Wednesday, November 04, 2009

False Lessons of History for Policy Guidance

The true lesson to be drawn from business cycle history is that, if left to run their natural course, severe downturns are followed by rapid snapbacks. For example, during the 1921 recession, wholesale prices, industrial production, and manufacturing employment fell by 30% or more, reaching their low in mid-1921. But, absent government intervention, the economy recovered naturally, and by early 1922, it had fully recovered, from its mid-1921 low.

Far from saving the patient, government intervention (in the 1930s) came close to killing it. But you wouldn't know it from listening to the current discourse about the Panic of 2008-09. Indeed, politicians and pundits throughout the world have unfortunately dialed back to the Great Depression and drawn on the false lessons of history for policy guidance and justifications for their mega-interventions.

~Steve Hanke, Professor of Economics, Johns Hopkins University


18 Comments:

At 11/04/2009 9:12 AM, Blogger spencer said...

the rule of thumb is that a recovery is proportional to the downturn and it generally takes about the same time to return to the prior peak as the downturn lasted.

this worked exactly in the 1930s.
The downturn was 3 and a half years from 1929 to 1933 and it took three years for output to surpass the prior peak in 1937.

On this basis the 1933-37 recovery was perfectly normal.

 
At 11/04/2009 9:51 AM, Anonymous Anonymous said...

Evidently this guy hasn't read To Big to Fail by Sorkin. These guys were leveraged up the wazoo, and Paulson was trying to figure out how to deal with a potential crisis from the unwinding of leverage 2 years before the crisis.

 
At 11/04/2009 9:56 AM, Blogger PeakTrader said...

Sustainable growth is optimal growth, because there's neither strain nor slack utilizing resources. Smoothing-out business cycles maximizes growth over time.

However, government tends to slow growth, e.g. through inefficiencies and capital destruction. The true cost of government:

Per capita GDP 2008

U.S. $45,000
France $32,000

Total taxes; percentage of GDP 2008
U.S. 29%
France 45%

France has universal health care and other big social programs.

From a 2006 article: "GDP, total output, of the U.S.A. is $12.6 trillion, which divided by 300 million, yields a per-capita GDP of $42,000.

The cost of regulations in the U.S. is about $1.2 trillion, or $4,000 per person. The government burden, taxes plus regulation, is thus over $16,000 per person."

 
At 11/04/2009 10:00 AM, Anonymous Anonymous said...

Indeed, politicians and pundits throughout the world have unfortunately dialed back to the Great Depression and drawn on the false lessons of history...

This should not be surprising. The leftists in control of higher education have deified FDR and created an entire mythology surrounding his administration. Government, for them, is always the answer. The Democrats, the media (I repeat myself) and most of the cultural elite have been indoctrinated to believe that without the guiding hand of the state nothing is possible. And if their misguided interventions "come close to killing [the patient]", well, it's alright, their hearts were in the right place.

 
At 11/04/2009 11:03 AM, Blogger juandos said...

"The leftists in control of higher education have deified FDR and created an entire mythology surrounding his administration"...

Good point anon @ 10:00 AM...

Its happening again today: ELEMENTARY EPIDEMIC: 11 Uncovered Videos Show School Children Performing Praises to Obama

 
At 11/04/2009 12:09 PM, Blogger M Miller said...

Read the commentaries from 1908 to 1910. Current economic panic is a virtual mirror of 1907-1908. Gibson Market Letters, Quarterly Economic Review,all on google books.

 
At 11/04/2009 12:17 PM, Anonymous Anonymous said...

I know what we can do: We can channel Andrew Mellon and balance the budget. We can give each other tax cuts on a credit card, making it more difficult to address crises in the future. Maybe we can get in a crisis in Iran and spend some more of that military spending. And, we need more faith based initiatives, too.

Oh, I'm sorry, I thought you wanted the Republican agenda.

 
At 11/04/2009 12:26 PM, Blogger juandos said...

"Oh, I'm sorry, I thought you wanted the Republican agenda"...

Hmmm, so we should want a liberal/Democrat mindset instead?

Just asking is all...

 
At 11/04/2009 12:49 PM, Anonymous Benny Telling It Like It Is said...

Milton Friedman thought monetary policy trumped a lot of other policies, and that a big mistake was contracting the money supply during the Great Depression.
So far, Bernanke (who knows a lot more about the Great Depressiopn than any posters here, including our host) has avoided that mistake.
He is printing money! Yes, a good idea, and I hope he prints until the plates melt. Indeed, we need a round of moderate inflation forman years to liquidate the huge debts we have built up withut means of paying off.
I hope Ron Paul gets the R-Party nod in 2012--because if you think the R-Party will cut the deficit, you weren't here for the Reagan-Bush-Bush eras. They love rural subsidies and an ossified,bloated, outsized and parasitic military.

 
At 11/04/2009 12:58 PM, Anonymous Anonymous said...

I know what we can do ...

We can give each other tax cuts on a credit card ...

Every time that taxes have been reduced, tax revenue has increased. Kennedy, Reagan, Bush, every time. So, yes, if the government wants to generate more tax revenue it needs to rationalize tax rates.

Maybe we can get in a crisis in Iran ...

