressions (as in the sharp and short downturn of 1921 and 1922) had typically lasted for two to three years. The predominant anti-depression policy before Hoover and Roosevelt was to cut spending, balance budgets, and let prices, profits, and wages readjust to more sustainable levels. Yet Krugman regards this older approach for curing depressions as “much worse” than the New Deal. The logical implication of his argument is that the New Deal, modest as it was, would have made the Great Depression at least somewhat shorter than previous downturns. The fact that it did not stands as a stunning indictment of FDR’s policies.
The unprecedented duration of the depression also represents an indictment of Herbert Hoover’s approach. This was because Hoover intervened too much not, as Krugman would have it, too little. Krugman’s article neglects the relevant point that Hoover had pursued a mini-New Deal from 1929 to 1933 via programs such as the Reconstruction Finance Corporation and the Federal Farm Board. It was Hoover, not Roosevelt, who was the first president to reject the advice of the “leave it alone liquidationists.” Instead of letting malinvestments (or toxic assets in today’s parlance) readjust at a lower level, he desperately propped them up. In great part because of Hoover’s high wage policies, real wages were actually 12 percent higher in 1932 than in 1929! Meanwhile, of course, unemployment advanced to record levels as businesses saved on payroll costs by laying off workers. Perhaps if Hoover had listened to the advice of the so-called “liquidationists,” the depression would have been over by 1931.
More troubling, at least for opponents of war, is Krugman’s dubious contention that “What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.” The evidence does not support the view that that war was beneficial for the economy. In a seminal article for the Journal of Economic History, Robert Higgs convincingly challenged the Keynesian theory of World War II as put forward by Krugman and others.
While unemployment disappeared during the war, it was hardly a step forward. Moving men and women from the unemployment lines to the killing fields of Anzio did not represent economic progress in any meaningful sense. During the war, Americans at home suffered from rationing, shortages, more accidents on the job, longer hours, and many other measures of economic deprivation. Moreover, as Higgs points out, “real personal consumption declined. So did real private investment. From 1941 to 1943 real gross private domestic investment plunged by 64 percent; during the four years of the war it never rose above 55 percent of its 1941 level; only in 1946 did it reach a new high.”
According to Higgs, genuine prosperity did not begin to return until the last months of 1945 and 1946. This prosperity occurred under a policy of reverse Keynesianism which included massive reductions in spending because of demoblization, rapid steps toward price decontrol, and scaled back deficit spending.
Higgs sums it up:
World War II, the so-called Good War, has been a fount of historical fallacies. One of the greatest—and one of the most pernicious for subsequent policymakers—is the notion that prosperity prevailed during the war. Although Americans might have been dying in the Pacific and European theaters of war, people on the home front actually benefited from the war, because it propelled the economy at long last out of the Great Depression. This view of the war would be sufficiently egregious if it were true, but despite the claims of historians for the past half century, it is not true.
Obama's best hope to bring lasting recovery is to let the economy go through a short, but sharp, readjustment. He needs to remove the malivestments not, contra Krugman, perpetuate them. Obama can faciliate this readjustment to a more sustainable level by cancelling the bailout, cutting spending, and pruning deficits. Another worthy goal would be to dismantle the Federal Reserve which helped to create this mess through its easy credit policies.
Most of all, however, Obama should end our costly empire by closing down our overseas bases and bringing home the troops. Only then, can we start to get our financial house in order and move towards genuine economic well being.
RESPONSE BY ALONZO HAMBY
(posted on Richard Jensen's Conservativenet 11-11-08)
My own take is that this is at best a 50-50 blend of fact and fallacy.
The Beito-Higgs critique is at its strongest in arguing that both Hoover and Roosevelt intervened in the economy in a number of egregious ways: One or both attempted to stabilize wages and prices through informal and/or formal cartel-type arrangements that tied the industrial economy in knots. Hoover delivered a blow to world trade by signing the Smoot-Hawley tariff. Roosevelt never attempted a general lowering of tariffs; rather he established a reciprocal trade policy that was mostly a cosmetic concession to the traditional free trade wing of his party. He also decided against commitment to international currency stabilization, a decision that further damaged international trade. Both Hoover and Roosevelt raised taxes, thereby sucking money out of the private economy. The New Deal gave free rein to a militant labor movement that disrupted the economy through strikes and work stoppages and had probably brought general wage levels above their market value, also putting a drag on recovery.
All that said, it needs to be understood that the New Deal farm programs did bring a measure of recovery to the agricultural sector--in this case likely more than if the process of liquidation had been allowed to run its course. The New Deal work programs wasted some money, and were only temporary pallatives, but along the way they produced a lot of necessary and useful infrastructure.
Beito and friends seem to assume that World War II did not need to be fought. One is left to wonder how they might have felt about a world in which Germany and Japan dominated the Eurasian land mass, were major naval forces in the Atlantic and Pacific, and were striking out to achieve influence in Africa and Latin America. Do they really believe hemispheric isolation was a promising alternative and that the United States had no interests in opposing Hitler and the Japanese imperialists? Are we going to hear that the Nazis and Soviets would have fought to an exhausting draw? That the Japanese would have overreached and bogged down into endless war in East Asia if we had done nothing?
Geopolitical issues aside and returning to the economy, most Americans at home pretty clearly came out of the war with more money and savings than they had at its beginning, and they were willing to spend it. At the beginning of 1945, there were widespread expectations of a postwar boom and bust, as had happened at the end of World War I. Instead, there was a boom, punctuated only by periodic mild recessions.
One can argue about how relevant that historical record is to present-day problems. The New Deal as an economic recovery program was clearly a failure, but it seems to me that it failed not because of stimulative spending but because of other policies that largely negated that stimulus. The World War II stimulus was much larger, and the mass shortages of consumer goods led to forced savings that were there to be spend in 1945. To these also, one must add the impact of various GI benefits.
I also am a little nervous about the huge sums of money being thrown around by the present administration and uncertain about how much good it will do. I suspect the impact will be mixed, think some bailouts need to happen, and question some others. If the end result resembles that of the post-World War II era, we can be happy and argue about whether it happened because of, or despite, the Bush-Obama handouts.