Saturday, November 29, 2008

Krugman's Recipe for Another Depression: Spend

What kept the picture so dark so long during the 1930s (see chart above)? Deflation for one, but also the notion that government could engineer economic recovery by favoring the public sector at the expense of the private sector. New Dealers raised taxes again and again to fund spending. The New Dealers also insisted on higher wages when businesses could ill afford them. Roosevelt, for example, signed into law first his National Recovery Administration, whose codes forced businesses to pay an above-market minimum wage, and then the Wagner Act, which gave union workers more power.

As a result of such policy, pay for workers in the later 1930s was well above trend. Mr. Ohanian's research documents this. High wages hurt corporate profits and therefore hiring. The unemployed stayed unemployed. "If you had a job you were all right" -- the phrase we all heard as children about the Depression -- really does capture the period.

Why does all this matter today? Because lawmakers are considering new labor legislation containing "card check," which would strengthen organized labor and so its wage demands. Because employees continue to pressure firms to spend on health care, without considering they may be making the company unable to hire an unemployed friend. Piling on public-sector jobs or raising wages may take away jobs in the private sector, directly or indirectly.

What the new administration decides about marginal tax rates also matters. Mr. Obama said in a Thanksgiving talk that he wanted to "create or save 2.5 million new jobs." People who talk about saving new jobs are usually talking about the private-sector's capacity to generate jobs in the future -- not about the public sector alone. We know that the new administration is going to spend. But how? It can try to figure out a way to do that without hurting the private sector. Or it can just spend, Krugman-wise, and risk repeating the very depression we seek to avoid.

~"The Krugman Recipe for Depression: Massive government spending is no solution to unemployment," by Amity Shlaes in today's WSJ

44 Comments:

At 11/29/2008 12:42 PM, Blogger PeakTrader said...

It should be noted, union workers were grossly overpaid, while non-union workers were grossly underpaid. Although, U.S. real compensation increased 70%, since the mid-'60s, the disparity between overpaid union workers and underpaid non-union workers narrowed substantially.

Also, low prices and low interest rates benefited the masses, i.e. more assets and goods per capita, which tend to be more evenly distributed on the consumption side than the production side.

 
At 11/29/2008 12:58 PM, Anonymous Michael Smith said...

To any of you who buy into the claim that the New Deal ended the Great Depression, here's a fact to ponder.

In 1939, after 6 years of "New Deal", the unemployment rate in the U.S. was still at 20% -- 20%! -- and the nation's output of goods and services was still 16% below the level it had been at in 1929, 10 years earlier.

Henry Morgenthau, Secretary of the Treasury and close personal friend of Roosevelt, told members of the House Ways and Means committee:

We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong…..somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises…. I say after 8 years of this Administration we have just as much unemployment as when we started…. And an enormous debt to boot!

So there is a key member of the Roosevelt administration admitting that the New Deal was a failure.

I believe Prof. Perry has posted that statement before, but it needs posting again. And again. Until the FDR "savior" myth is eradicated.

 
At 11/29/2008 1:21 PM, Anonymous poor boomer said...

"Because employees continue to pressure firms to spend on health care..."


Cite, please!

I've had a number of jobs over several decades, and I've never worked for an employer that was pressured to spend on health care.

 
At 11/29/2008 1:39 PM, Anonymous Anonymous said...

the nation's output of goods and services was still 16% below the level it had been at in 1929, 10 years earlier.

I'm calling you out, buggy. Real GDP in 1936 exceeded the 1929 peak.

Yes, the unemployment rate was high. But remember that there is a data series break in 1940. Pre-1940 data is not comparable to post-1940 data. Ironically, it was a New Deal program, the Works Progress Administration, which initiated what is now the BLS employment surveys.

 
At 11/29/2008 2:37 PM, Anonymous Fred said...

Why do Democrats have such nostalgia for the depression? Indeed, it was a time when giant Democrats ruled the Earth, trampling mere mortals like the grass.

 
At 11/29/2008 3:34 PM, Anonymous Anonymous said...

"I'm calling you out, buggy"

Uh, don't you have to be out yourself to call someone else out?

You disengenously ignored the unemployment figures with that little bit of hey look over there on the GDP numbers. Well, I'm calling you out. See you on the playground after school unless you are too chicken to show up.

 
At 11/29/2008 4:07 PM, Blogger bobble said...

fact 1) its impossible to know how long the depression would have lasted had some "recipe" other than FDR's been implemented.

fact 2) before FDR took office, unemployment rose and GDP fell for four years(1929 to 1933). after FDR took office unemployment fell and GDP rose for four years.

unemployment

GDP

free market extremeists can spin all they like, but those are the facts.

 
At 11/29/2008 4:25 PM, Anonymous J said...

Pro-FDR types can argue all they want about directions of data series. The facts of the matter are that after 8 years of FDR's economic tinkering, the economy had not returned to, or surpassed, its 1929 peak.

 
At 11/29/2008 5:29 PM, Anonymous Anonymous said...

It is sad to see a nobel winner like Krugman acting like a prostitute. It is now very clear from the UCLA studies plus the work done by Friedman and others that the Keynsian ideas do not work.

