I Have My Limits
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