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I Have My Limits

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March 04, 2010 – Comments (17)

When it comes to listening or reading bad economics, I have my limits.  I have thought about penning daily responses to the various bootlicking hacks that operate in the blogosphere, most notably Krugman's little sister Berkeley economist Brad DeLong.  Too bad I have discovered there is a limit to how much nonsense I can take.

The other day on DeLong's blog, Brad was reviewing an article summarizing the struggles currently facing our economy.  Among the author's conclusion was that if wages were allowed to fall, the economy would be in much better shape going forward.  DeLong, like every good scientific socialist, is a champion of shedding crocodile tears for the working man.  He rejected that idea.  What solution does he propose instead?  If you guessed "bigger deficits," you get a star.  In typical Keynesian fashion he reasons that running larger deficits would boost employment and aggregate demand without the nasty trade-off of reducing "real wages."

Stop right there.

Before we can understand why DeLong is misguided it's important to understand the Keynesian view of The Great Depression.  So as not to take apart a strawman, feel free to add a correction if needed in the comment section.  In the typical Keynesian view, Hoover was a laissez faire "do nothing" President.  Often, you will hear DeLong call him a "liquidationist," a supposedly derogatory term that means he wanted to liquidate the bad assets.  According to Keynesians, the market could not self correct because wage earners did not or could not find work at lower wages ("sticky wages.")  Along comes FDR, he solves the sticky wages problem by running a huge federal deficit, employing millions in public works programs, and the economy starts to turn around by 1937.  Then FDR makes the mistake of reducing the deficit, caving to the "nihilists" that were worried about spending, and the economy tanks again.  Only the massive federal spending of the war brought America out of Depression.

That's pretty much the story. So what's wrong with this picture?

1. The idea that Hoover was a liquidationist comes not from Hoover, but from Hoover's aides, many of whom urged Hoover to allow the market to self-correct.  In his memoirs, Hoover brags about how he ignored them and ran up the deficit anyway.  Hacks like DeLong and Krugman like to quote the people around Hoover to imply that Hoover acted the same way.  Hoover was a proud Progressive, a hyperinterventionist, and at every level of government service he attempted to meddle in the economy.  Hoover ran the largest deficit in American history up to that point.  FDR actually campaigned against Hoover's deficits, claiming that Hoover's administration was out of control. 

Here are 21 Hoover interventions that helped turn the depression of 1929-1930 into The Great Depression.  I urge you to click the link in the previous sentence if you are under the impression that Hoover was a do-nothing President.

2. The second sticking point in the Keynesian story is that the economy was turning around by 1937.  This might be true. It might not be true.  But is that really a great story?  Compare that with the Depression of 1920-1921.  In 1920, the economy contracted at a sharper rate than in late 1929-1930.  President Harding slashed federal spending and the economy fully recovered in less than two years. That doesn't fit very well with the Keynesian story.  How did America avoid a Great Depression in 1920 without increasing the deficit, if the The Great Depression was caused by not increasing the deficit?  That doesn't make a whole lot of sense.  Bad economics does not make sense.

3.  I'm too bored to discuss the ridiculous idea that human slaughter is good for an economy.  You are taking the Broken Window Fallacy and extrapolating it into the Broken Country Fallacy to believe such nonsense.  Like I said, bad economics does not make sense.

4.  That brings us to "sticky wages."  If I take money from Paul to pay Peter to dig a ditch, Peter no longer has a sticky wage problem.  But what happened to Paul?  And what happens to the value of all wages when you engage in public works projects?  All wages, in the long run, will lose their purchasing power as the value of the dollar plummets.  This is why FDR had to take America off the gold standard, by confiscating private gold holdings in 1933, and then resetting the standard at $35.  (That's right, an American President stole his citizens' private gold holdings and yet historians hail him as a hero. Strange.) Everyone's standard of living went down.  That's what hapens when you rob Paul to employ Peter. Say it again, bad economics does not make sense. 

Can you tell that Keynesianism bores me?  It's like studying witch craft.  It's exciting for the first few minutes, but then you realize the whole thing is kinda silly and the witch doctor takes his practice a little too seriously.  It stops being cute.