We need to let the market price. Trying to stimulate demand by taxing only ensures that spending id directed in the wrong direction.

 
At 11/29/2008 5:35 PM, Blogger bobble said...

hey, "J". nice spin, but go back and re-read 'fact 1' in my post. are you asserting it's a fact someone else could have done it faster?

 
At 11/29/2008 5:38 PM, Blogger wcw said...

On topic:
- the spelling is 'Shlaes'
- Shlaes and Krugman (and I) all *agree*: the New Deal did not end the Depression (not because Keynes was wrong, but because the New Deal was an insipid rounding error in the context of what was needed)
- spending -- really large deficit spending in wartime -- worked, pretty clearly proving Keynes right
- Shlaes is (as usual) almost entirely an idiot; see Krugamn take down her argument on wages (far too kindly, IMO) at http://krugman.blogs.nytimes.com/2008/11/29/changes-in-money-wages-and-amity-shlaes/

Off topic:
- the appearance of an argument on the WSJ editorial page remains prima facie evidence that it is wrong (the news section of the paper remains excellent)
- I'm no Democrat (I'm far to the left of those Eisenhower-Republican establishmentarians), but I do not know a single one who misses the Depression
- FDR didn't end the Depression, but he saved capitalism (see Norman Thomas). Is this a problem for the far right wing these days?
- not to get too personal, but I really, really hope you lackwits are on the other sides of my trades

 
At 11/29/2008 5:38 PM, Anonymous Anonymous said...

No personal offence taken Fred. I know that Carpe Diem is a busy ivory tower advocate, but he could at least spell Amity Schales name correctly, it's Amity Shlaes; you could view her bio. Just another journalist with a smidgen, if any, of economics/finance background. Maybe she's up to a guest lecture at Michigan, Flint.

She's kinda cute in a Palinesque kind of way, no?

You are such a sweetheart anon 3:34. Kisses and blushes on the house.

 
At 11/29/2008 5:52 PM, Blogger Mark J. Perry said...

Sorry about the spelling error, it's fixed.

 
At 11/29/2008 6:53 PM, OpenID Machiavelli999 said...

Krugman actually fired back at Amity Shales criticism on his blog. You should give it a read.

To sum it up, he says the New Deal didn't work because Roosevelt actually stopped massive spending programs because he began worrying about the defecit.

Just like we accept the role of government as a lender of last resort, in certain dire economic times, it has to be the purchaser of last resort.

The economic stabilizers setup by the New Deal did not make the Depression worse, in fact its keeping this downturn less extreme. Things like unemployment insurance, keep aggregate demand from collapsing of a cliff.

Also, back to Roosevelt, he was eventually forced to spend and run up defecits noone had ever seen because of WWII. Surprisingly, the economy was back on its feet by the late 40s.

 
At 11/29/2008 8:12 PM, Blogger OBloodyHell said...

> - spending -- really large deficit spending in wartime -- worked, pretty clearly proving Keynes right

Then the 1970s happened, and blatantly proved to anyone with the least clue that Keynes was abysmally wrong. Supporters have been trying to fix Humpty Dumpty ever since.

Keynesianism in all its forms is some variant of deckchair rearrangement on the Titanic. Some forms of robbing Peter to pay Paul can work, short-term -- supporting it by selling bonds and/or resorting to the printing press rob Peter's son to pay Paul, hiding the downside of the ridiculous policies by passing the expenses to future times (which is what happened with WWII).

All government moneys come from taking money away from somewhere else and having a bureaucrat with no particular interest in the successful use of the money decide how to use it. This can theoretically work as well as the free market. However, just as communism might work in theory, in practice, both are abysmally ineffective in functionality.

 
At 11/30/2008 9:28 AM, Blogger Michael Smith said...

Anonymous wrote:

I'm calling you out, buggy. Real GDP in 1936 exceeded the 1929 peak.

Of course, I didn't say anything about the GDP in 1936 -- so your attempt to “call me out“ is rather lame.

There was, in fact, some economic recovery in the brief period between the Supreme Court declaring the centerpiece of Roosevelt's New Deal, the NRA, unconstitutional in 1935 and when the Wagner Act and the Undistributed Profits tax hit with full force in 1937. (Yes, the Wagner Act was passed in 1935, but it was basically ignored until it was upheld by the Supreme Court in 1937).

So, what your data shows is that removing a major portion of the New Deal allowed economic conditions to improve a little. Your data supports my contention that the New Deal hindered, rather than helped, economic recovery.

If you want more evidence of the New Deal’s failure, here is a link to one of Roosevelt’s “fireside chats” in which he admits that in 1938, the national income stood at $68 billion, whereas in 1929 it had been $81 billion. Link: http://www.mhric.org/fdr/chat12.html

Of course, as you’ll see in that link, Roosevelt blamed the Depression on the ridiculous “over production scenario” and then goes on to state that the reason economic problems were still present in 1938 was because of “continuing overproduction”!!

 
At 11/30/2008 10:31 AM, Blogger Michael Smith said...

Bobble wrote:

hey, "J". nice spin, but go back and re-read 'fact 1' in my post. are you asserting it's a fact someone else could have done it faster?

