There's much to like in Obama's plan. But there are two important ways he may have to go further. Most economists agree that what finally pulled the U.S. out of the Great Depression was military spending for World War II. Some liberals argue that if the Roosevelt administration had not abandoned a Keynesian stimulus strategy in 1937-38, the U.S. might have gotten out of the depression without a war. But in 1936, unemployment was still at 16.9 percent; by 1942, after two years of war spending, it was 4.7 percent, strongly indicating that it was war spending that did it. I am not suggesting that the United States start a world war in order to solve the world's economic problem. But I am suggesting a strategy that could be called the fiscal equivalent of war.
It would consist not merely of updating or repairing the nation's infrastructure, but in undertaking massive new investments that would expand the scope of American industry, and address other urgent problems in the process: global warming, over-reliance on petroleum, and the need to revive America's domestic manufacturing capabilities--not just to provide jobs, but also to provide tradeable goods that can reduce the country's current account deficit.
One area that is ripe for such investment--and that is not, from what I have seen, a declared priority of the Obama administration--is high-speed rail. Amtrak's Acela trains--the closest thing we have to one--average less than 100 mph between Washington D.C. and Boston, whereas trains in Western Europe and Japan go more than twice as fast. Many of them also run on electricity. They would be the most energy-efficient and quickest means of getting between places like Boston and New York, or Los Angeles and San Francisco. But they would require a massive investment. For instance, installing high-speed rail in the Northeast corridor could cost about $32 billion, while California's high-speed rail system would require up to $40 billion. A system that would address the other areas of the country could easily raise the cost to the hundreds of billions. The House transportation and infrastructure committee has currently proposed $5 billion in stimulus funds for intercity rail--not even a down payment on what it would cost to convert the U.S. to high-speed rail.
Here's the problem: by 1942, the war had more than doubled government outlays, increasing the fraction of GDP spent by the Federal Government from 9.8% in 1940 to 24.3% in 1942. The next year brought it up to 43%. Much of this was paid for by not-quite-forced-savings like War Bonds and rationing.
Even if Obama wanted to spend this kind of money, where would he get it? Americans used to save approximately 8-10% of their household income. Now they save . . . nothing. That's only just reversed itself, and much of it is going not into loans, but to building up the balance sheets of the lenders they're repaying.
Nor do I see high speed rail as a great place to absorb huge numbers of unemployed. In construction, yes, some, though even those jobs aren't perfectly fungible--pavers and crane operators and steel workers are not much used in residential building, and many of the residential construction workers are illegal aliens who will not be applying for Davis-Bacon jobs. But what does a mortgage bond trader do on a high speed rail project, other than read the Wall Street Journal and bitch about the quality of Amtrak coffee?
Great. Some genius just figured out that massive forced conscription by the millions lowers unemployment.
Wonderful.
By the way. What happened to income tax rates over that period?
Megan: If the Government wants to stimulate the economy, then why not just declare a payroll tax holiday immediately?
It's fast to turn on, fast to turn off once CPI ticks up, and you don't have all these "is it really shovel ready" questions you have with fiscal stimulus.
People will save some of the tax cuts, but people need to pay down debt too. That's why you keep it going until there is enough spending that it starts to show up in CPI.
Are you saying the economy will never recover until the employment in the financial sector reaches what it was a year ago? Isn't the overemployment of brainpower in the financial sector what got us into this mess?
But what does a mortgage bond trader do on a high speed rail project
Learn to issue corporate bonds? I expect the skill sets are pretty comparable. While major construction projects may not sop up 100,000 unemployed finance-industry professionals (or however many it is now), they'll need at least some people with a financial background and experience with the markets.
On winterspeak's point, the main problem with a payroll tax holiday is that it minimizes Congressional opportunities for graft and larding out goodies to their contributors. That makes it both wise and politically unfeasible, at least until we get a better class of congresscritter. Here's hoping they prove me wrong!
You may wish to check out this Econtalk podcast (http://files.libertyfund.org/econtalk/y2008/Higgsgreatdepression.mp3) that looks in some detail at the claims underlying Mr. Judis's perscriptions.
The Financial Times is $49 for 6 months and a better read in this environment. Yes, the magical Obama is supposed to be like the fairy godmother that changes rats into horses. I think they're going to have to hire the finance guys into the IRS to watch for 'my fellow Americans' drilling holes in the budget with the 'tax cuts.'
Focus on mortgage bond traders is either just sarcasm, or highly misplaced.
Infrastructure spending would help more than just people involved in construction jobs.
Somehow the fate of mortgage bond traders just does not seem particularly important.
But what does a mortgage bond trader do on a high speed rail project
Make coffee and buy muffins for the people with useful skills.
Wasn't Bush's lavish military and domestic spending essentially the sort of thing MM is talking about? We've already tried that way out and it didn't work.
