February 13, 2009

JUST GIVE US BACK OUR MONEY:

The Real Lesson Of The New Deal: Deficits were too small, not too large. (Bruce Bartlett, 02.13.09, Forbes)

[I]n terms of fiscal policy, Roosevelt's error wasn't that he spent too much, but that he didn't spend nearly enough.

As economists Milton Friedman and Anna Schwartz proved to the satisfaction of most economists, the core economic problem in the early 1930s was a contraction of the money supply by a third. This caused the general price level to fall by about 25%.

Deflation caused real wages to rise, forcing employers to lay off workers to reduce labor costs; it forced businesses to go bankrupt because they had to sell goods for less than they cost to produce; it magnified the burden of debts as borrowers had to repay loans in dollars worth more than those they were lent; and it increased real interest rates and the real burden of taxation. [...]

The critics were also totally opposed to deficit spending. As with Republicans today, they said that federal borrowing would simply draw funds out of productive uses in the private sector to be squandered on make-work government jobs, pork barrel projects of dubious value and welfare programs that would sap the dynamism of the American economy.

Apparently, it didn't occur to these critics that the existence of vast unemployment, closed factories, abandoned farms and extremely low interest rates meant that much of the private sector's resources were simply idle. Borrowing them by running deficits didn't reduce private output because there were no alternative uses available.

Furthermore, an expansive fiscal policy was essential to recovery because without it monetary policy was impotent and deflationary conditions continued. Although Roosevelt had economists like Leon Henderson and Lauchlin Currie around him who perfectly well understood this, he did not heed their advice.

Roosevelt preferred instead the counsel of Treasury Secretary Henry Morgenthau, who argued that the modest budget deficits Roosevelt ran in his first term were exacerbating the economy's problems, rather than being part of the cure. In 1937, Morgenthau was successful in getting Roosevelt to raise taxes and cut spending, and in convincing the Fed to tighten monetary policy because prices were finally starting to rise.


Globalization and technology have created long term deflationary pressures and it's deflation of the good sort. But we concurrently have deflation of the bad sort and you counteract that by pumping money into the economy. There would seem no better way to do that than to directly give money back to the tax payers.

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Posted by Orrin Judd at February 13, 2009 9:12 AM
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