Yes, had wages and product prices been allowed to fall -- as the deflation that had occurred demanded, and as they would have done absent government intervention -- the economy would have reached a new equilibrium far faster.

In 1929, the money supply of the United States was approximately $26 billion and the gross national product of the country, which provides an approximate measure of consumer spending, was $103 billion. By 1933, following massive bank failures, the money supply had fallen to approximately $19 billion and the GNP to less than $56 billion.

What needed to happen was for both wages and product prices to fall, so that the same volume of employment and production could go on as before, simply using less money. (And that, actually, is what had happened in earlier crashes when government did not intervene.) Yes, wages would have been lower but product prices would be correspondingly lower, so there would be no net loss of purchasing power.

Remember, don't confuse money with wealth. The deflation destroyed money, but it didn't destroy wealth or all the physical assets that existed for producing more wealth.

But first Hoover, and then Roosevelt, refused to let either wages or prices fall. The result was the only possible result: mass unemployment.

There is a reason why this crash turned into a decade of double digit unemployment when no other crash had produced such a prolonged crises. The reason is: government intervention via the New Deal, started by Hoover, and continued by Roosevelt.

That's not "free market extremist" "spin" Bobble, it's the laws of economics.

 
At 11/30/2008 11:03 AM, Blogger Michael Smith said...

wcw claimed:

Shlaes and Krugman (and I) all *agree*: the New Deal did not end the Depression (not because Keynes was wrong, but because the New Deal was an insipid rounding error in the context of what was needed) - spending -- really large deficit spending in wartime -- worked, pretty clearly proving Keynes right

Putting 12 million men in uniform certainly "worked" to cure the unemployment problem. But the notion that it "worked" to end the depression is false. What Americans experienced during WWII was economic privation, not rising prosperity.

Those 12 million draftees were not producing radios, refrigerators, automobiles, food, clothing, nylon hose, cosmetics -- or any other form of wealth. They were, rather, busy destroying the enemy’s wealth.

And the millions of American women that flooded in to the workplace weren’t producing goods for use or consumption by Americans -- they were producing weapons of war; 86, 3338 tanks, 297,000 airplanes, 17.4 million rifles, 315,000 pieces of artillery, 12,000 navy ships including aircraft carriers, battleships, destroyers, etc.

In fact, the government outright prohibited the production of automobiles, houses, appliances, radios and other “luxury” items deemed “non-essential”. Everything from milk to meat to rubber for tires was rationed. Price controls covered dozens of items.

The GDP numbers for the war years are greatly inflated by the government’s deficit spending on war materials. America’s living standards went down during the war, not up.

Real economic recovery did not begin until after the war, when government spending fell precipitously and economic freedom returned with the repeal of price controls, war-decrees and rationing.

 
At 11/30/2008 11:31 AM, Blogger Colin said...

Bobble,

Go back and look at your own GDP figures. They reached their nadir BEFORE FDR even took office. Remember, he didn't take office until March 1933 right? The upswing had already begun at that point.

Unless you are willing to argue that his mere election produced a recovery I think your own stats would seem to undercut your argument.

 
At 11/30/2008 11:34 AM, Blogger Colin said...

http://www.realclearpolitics.com/articles/2008/11/new_new_deal_wont_help_the_eco.html

 
At 11/30/2008 1:52 PM, Blogger wcw said...

OBH, I must have missed both the 1970s Depression and the massive deficit spending (WWII deficits were pushing a third of GDP, if memory serves) that failed to combat it. Please, document them.

MS, we agree that spending on infrastructure is everywhere and always preferable to bombing other people as stimulus. How you reconcile your bloviations about "economic freedom" with the 1929-1933 experience eludes me, but by all means: explain.

All: please forgive me for my earlier crack about trading. It was unfair to assume that macro lackwits need also make bad trades. Apologies.

 
At 11/30/2008 3:54 PM, Blogger bobble said...

Michael Smith:" [bobble: are you asserting it's a fact someone else could have done it faster?]

Yes, had wages and product prices been allowed to fall -- as the deflation that had occurred demanded . . . . "

sorry, that's all theory, not fact.

i'm not saying i believe FDR had the best cure for the depression. we'll never know for sure.

what i am trying to get at is all the arguments against FDR are just theories. maybe they would have worked better. maybe not. there are too many variables, not all of which have been or even can be quantified, to ensure that any theory would have worked as predicted.

so theorize all you like, but please remember, the only *fact* we have to work with is: before FDR took office, unemployment rose and GDP fell for four years(1929 to 1933). after FDR took office unemployment fell and GDP rose for four years.

 
At 11/30/2008 7:25 PM, Blogger Michael Smith said...

WCW wrote:

How you reconcile your bloviations about "economic freedom" with the 1929-1933 experience eludes me, but by all means: explain.

Is every utterance with which you disagree a "bloviation"? You are probably not worth responding to, but for the sake of others who may have been victimized by the standard Hoover & /Roosevelt myths, I will respond.

I assume from your statement that you belive the Great Depression was caused by something like “overproduction” and that “do nothing Hoover” made things worse by, well, doing nothing. But that is simply not the case.