That one sort of jumped out at me too. I had to reread it a couple of times but the author Megan cites appears to think (or at least pretends to think) that it was a function of war spending as opposed to conscripting most of the able-bodied male population that suddenly reduced the unemployment rate. Given some of the things that came out about Obama’s “national service” plan, I would be cautious about using the “c-word.”
Here is another problem people forget to consider when talking about the trade account deficit.
If America is to export more, other countries have to produce less. This should be intuitive but people seem to forget this. I suppose if you're talking only export brand new innovations, this would change, but even then that innovation is most likely a substitute not a whole new breed of product business/consumers also need to buy.
In another way, our deficit is someone else's surplus. Take away our deficit and you take away their surplus. IE, Aerobus stops selling planes and Boenig sells instead. I'm not saying it would be arbitrary like this by any means.
But in terms of trade China has a surplus, we have a deficit. Germany has a surplus, we have a deficit.
What's interesting about this is these other countries actually have a lot more of a problem than we do.
If America started filling its own demand (or reducing demand overall) their industry would not be able to maintain itself as they rely on our demand to run their economies.
We only need them to buy up our treasury bills which we print for free anyway...
Sweden was the first country to recover from the Great Depression, it did so with spending, not conscription. It's recovery was amazingly quick --by 1934, Sweden's real output had recovered to 1929 levels. By 1935, it was 7 percent above it. Growth continued well into World War II.
Sweden's success was owed to the liberal policies of the Labor government that came to power in 1932 -- policies influenced by a group of economists led by Gunnar Myrdal who had been advocating Keynesian-like solutions for years. The government ran large deficits and spent itself out of the Depression in two years.
Germany was the 2nd country to emerge from the Depression -- with military spending. Great Britain too spent itself out of the Depression (before the US) with increased military spending.
This history would suggest that it was spending, not conscription, that was most important.
It is reasonable to ask whether the US would tolerate the tax burden that could make such spending possible. But it is a mistake to suggest that increased government spending -- whether for infra-structure, social policy or war -- wasn't key to recovery from the Great Depression.
Yes, we are screwed. Forget that it was Uncle Sam who did the borrowing that amounted 43% of GDP in the early 40's. The point is that the stupendous increase in system wide credit brought on the economic growth.
Look at this chart. Credit as a percent of GDP. But note two things.
1 the huge spike in 1930-35 was caused by the ratio going wild as GDP shrunk, not because debt grew. Even though huge amounts of debt defaulted GDP kept right on shrinking so the ratio stayed high.
2. the pre 1930 numbers are unreliable and almost certainly wrong but I don't have the time to prove it.
2a. Credit spiked in the late 20s, much of it for financial purposes which inflated stock and financial paper prices. The stock market crash was coincident with the failure of credit structures related especially to trusts and intensified greatly by margin calls as so much stock was being bought with credit.
http://farm1.static.flickr.com/18/24012562_68e2121a3d.jpg
Then by 35 total systematic credit shrunk faster than GDP. Nobody would borrow. Business had little need to with so much idle capacity and then too why borrow anyway if prices are not going to rise. It was deflation remember. Don't buy today, buy tomorrow it will be cheaper. (Inflation is our friend. The banking and credit system simply does not work without it. Not with fractional reserve banking anyway. Not with a consumer centric economy)
Then finally Uncle Sam stepped up to the plate. Hugely increasing system wide credit outstanding, but GDP rose almost as fast. Those borrowed dollars were getting a lot of bang for the buck.
And so it went till 1980, Morning in America. (better charts pinpoint 1982) Then total credit started an inexorable rise. In total of course but as a percent of GDP shown in the chart. The chart ends in 05 missing the final blow off. No matter. What was happening was that every successive dollar borrowed generated less and less GDP growth.
Throw in that so much of the credit was issued for consumption of things from homes to boob jobs to stock buy backs to Iraq and precious little for profit making investment nor infrastructure, human or capital good and you have our problem
Think these thing through for awhile and try to predict the likely hood that more credit will solve the problem. Most all Uncle Sams borrowing so far has gone into the fools errand of trying to reinflate or at least stop the deflation of old debt. As the Fed buy MBS and various other damaged credits. In the insane hope that we can get the old game going again. It's insane to me anyway, of course my net worth didn't grow 10 figures during the boom.
Carter said in essence, we have to recognize limits. Limits to material things. Others disagreed. A few got stupendous wealth and power beyond the imaginings of kings of old. Most got lots of fun stuff and a lot of debt. We also got peak oil and global warming.
"If America is to export more, other countries have to produce less."
Or they could save less and buy more. With a domestic savings rate of 30%, it could be argued that the Chinese are saving too much. In order to grow domestic demand they need to reduce this propensity to save.
