September 7, 2010

WAS HE TRYING TO BE HOOVER OR DOES THE UR JUST SUCK AT ECONOMICS?:

Explaining the Great Depression (Richard Vedder, Spring 2010, Claremont Review of Books)

The scholarly evidence, once seemingly supportive of activist governmental fiscal and monetary policies, has increasingly shown that Depression-era governmental activism likely prolonged (and perhaps even caused) the downturn. Thus an objective reading of the Depression story makes one decidedly pessimistic that President Obama's policies of massive budget deficits, stimulus packages, huge interventions in financial markets, and major structural changes in the economy (via health care reform and so-called cap and trade bills) will have positive effects on the economy in years ahead. Parallels between Franklin Roosevelt's New Deal and the Obama Administration's agenda are often uncanny: in 1933, government officials promoted the killing of six million pigs to help agriculture; in 2009, the Obama administration promoted the "killing" of 250,000 older automobiles (Cash for Clunkers) to help the auto industry.

In this connection, it is instructive to compare the 1920-22 downturn with the one beginning in 1929. For the first seven quarters, the 1920-22 cyclical decline was by most measures slightly more severe than the one beginning in late 1929. Yet the earlier downturn elicited little government action: President Woodrow Wilson was too incapacitated by a stroke to manage major policy innovations. Warren G. Harding, who assumed office in March 1921, was opposed to intervention, and aided by conservative Treasury Secretary Andrew Mellon, he cut government spending and returned the government to a healthy budget surplus. Within a year or so, the economy was rebounding. By contrast, in the 1929 downturn, the federal government tried to manipulate wages upward, enacted the highest tariff in American history, and undertook huge public works projects, major new social programs (e.g., Social Security), and comprehensive regulation of wages, prices, and working conditions (the National Industrial Recovery Act). Yet the unemployment rate exceeded 10% for a decade. The non-activist policy response of 1920-22 was decidedly more effective than the activist one of 1929-30.

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Posted by Orrin Judd at September 7, 2010 4:15 PM
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