In fact, Hoover was an active, anti-capitalist interventionist -- every bit as statist as Roosevelt. In a very real sense, it was Hoover that started the New Deal. Roosevelt merely continued it.

Hoover gave us Smoot/Hawley -- a 60% tax on over 3,200 imported items that resulted in retaliatory duties on our exports, causing a 64% plunge in exports. Hoover also gave us large increases in personal income taxes, increases in business taxes, and a vast increases in excise taxes.

(Someone will no doubt rush forward to point out that the increases in personal taxes were not damaging because only a small percentage of people paid taxes at the time. It's true that the number of people affected by the tax was relatively small, but those people paying taxes were the very innovators and businessmen that maintained existing jobs and created new ones. So it was a tax aimed at the nation’s most creative and most productive individuals -- a tax increase aimed at that 1 person in a 100 that can start and run a business that supplies jobs to the other 99. Do not dismiss the damaging effect of taxing the job creators.)

Excise taxes, however, hit virtually everyone. Excise taxes had historically applied only to so-called “sin” items like alcohol and tobacco. But Hoover expanded them to cover automobiles, movie tickets, radios, phonographs, telephone calls, telegrams, cosmetics, cameras, bank checks, stock transfers, yachts, jewelry, furs and gasoline.

Hoover believed that the stock market crash had been a result of “overproduction”, i.e. that the problem was a lack of demand. (Roosevelt believed the same thing) So his immediate response to the slowing of business (brought about in part by his tariff and his tax increases) was to summon business leaders to the White House to demand that wages be kept high -- at the very time they needed to fall, to allow employment to continue. Hoover’s urging was a prescription for mass unemployment.

Hoover didn’t stop with this mere jawboning either. In 1930 he said:

The business community and the government have cooperated in more widespread measures of mitigation than have ever been attempted before… Our leading business concerns have sustained wages….. These measures have maintained a higher degree of consumption than would otherwise have been the case. They have prevented a large measure of unemployment… We have even more amplified plans in the future.

He did indeed have “even more amplified plans in the future”. Throughout his term in office, Hoover hit businessmen, farmers and investors with a array of interventionist agencies and acts, including the Federal Reserve (whom Hoover refused to restrain even as it was disastrously contracting the money supply), the Agricultural Marketing Act, the Federal Farm Board, the aforementioned Smoot/Hawley tariff, the Norris-La Guardia Anti-Injunction Act, the Timber Conservation Board, the Federal Oil Conservation Board, the Reconstruction Finance Corporation, the National Credit Corporation, the Reconstruction Finance Corporation, the Federal Employment Stabilization Boar, the Emergency and Relief Construction Act and the Glass-Steagall Act.

Hoover increased Federal spending by 49% in a mere 4 years. He spent over $2 billion on various public works projects.

So the notion that Hoover was a “do nothing” President is a myth. Hoover launched a massive program of government intervention that Roosevelt simply decided to continue and expand. There can be no question that Hoover's efforts to keep wages up simply made the unemployment problem worse -- nor can there be any doubt that his tariff, his tax increases, his blizzard of rules and regulations all contributed to worsening the business contraction. Roosevelt took it from there.

 
At 11/30/2008 7:28 PM, Blogger Michael Smith said...

Bobble claimed:

Yes, had wages and product prices been allowed to fall -- as the deflation that had occurred demanded . . . . "

sorry, that's all theory, not fact.

No, it isn't mere theory -- it's what actually happended in previous "crashes".

 
At 12/01/2008 9:56 AM, Blogger wcw said...

MS, I think 'bloviation' ("speak or write verbosely and windily" -- m-w.com) encapsulates the style of anyone who enumerates WWII weapons production in this discussion, rather than simply expressing it in GDP terms.

As for your response, it's nice and wordy, but speaks only to a straw man who has not entered here. You assert, "recovery did not begin until.. economic freedom returned with the repeal of price controls, war-decrees and rationing." I asked how you reconciled this with the 1929-1933 experience, assuming you recalled that it mostly lacked price controls, war-decrees and rationing.

I hesitate to assume anything about your thinking, but you do seem to treat taxation as antithetical to economic freedom. If you feel like answering the original question, please also answer another: how do you reconcile that view of taxation, if I have it right, with the post-1945 experience, which included a very nice recovery after the initial postwar recession, as well as its share of taxation.

 
At 12/01/2008 4:25 PM, Blogger Michael Smith said...

wcw wrote:

MS, I think 'bloviation' ("speak or write verbosely and windily" -- m-w.com) encapsulates the style of anyone who enumerates WWII weapons production in this discussion, rather than simply expressing it in GDP terms.

But when you speak only in "GDP terms", it hides the fact that a great deal of what was produced during WWII was not wealth, but machines for destroying wealth. If we are evaluating the claim that WWII ended the Great Depression, it makes a difference whether we were producing more food, housing and clothing or just more tanks, warplanes and battleships.

I asked how you reconciled this with the 1929-1933 experience, assuming you recalled that it mostly lacked price controls, war-decrees and rationing.