Where I live, in the Iowa City-Cedar Rapids corridor, a Japan/Europe-quality high-speed train to Chicago would hugely benefit the economy. People here could commute to the Chicago area for work; we could be at least something of a bedroom community. Given the economics problems in Cedar Rapids (major flood damage last summer) it would be all the more welcome. And it does seem like something that the Federal government would need to step in for - I don't think either state (Illinois or Iowa) has the resources now or the political will. So I say, Judis is on to something; just think outside of the East Coast. Need any further motivation, political leaders? Remember - -caucus in eight years, caucus in eight years, caucus in eight years.....
Is there a profitable passenger rail line in the U.S. on which such a system could be modeled? Otherwise it seems like we'd just be committing to a larger, permanent Amtrak subsidy.
Are the only construction workers you care about, the illegal aliens? The ones you don't mind stealing those jobs from the American citizens who have always worked in them, and still need to? It's not surprising that the American people don't trust the media.
As to Davis Bacon, illegals took the jobs in Louisiana, because Bush and the democrats over turned Davis Bacon in that instance.
If Obama doesn't reinvigorate enforcement of our immigration laws, raid, round up and deport illegals, there will be riots in the streets, as the real sleeping giant, the American citizenry, who are black, brown and white, is waking up and it won't be just the corrupt politicians they go after.
Respectfully, the only problem with this is what happens when those treasury bills gradually become worthless?
And what happens when those who own them decide it's of less risk to them to offload, or even simply stop buying, those treasury bills?
I'm sorry, I simply disagree with the notion that the trade imbalance, the devestation of our manufacturing base, our soaring reliance on imports, a cratering currency and a burgeoning debt passed down in a society that has abandoned any principle of saving is a formula for success.
The best thing to do would be to address our trade imbalance with China by actually confronting them on their currency manipulation and rebuild our own manufacturing base.
The notion of forcefully propping up the banks by force-feeding them money they don't want (a la TARP) is idiotic. Banks aren't going to loan out money in the current environment and you can't blame them.
Tax cuts would help. Not being afraid of always being called "protectionist" by simply confronting a major exporter the entire world knows is manipulating their currency would help even more. As would building our own alternative energy technologies which we could then export.
Deficits don't matter, until they do. Saying they don't matter isn't novel economics, its a lack of forethought.
Our current deficit spending is going to leave us up the creek without a paddle.
Tim,
If our debt is 40% of GDP and Japans is 190% - it's seems we have a while to go before we end up the proverbial creek.
We could double our debt and still not have a debt load as high as Germany or France.
We could double our debt and still not have a debt load as high as Germany or France.
Let's not and say we did.
Rob,
Agreed, but if the need is there for a little more deficit spending then we have enough wiggle room to make it happen. The idea that we would collapse with a debt load of 60% of GDP is ridiculous if Germany and France haven't collapsed with debt loads of 75-80% and Japan at 190%.
I bet Tim didn't know that Chinese gov't debt is nearly 25% of their GDP - our debt load isn't that much higher.
If Obama doesn't reinvigorate enforcement of our immigration laws, raid, round up and deport illegals, there will be riots in the streets...
Oh nonsense. If Americans were as furious about the illegal immigration "problem" as many allege, they would vote in rock solid majorities of restrictionist Republicans to go along with a Pat Buchanan-style Republican in the White House. They have manifestly failed to do either of these things.
Even if Obama wanted to spend this kind of money, where would he get it?
Megan: There's no "if" here. We're going to be spending close to a trillion this year on stimulus alone, plus other sundry hundreds of billions for various bailouts, plus sundry other hundreds of billions for recession-related stabilizers. According to my back-of-the envelope math, total public sector spending in this country is going to peak and damn near half of GDP. Where will the government get all this dough? Well, this being America, they'll borrow it, of course. Will financial markets support this kind of borrowing? My guess is they'll do so for a short while, but Obama had better flesh out plans for paying the country's bills sooner rather than later (even if such plans don't take effect until well after the economy has resumed growth).
Also, in theory, we should get a lot more bang for the buck on stimulus in 2009-2010 than we did in 1942-1944, given the fact that much of military spending goes for things that don't enhance the economy's ability to grow.
The idea that we would collapse with a debt load of 60% of GDP is ridiculous if Germany and France haven't collapsed with debt loads of 75-80% and Japan at 190%.
Indeed US public debt was way above 100% of GDP by September of '45.
...but also to provide tradeable goods that can reduce the country's current account deficit.
Exactly how do you export a high-speed rail line? Gonna need one hellacious big forklift for that container!
As Bugs Bunny would say, "What a maroon!"