If by "we" you mean leftists, I'm certain of it. Weakness breeds instability and conflict, and next to Jimmy Carter, Obama may be the weakest president we have ever had.

And, we need more faith based initiatives ...

Liberalism is one giant "faith based initiative". Faith in the state. It pathetic how leftists are always searching for their "Dear Leader". Marxism is your religion.

 
At 11/04/2009 1:25 PM, Anonymous Anonymous said...

... we need a round of moderate inflation forman years to liquidate the huge debts we have built up withut means of paying off.

Moderate? That's quite a climb down for you.

A government that runs a huge budget deficit cannot inflate away it's debts. Aside from the fact that it would be morally insidious, inflation only works on existing debt, not debt flows. Once the government starts to inflate it's ability to borrow at attractive rates will vanish. The markets may even demand that we finance our deficits in a different, more stable, currency.

Further, it does no good to inflate when such a large portion of your debts are tied to inflation linked Social Security accounts.

If you're paying attention, you will have noticed that the vast majority of the governments borrowing has been at the short end of the curve - under one year. This means that government financing is very sensitive to changes in interest rates. One whiff of inflation and the markets will demand higher rates adding billions to the cost of refinancing our deficits.

Get a clue.

 
At 11/04/2009 1:45 PM, Anonymous Benny The Realist said...

Anon-

Okay, let's pay off the debt, without inflation.
And cut taxes for rich.
And finance a Cold War relic--the ossified and fat US Military--and a few wars.
And send $200 billion a year to rural America.
And wipe out HUD, Dep't of Agriculture, Commerce, and Labor.
And eliminate public universities.

What are the chances of the above happening?

There is no way our two political parties have the will to pay down the debt. None.

Running five percent inflation for six or seven years would liquidate about one-third of our debt.

We are fortunate in that we can even liquidtae debt owed to foreigners in dollars. Start printing!

 
At 11/04/2009 2:23 PM, Anonymous Anonymous said...

What are the chances of the above happening?
There is no way our two political parties have the will to pay down the debt. None.

It will not be a question of "will". The fiscal realities will force a resolution.

All the things you constantly prattle on about - rural subsidies, military spending, blah, blah, blah - are not the problem. The problem is entitlement spending. Social Security, Medicare and Medicaid. The Democrats structured these programs as ponzi schemes and they have demagogued every attempt to reform them. In the end, these programs will fail and those that depend on them will be worse off than if these programs had never existed. To paraphrase Steve Hanke, Far from saving the patient, government intervention will come close to killing it.

 
At 11/04/2009 3:10 PM, Blogger W.E. Heasley, CLU, LUTCF said...

(1) Keynesian Government Deficit Spending (fiscal stimulus) creates temporary jobs creating temporary stimulus. When the deficit spending ends, the temporary jobs end as well as the temporary stimulus effects,

(2) rising taxes, rising regulation, and increased government debt reduces Private Capital Formation which is directly related to Private Sector Job Creation,

(3) rising taxes reduce Private Sector consumption,

(4) repeating 1-3 above, over and over again, as was done in the Great Depression, yields the same result: continued recession.

 
At 11/04/2009 3:51 PM, Blogger juandos said...

From CNN Money, dated August 27, 2009: The nation's debt must be brought to heel, and doing so will require tough choices beyond spending cuts, experts say

 
At 11/04/2009 4:34 PM, Anonymous Benny Telling It Like It Is said...

Check out the federal budget, and hidden subsidies to rural America, and the most bloated, ossified money-hungry of all federal departments--the Department of Defense.
The US Congress has determined military outlays, through the House and Senate Appropriations Committees, for decades upon decades.
Congress controls the spending--what do you glean from that? Ossified fat and patronage.
Of course, enttitlements need to be whacked.
Who is going to cut Social Security? Medicare? The VA? Medicaid?
No one.
Also, the largest entitlement programs have no impact on income taxes.
It should be remembered that Social Security-Medicare is funded through payroll taxes, not income taxes. Cutting it back would not lower income tax rates at all!
However, if you want to cut income taxes --and I do--then whacking the Department of Agriculture and DoD would result in huge savings--and improved market performances, as the subsidized agri-sector responded to market signals, and the parasitic military was lifted off the backs of productive hard-working, taxpaying people and businesses.
Did you know that more than one-half of your income taxes are absorbed by the military? That includes costs from the past--pensions etc--and ongoing wars.

I vote the cut my income taxes in half. I vote for Ron Paul. I vote to cut the military back to a reasonable level to protect our shores, and get farmers to take care of their own businesses. I vote for free enterprise and the real American way.

 
At 11/04/2009 8:52 PM, Anonymous Anonymous said...

It should be remembered that Social Security-Medicare is funded through payroll taxes, not income taxes.

We are fast approaching a point where payroll taxes will not cover Social Security and Medicare outlays. When that day comes these entitlements will have draw on general revenue.

Did you know that more than one-half of your income taxes are absorbed by the military?

Wrong.

 
At 11/05/2009 4:10 PM, Blogger juandos said...

"Also, the largest entitlement programs have no impact on income taxes"...

Hey pseudo Benny, do you make this stuff as the mood moves you or are you getting your talking points from Nancy Pelosi?

 

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