The 1929 - 1933 period featured two deadly price controls -- one on the price of labor and one on the price of goods. Hoover demanded that the price of both remain at pre-crash levels, even in the face of drastically falling demand for both. The inevitable result was mass unemployment.

The rest of my "bloviating" response gives you some idea of the scope of Hoover's interventions into, and interference with, the market. True, we didn't have war-decrees of the military sort -- instead, we had the war-decrees of Hoover's war against businesses and against the market.

I hesitate to assume anything about your thinking, but you do seem to treat taxation as antithetical to economic freedom. If you feel like answering the original question, please also answer another: how do you reconcile that view of taxation, if I have it right, with the post-1945 experience, which included a very nice recovery after the initial postwar recession, as well as its share of taxation.

Yes, taxation is antithetical to economic freedom. Economic freedom is the freedom to produce and trade what one produces with others on a voluntary, value-for-value basis. Taxation is the act of government confiscating a portion of what is produced, thereby denying the producer the full value of what he produced. Such confiscation only acts to discourage production in proportion to how much is taken.

For instance, if the top tax rate is set at 25%, that means of every extra dollar you earn, you get to keep 75 cents. By contrast, if the top tax rate is set at 75%, you only get to keep 25% of every extra dollar you earn. Given those two alternatives, the lower tax rate obviously provides a greater incentive to people to produce and earn more. 0% is better than either, but 25% is highly preferable to 75%.

So there are two points here. First, though taxation is antithetical to economic freedom and serves to decrease the motivation to produce, how much of a discouraging effect it has depends greatly on its magnitude. Second, it is not the only thing that affects economic output.

There were many positive changes after the war. First, there was a massive deregulation as businesses were allowed to switch back to what they'd been producing before the war-decrees came down. Price controls were removed in 1946. From 1945 - 1948, Congress decreased federal spending by 68% and that spending went from consuming 44% of GDP to just 12%. Federal budget surpluses emerged in 1947 for the first time since 1930. The U.S. signed the Bretton-Woods agreement which put us back on at least a nominal gold standard, with the result that the money supply, which had grown 144% during the war, grew by only 13% from 1945 - 1950. Starting in 1946, the U.S. began to participate in the General Agreement on Tariffs and Trade, which, over a period of a few years, cut tariff rates by half. In 1947, the Taft-Hartley Act curtailed much of the union’s power to use violence and intimidation that the Wagner Act had unleashed in 1937; as a result, union membership began to shrink and strikes became less and less common.

So yes, although taxation was high -- the top tax rate at the end of the war was 94% and by the end of 1948, it had only been cut to 82% -- the overall level of economic freedom was much, much greater than it had been during the war or during the Depression prior to the war.

Also note that although we restored much economic freedom in the post-war period, we never returned to the level of economic freedom we had under Harding and Coolidge -- and thus we've never again seen a period of 10% annual economic growth like we saw in the 8 years of Harding and Coolidge. Those 8 years feature the lowest "misery index" -- the sum of inflation and unemployment -- ever recorded: the sum of inflation and unemployment for that period averaged 4.4%

One more thing: at the end of WWII, Keynes and his followers predicted a multi-year global depression if government “investment”, interventions and deficit spending was reduced. Well, all three were, in fact, reduced, and the global depression did not materialize.

Sorry for another bloviation, but I don’t know how to respond to these issues without covering this ground.

 
At 12/01/2008 8:30 PM, Blogger wcw said...

MS, try to recall, neither of us likes bombs.

In re: 1929-1933 price controls, umm.. what? Citations for legislation or executive action, please. Though that reminds me: why did Hoover's price controls fail in your mooted universe, while Eisenhower's (which I can document) didn't?

As for Keynes at the end of the war (he died in 1946): citation, please.

 
At 12/01/2008 8:30 PM, Blogger bob wright said...

MS,
Nice posts. Appreciate the detail - not bloviation. What are some of your sources for the detail you outline?

 
At 12/02/2008 1:37 PM, Blogger Colin said...

Thank you Michael Smith.

 
At 12/02/2008 1:49 PM, Blogger Michael Smith said...

wcw asked:

In re: 1929-1933 price controls, umm.. what? Citations for legislation or executive action, please. Though that reminds me: why did Hoover's price controls fail in your mooted universe, while Eisenhower's (which I can document) didn't?

Hoover’s efforts to fix the price of labor -- to keep wages high -- was initially implemented by simple direct “request” from Hoover to businessmen and business leaders, who generally went along with it.

I gave you a Hoover quote earlier in which he acknowledges that business leaders responded to his requests to maintain wages:

"The business community and the government have cooperated in more widespread measures of mitigation than have ever been attempted before… Our leading business concerns have sustained wages…."

Hoover said that in 1930. In 1932, Hoover summed up the results of his 4 year effort to combat the depression as follows:

"We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counter-attack ever evolved in the history of the Republic. We put it into action…..For the first time in the history of depression, dividends, profits, and the cost of living have been reduced before wages suffered….. Wages were maintained until the profits had practically vanished….. We prevented an immediate attack on wages as a basis for maintaining profits….We have placed humanity before money, through the sacrifice of profits and dividends before wages."