Which brings us back full circle.  Do you understand now why Keynesians like DeLong believe we should be running huge deficits, that Obama is not doing enough, and why they hate the current Republican obstructionism?  Do you get why Ron Paul and libertarians, particularly free market supporters like our friends at Mises and Cafe Hayek, consistently draw their most hateful venom?

I get it. I've had enough of Keynesianism.

David in Qatar

17 Comments – Post Your Own

#1) On March 04, 2010 at 1:20 PM, whereaminow (30.29) wrote:

This article can also be found at Freedom Chatter. I also hope you'll extend your support for fellow FC contributor and Congressional hopeful Jake Towne.

David in Qatar

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#2) On March 04, 2010 at 1:40 PM, whereaminow (30.29) wrote:

Speaking of daily rebuttals, economist William Anderson is apparently not as bored as I am. He tackles Krugman's crackpot ideas at Krugman in Wonderland.

David in Qatar

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#3) On March 04, 2010 at 1:43 PM, catoismymotor (< 20) wrote:

You did a good job with writing that. It flows nicely, feels shorter than it really is.

Like you I have grown weary of Keynesianism. At first I dreaded its arrival. Now I am ready to see it go. Hey, kind of like visiting in-laws!

Those of us that are fiscally conservative must put our best thoughts and actions into play in order to end this madness.

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#4) On March 04, 2010 at 1:52 PM, whereaminow (30.29) wrote:

Thanks Cato!

We need to beat their ideas, particularly by refuting the intellectuals that currently spread these false theories.  It drives me crazy to read their drivel and respond but we have to do it.  It is the ideas that make a society and not vice versa.

David in Qatar

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#5) On March 04, 2010 at 2:30 PM, 4everlost (29.47) wrote:

David,

Your post must have made a ton of CAPsters rush to the econlib.org site 'cause it's having problems.  You know how many avid followers you have (including me :-) ); they all must have clicked on the link and it can't handle the traffic.

Great info in your post.  It always surprises me when anyone claims that Hoover was a do nothing president.  There are places where one can look things up and look at actual facts, aren't there?

Thanks for your continuing efforts.

Rec #6

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#6) On March 04, 2010 at 2:40 PM, whereaminow (30.29) wrote:

4ever,

Darn. I just tried to get back there too. Here's some more background on Hoover's interventions.  Also, Murray Rothbard wrote a whole book about 1929-1932 called America's Great Depression, which covered the whole ordeal in painful detail. 

Here's another great link.  Thomas Woods explains why you've never heard of the Depression of 1920-1921.

Thanks back to you!

David in Qatar

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#7) On March 04, 2010 at 2:45 PM, FleaBagger (28.77) wrote:

Didn't CAPS's own pecils2 (David Kretzmann) found Freedom Chatter a couple years ago?

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#8) On March 04, 2010 at 2:56 PM, catoismymotor (< 20) wrote:

Not only do we need to beat their ideas but we need to be heard. And I think gradually that is happening. More people, of all ages, are turning their backs on the networks, national magazines and papers to look for less biased, more fact driven informative sources. Big media is still on top, but will not be forever.

 

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#9) On March 04, 2010 at 3:05 PM, kdakota630 (29.76) wrote:

4everlost

It always surprises me when anyone claims that Hoover was a do nothing president.

That's what I was taught in high school, and I never thought to question that fact until within the last couple of years.  Even then, it was probably only 6 months ago when someone informed me that FDR actually campaigned AGAINST Hoover's interventionism, only to ratchet it up once in office.  Of course, this was long before Wikipedia.

whereaminow

Thomas Woods explains why you've never heard of the Depression of 1920-1921.

Argh.  Thanks a lot!  Now I'm trying to figure out where I saw this before.  Was it a YouTube clip?  Was it an article I read on the internet?  Was it a chapter from a book?  Great.  This is going to bug me until I figure it out.