Both Hoover quotes are from “America’s Great Depression”, by Austrian economist Murray N. Rothbard, pages 217 and 282-283. Rothbard also documents the White House meetings and wage negotiation interventions that Hoover undertook throughout his term in office.

It apparently never occurred to Hoover that there might be a connection between the fact that “for the first time in the history of depression” wages were maintained and the fact that by the time he uttered that observation, the depression had become the worst in our history.

Hoover’s price fixing of wages, in one sense, did NOT fail. Wages *were* maintained. But if this is done in the face of a falling demand for product -- which is, itself, a falling demand for labor -- mass unemployment is the only possible outcome.

What is the evidence that Eisenhower’s price controls “worked” -- and what do you mean by “worked”?


As for Keynes at the end of the war (he died in 1946): citation, please.

Nice posts. Appreciate the detail - not bloviation. What are some of your sources for the detail you outline?

In addition to Rothbard’s book mentioned above, much of what I’ve cited comes from the four-part series of articles by Richard Salsman on the Great Depression in the June, July and August 2004 issues and the January 2005 issue of “The Intellectual Activist”. The four articles contain 106 separate citations from other studies, books and sources.

The post WWII depression prediction by the Keynesians is noted in part 4 of Salsman’s series.

Many of the statistics that both Salsman and Rothbard cite are from: “Historical Statistics of the United States: Colonial Times to 1970” (Washington, U.S. Department of Commerce)

See also “New Deal or Raw Deal” by Burton Folsom. This is a new book that provides many interesting details of Roosevelt’s programs and their effects.

See also “Capitalism”, by George Reisman, any of the sections on the money supply and prices during various depressions, such as pages 588 - 591. See also his refutation of Keynes on pages 863 - 892. It’s devastating.

 
At 12/02/2008 8:29 PM, Blogger wcw said...

MS, your post boils down to the admissions that Hoover did not implement price controls and that Keynes never predicted a multi-year global depression if deficit spending were reduced.

Let me show you how to document assertions without logorrhoea.

I assert Eisenhower implemented price controls, that they worked, and that at the end of his second term he said, "[t]he potential for the disastrous rise of misplaced power exists and will persist."

The Economic Stabilization Agency from 1950-1953 implemented Ike's price controls.

Year-over-year CPI during Ike's price controls shows they worked.

Ike's 1961 farewell address contains the cited quote.

Please do Hoover and Keynes. Your cheering section seems to need the comfort.

 
At 12/03/2008 4:44 PM, Blogger Michael Smith said...

Wcw wrote:

MS, your post boils down to the admissions that Hoover did not implement price controls and that Keynes never predicted a multi-year global depression if deficit spending were reduced.

Nonsense. I gave you the Hoover quotes, the title of the book it came from and the page numbers.

Whether the price controls consisted of laws passed by the legislature or pressure applied by the President is irrelevant to the issue at hand -- which is: whether or not the period from 1929 - 1933 was a period of economic freedom from government controls and interventions. I have provided overwhelming evidence that it was not and that Hoover intervened and interfered in the economy on an unprecedented scale. He even said so.

As for the Keynesian prediction, I told you that came from Salsman and I told you where to find the article. Salsman doesn't tell us his source, but why should anyone doubt the Keynesians would make that prediction? If government deficit spending and public works (or production of military hardware) is what ended a multi-year, global scale depression, it’s only logical to think that stopping all that deficit spending and stopping the public works and the production of military hardware would undo all the good that had been done and put us right back where we started.

Indeed, the essential Keynesian claim is that a free market cannot cure mass unemployment or achieve full employment -- so why wouldn't they think that the dismantling of the war economy would cause unemployment to shoot up again?

Let me show you how to document assertions without logorrhoea.

I assert Eisenhower implemented price controls, that they worked, and that at the end of his second term he said, "[t]he potential for the disastrous rise of misplaced power exists and will persist."

The Economic Stabilization Agency from 1950-1953 implemented Ike's price controls.

Year-over-year CPI during Ike's price controls shows they worked.

Ike's 1961 farewell address contains the cited quote.

That proves nothing. That’s post hoc, ergo propter hoc fallacy.

I agree with one thing, though: it saves words when you don't have to explain any causal connections or examine evidence in detail.

 
At 12/03/2008 7:06 PM, Blogger wcw said...

MS, I don't know about the others here, but you I want on the other side of my trades. What are you buying, selling or holding these days?

 
At 12/04/2008 10:22 AM, Blogger Michael Smith said...

For those interested, here is a fascinating 5 page article from the December 2, 1929 issue of Time Magazine. It describes the series of conferences held by President Hoover to obtain from industry promises to maintain wages and increase/accelerate capital spending plans. For Hoover’s part, he promises huge increases in Federal public works spending, while various state and local officials promised increased spending as well.

Here is the article (be sure to read all 5 pages):

Prosperity Pledgers

Interestingly enough, that article reveals that even Henry Ford believed the economic problems to be the result of “overproduction” and a lack of “purchasing power” on the part of the people. He even declared he’d raise his employee’s wages to help address the problem.

Of course, we know how Hoover's plan worked. Apparently, Obama is set to give it another try.

 
At 12/04/2008 2:41 PM, Blogger Michael Smith said...

Here is an article by a very noted Keynesian -- Paul Samuelson -- published in “The New Republic” in 1944, warning of the consequences of a drop in government spending after the war:

“Unemployment Ahead: The Coming Economic Crises”.

(It may take a few moments to link through.)

In the article, Samuelson states what must be done to avoid the coming crises:

This means we must embark upon a substantial program of income maintenance via welfare payments, social security, etc. We must exercise the greatest ingenuity in overcoming the technical delays to reconversion along with effective prosecution of the war. We must be planning more on a state and national scale for a vast expansion of useful public construction, for its own sake, and for maintenance of income and employment.

Fortunately, he was wrong and no crises developed even as Federal spending plummeted from 43.6% of GDP in 1944 to 11.6% of GDP in 1948. The dollar change was a fall from $92.7 billion in 1944 to $29.7 billion in 1948.

 
At 12/04/2008 5:35 PM, Blogger wcw said...

Still no Keynes quote. The assertion was, "Keynes and his followers," not "Keynes or Samuelson" (a neoclassical economist).

On Hoover and wages, run the numbers. The NIPA domestic income tables have employee compensation, and the Census tables (XLS). Divide compensation paid by number employed for per-employee compensation. Per man, wages fell 4% in 1930, 9% in 1931 and 15% (!) in 1032.

And please, post some recent trades for me to fade.

 
At 12/05/2008 11:13 AM, Blogger Michael Smith said...

Per man, wages fell 4% in 1930, 9% in 1931 and 15% (!) in 1032.

Yes, and when the current slump in automobile demand -- the sort of slump that the entire economy faced in 1929 - 1932 -- when the current slump causes the least efficient of the automobile companies -- the Big Three -- to “downsize” or go bankrupt or otherwise go under, many of their high paid workers will lose their jobs because the UAW -- playing the role of Hoover -- refused to allow a cut in wages.

And after those jobs are lost, what will you see if you calculate the average wage being paid to automobile workers? It will have fallen! Aha! Proof that wages were indeed reduced!

Had there, in fact, been wide spread wage rate reductions in 1929 - 1932, then there would be no reason for unemployment to do this:

1929 3.2%
1930 8.7%
1931 15.9%
1932 23.6%

Whenever there is a severe recession/depression, there will be many business failures. The first firms to fail will generally be those that are least efficient -- such as one’s with high labor costs. The survivors will tend to be the ones with the lower wages. So it’s to be expected that the average wage will fall during a downturn as severe as the Great Depression. It doesn't mean there were wide spread wage cuts.

It's true that there were a few wage cuts as things got desperate. U.S. Steel cut wages in 1931 -- and William Green, President of the American Federation of Labor, promptly accused them of violating their pledge to the President. Even Henry Ford was forced to reduce rates in 1932.

But the wage cuts were isolated and were the exception, not the rule. Secretary of Commerce Lamont declared in April, 1931:

“I have canvassed the principal industries, and I find no movement to reduce the rate of wages. On the contrary, there is a desire to support the situation in every way.”

 
At 12/05/2008 11:54 AM, Blogger Michael Smith said...

Still no Keynes quote. The assertion was, "Keynes and his followers," not "Keynes or Samuelson" (a neoclassical economist).

Samuelson in 1944 was indeed a follower of Keynes and the fears he expressed in that article are in keeping with Keynes’s theory. So unless we are to believe that by 1944 Keynes had abandoned his own theory, it is certainly plausible to believe that he agreed with Samuelson’s assessment.

The larger point, of course, is that Keynes’s theory claimed that laissez-faire capitalism cannot eliminate mass unemployment or bring about full employment -- that only government deficit spending can do that. Given that belief, and faced with the prospect of 12 million additional workers being dumped on the American economy as military service ended, it would be entirely logical to call for exactly what Samuelson called for in that article.

What do you believe? That Keynes in 1944 had abandoned his theory and was instead advocating a post-war policy of laissez-faire capitalism? Or are you merely interested in finding something in one of my posts to disagree with -- even if it is not germane to the fundamental issue?

The fact that the American economy absorbed all those men without a crises of unemployment -- and did so in the face of falling government expenditures -- is a pretty hard knock against Keynes’s theory. That’s true with or without any particular quote from the man.

 
At 12/05/2008 11:55 AM, Blogger wcw said...

Still no Keynes quote. That one is settled: Keynes never predicted what you claimed. May I suggest rereading his General Theory? It is flawed, of course, but it's part of the canon for a reason.

On Hoover and wage controls, I again consider the matter settled. Hoover never refused to let either wages or prices fall. There were no price or wage controls. There was no stability in aggregate wage levels or price levels under Hoover.

Not that it matters, but your claims are now laughable: Relatively high-wage enterprises choose bankruptcy instead of wage cuts. Despite the hard aggregate data, per-man, per-position, per-enterprise wages did not fall. Data mean nothing when you have anecdote and political rhetoric. Anecdote from surviving industries tells us about wage behavior of bankrupt enterprises.

And still no trades. Sad.

 
At 12/08/2008 4:31 PM, Blogger Michael Smith said...