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#10) On March 04, 2010 at 3:06 PM, whereaminow (30.29) wrote:

Flea,

That is correct. Let's hope he succeeds and I get a wider audience :)

Cato,

Totally agree. Big media is trying to adapt.  CNN is even running Tea Party impact segments now.  That cracks me up.  Remember their initial reaction lol?  But big media moves too slow and has its own agenda. 

David in Qatar

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#11) On March 04, 2010 at 5:01 PM, ChrisGraley (29.89) wrote:

LOL, the site is under too much strain for me to even pull it up. I shall have to wait until later tonight.

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#12) On March 04, 2010 at 7:06 PM, dbjella (< 20) wrote:

Thanks David this was a nice read.  If I have to wait a little longer to get blogs like these well so be it :)

I remember in high school I did a report on FDR.  I still have it today and just laugh at what I wrote.  I remember my teacher never challenging me on any "facts" or my conclusion probably because I pulled them straight out of the encyclopedia. 

I just hope to improve the critical thinking of my children.

I am curious as a former marine you seem a little to deep a thinker (sorry for the stereotype) were you always this way or did you stumble upon an aha moment?  

 

 

 

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#13) On March 04, 2010 at 7:22 PM, AvianFlu (32.65) wrote:

David:
I am with you, sir.

I do not understand why the Keynes fanatics refuse to acknowledge the complete failure of their concept, even after 80 years of test marketing it in one socialist "paradise" after another. They always say, "The spending would have worked, but we didn't spend enough!" They will never admit the bankruptcy of their idea. I'll bet Keynes himself would have changed his tune if he were alive today.

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#14) On March 04, 2010 at 7:30 PM, whereaminow (30.29) wrote:

dbjella,

MARINE =

Muscles Are Required Intelligence Not Essential

No problem with the stereotype. And I've been out so long now that the muscles are no longer there.  I guess I needed to replace them with something else.

I actually first learned about libertarianism from a Master Sergeant in the Marines.  I had my "aha" moment as he was schooling me on the virtues of a Constitutionally-correct, humble foreign policy.  It may surprise you, but the Corps has always attracted individualists with libertarian leanings.  It's becoming more like the Army now with the elitist, statist, collectivist mentality of its leadership but many Marines are holding on to their individualist roots.

I was a bit of a neocon in my younger days. I liked the warfare/welfare state and I believed in all of the foolish ideas that I debunk on a daily basis now many years later.  It's amusing, since a lot of people come here and tell me arguments that I used to believe in as if I never heard them before.  Very fun.

I'm not a particularly clever person.  I just put the time in to learn economics because I was fascinated by what libertarians had to say about it.  It was new and interesting, and it never gets old.  I went on to ITunes a few weeks ago and downloaded the 65 lectures from the Mises U summer course.  I've already listened to almost half of them (they are each about an hour long.)  It's just something I really enjoy.  And my fiancee seems to be ok with my nerdy hobby.

When it comes to most other things though, I'm pretty dumb.

David in Qatar

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#15) On March 04, 2010 at 7:53 PM, devoish (97.60) wrote:

Among the author's conclusion was that if wages were allowed to fall, the economy would be in much better shape going forward.  DeLong, like every good scientific socialist, is a champion of shedding crocodile tears for the working man.

Thanks for the laugh guys. I am picturing all of you running in to your boss's office demanding pay cuts for yourselves. Not someone else.

Reluctantly, your boss agrees.

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#16) On March 04, 2010 at 8:03 PM, whereaminow (30.29) wrote:

devo,

That actually made me laugh. Score one for mr. devo. My boss would love to see my wage reduced!

But you missed the point entirely.  We have all taken pay cuts as our standard of living will drop because our purchasing power will decrease.  That's what makes the Keynesian argument for curing sticky wages so foolish.  It's not a solution.  There is no free lunch. 

The key to understanding the bust is understanding the boom that preceeded it.  But that's for another lecture.

David in Qatar

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#17) On March 04, 2010 at 11:56 PM, tonylogan1 (28.17) wrote:

rec 30.

give devo another 4 years and he'll be lib leaning at least.

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