Still no Keynes quote. That one is settled: Keynes never predicted what you claimed.

You have problems with basic logic. The fact that I can’t locate a Keynes quote means I can’t prove he made the prediction. But it's a non sequitur to claim this proves he did NOT make the prediction. Unless you are adopting the position that all predictions ever made are available to a casual search on the internet. Is that your position? Every prediction ever uttered is out there on the internet?

On Hoover and wage controls, I again consider the matter settled. Hoover never refused to let either wages or prices fall. There were no price or wage controls.

Of course you consider the matter settled. I knew the matter was settled in your mind before I made my first post on the subject. I didn’t post the information in the hope of “unsettling” the matter in your mind -- I posted it for the benefit of those who are willing to think and consider the evidence.

Not that it matters, but your claims are now laughable: Relatively high-wage enterprises choose bankruptcy instead of wage cuts.

Go ahead and laugh -- it only demonstrates that you are detached from reality.

Many companies have gone bankrupt rather than cut wages. See, for example, the history of Eastern Airlines. In fact, sometimes the only way to cut wages is to go bankrupt, go through a reorganization and come out as a much more efficient, lower cost producer. For an example of this, see United Airlines.

What’s more, today, even companies that don’t go bankrupt in a business downturn generally follow the policy of laying off their workers rather than cutting wage rates. Surely you’ve noticed that mentions of “job losses” greatly exceed mentions of “wage rate cuts”.

So today, businesses are following the very policy Hoover urged in 1929 - 1932, but back then -- according to your view -- businesses ignored Hoover and followed the opposite policy.

According to your view, then, at some point later in time, all businesses just spontaneously and causlessly decided to switch to the policy Hoover advocated, but which they, at the time, chose to ignore.

And apparently we are to believe this merely because you say so.

Despite the hard aggregate data, per-man, per-position, per-enterprise wages did not fall. Data mean nothing when you have anecdote and political rhetoric

No, I didn’t say the average wage did not fall. I showed how it can fall even as employers were keeping wage rates up.

And I didn‘t say that data mean nothing. I agree that data means a lot. For instance, consider this data:

In 1932, an aggregate payroll of $31,100,000,000 was paid out to 38,940,000 employed Americans for an average annual wage of $799/year, leaving 12,060,000 men unemployed. If, instead, the average wage had been decreased to $610/year, this same aggregate payroll of $31,100,000,000 dollars could have employed the entire workforce of 51,000,000, leaving ZERO unemployed.

Now, for the most part, the capital to employ these men existed; it was sitting idle. Clearly, it would have been of GREAT benefit to every producer to lower his average wage to $610/year, because doing so would decrease his costs of production, allow him to hire more workers, put his idle equipment to use and thus increase his profits. Clearly, it would have been of GREAT benefit to all of the 12,060,000 unemployed Americans had they been able to stay on the job at $610/year. Clearly, it would have been of GREAT benefit to the country to have production returned to the level made possible by full employment; such an increase in supply, coupled with decreased costs of production, would mean a reduction in prices thereby improving everyone’s purchasing power.

Yet, despite these tremendous benefits, employers kept the average wage above the wage that would have cured the unemployment problem and maximized their profits. Now why would they do that, if not for Hoover's jawboning? Mass stupidity on the part of businesses? Wholesale insanity? An abandonment of the profit motive?

Wage rates stayed high enough to cause digit unemployment, with double digit numbers of unemployed Americans, to persist for years.

And in the face of those facts, you claim that Hoover’s efforts to keep wages up had no effect and that wages *were* cut to avoid unemployment?

Obvioulsy, what you choose to believe is unaffected by the facts, so believe whatever you wish.

 
At 12/11/2008 2:00 AM, Blogger wcw said...

Jeepers, what a whole lot of syllables to say, "I'm sorry, I have no data and no citations."

Pathetic.

 
At 12/12/2008 2:13 PM, Blogger Michael Smith said...

Jeepers, what a whole lot of syllables to say, "I'm sorry, I have no data and no citations."

Pathetic.

That’s your response? No data?

The data I used to demonstrate how a fall in wages from $799/year to $610/year would have ameliorated the mass unemployment doesn’t count as data in your mind? It’s the very same data you linked to in your comment on 12/04/08 at 5:35 pm. So it was data when YOU used it, but it is dismissed as “no data” when I use it?

No citations? What sort of citations do you want to accept that 2 + 2 = 4?

Pathetic indeed.

 
At 12/12/2008 8:21 PM, Blogger wcw said...

Nothing personal, my good man, but I fear you may be divorced from reality in a moderately dangerous way. Please, get help -- if not for me, then for the sake of whoever out there cares for you.

I am not kidding. In the words of Johnny Rotten, I mean it, man.

Get help now.

 
At 12/14/2008 12:17 PM, Blogger Michael Smith said...

That's all you got, wcw? A lame attempt to pretend that I'm deranged or something? Is it really necessary for me to point out that an ad hominem attack is a logical fallacy -- and that resorting to it is a confession to intellectual bankruptcy?

One wonders, who -- other than yourself -- do you think you are fooling with such comments?

 

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