High speed rail is a perfect example of an anti-growth mega project, a true boondoggle. As people have pointed out in previous comments to this blog, compared to air transportation and road transportation, high speed rail is too slow for long trips and too inflexible for short-to-medium length trips. It worthless except as a permanent drain on the taxpayers for the benefit of unionized rail workers and their bureaucratic bosses (as you see in Europe and Japan). High speed rail does not promote the actual output of goods and services people actually want, it just soaks up subsidies.
(Please, please, don't make the tyro mistake of claiming that "roads are heavily subsidized." Go look at the USDOT report. Motor-fuel and motor-specific taxes cover all long-haul road spending (i.e., the roads high-speed rail would compete with) plus mass-transit, bikeway, and passenger rail. If we stopped diverting fuel taxes to subsidize uneconomical mass-transit and "alternative transportation" projects, we would then have enough fuel-tax money left to pay for more than half of local roads and streets as well, or to greatly improve our long-haul roads.)
Do you want to revive "America's manufacturing capability?" Slash the astonishing thicket of productivity-killing regulations which strangles American businesses.
"But I am suggesting a strategy that could be called the fiscal equivalent of war."
Jonah Goldberg, please call your office - jeez, these guys are almost like a conservative parody of themselves.
For what it is worth, we could easily spend $400billion replacing military gear damaged or destroyed since 2000, plus upgrades deferred since around 1993.
"Will financial markets support this kind of borrowing?"
If they don't then the Fed will buy them. No, you say - that would be inflationary. We'll if you've looked at the price of things recently you'd see that:
* wheat is down 58%
* oil is down 75%,
* copper is down 75%
* milk down 50%
* housing down
* cars down
* clothing down
We are in a deflationary spiral and need all the inflation we can get.
I don't think "most economists" think military spending on WW II pulled us out of the depression. If the war had any good effect on the economy it was mostly because FDR realized that he'd need industry to make tanks and such and so eased up on the anti-business stuff. We certainly weren't prosperous during WW II, what with most young men earning privates' wages and rationing at home.
Great. Some genius just figured out that massive forced conscription by the millions lowers unemployment.
Specifically, with a labor force of about 50 million, the military grew by 3.5 million by 1942. That's 7 percentage points of the 12 Judas cites.
(The military then grew to 12 million by 1945 ... unemployment cured! About a million of these people were shot -- reducing unemployment by 2 points right there!)
Of the other 5 points, OK, I'll concede, maybe most could be attributed to ramping up the formerly idle production lines to build tanks, bombers, war ships, halftracks, and billions of dollars worth of other items of no productive value at all to the economy (in 1946 how many businesses bought used halftracks to distribute their goods to retailers?) ... all paid for out of the real incomes of taxpayers. Whatever the importance of winning the war, that was all deadweight loss to the economy.
"War Boosts the Economy" is nothing but the Broken Windows Fallacy writ out at its hugest -- even when the war is fought on somebody else's territory.
People fall for it because they look at those "better" unemployment and GDP-growth stats and think they mean the same thing that they do in peacetime -- that they represent more mutually beneficial voluntary transactions that add to welfare and national wealth, but they don't.
Obama could accomplish the same thing today by:
(1) Getting somebody to shoot 3 million Americans, reducing unemployment by 2 points; and then getting rid of the remaining 5 points of it by
(2) drafting 10 million people and sending most of them to various miserable rathole locations around the world to live in camps and do work that is totally non-productive economically (maybe half digging trenches and the other half filling them) while paying them at sub-minimum wage, and
(3) Getting the Detroit production lines humming again and the UAW re-employed by ordering maybe $20 billion of SUVs, Hummers, pickup trucks, etc., then putting them on ships and dumping them in the ocean. And doing the same thing with as many other industrial producers as it can think of.
And then putting the bill for all of this on the taxpayers.
Unemployment would be wiped out and GDP would zoom with all the new production, so the economy would be much better! And just think of all the improvement in human welfare we'd have created!
Why hasn't anyone mentioned a space elevator yet?
Jim Glass: If your argument about WWII mobilization were valid, unemployment should have promptly jumped back up to 16% when the trooops came home.
"War Boosts the Economy" is nothing but the Broken Windows Fallacy writ out at its hugest.
Who exactly is making this fallacy? The version I hear is usually "massive Keynesian stimulus" boosts the economy. The fact that the Keynesian stimulus that got the US out of depression was due to war spending is neither here nor there.
Could we start with Jim Glass? It's an infinitesimal dent, I know, but every journey and that.
By this measure, shooting Jim Glass would be a two-fer.
Forget if the debt is public or private. The important thing is the total. I cannot speak to the total ratio of other nations.
The US total credit market debt to GDP is probably north of 300%.
In many if not all ways if the debt is public or private makes little difference in the macro picture. No, US Treasury debt is not near as high as many nations. The total, public and private is probably right at the top.
Then too remember that this financial crisis is a world wide phenomenon. This is a crucial point. The world is swimming in debt. In amounts unimagined even a generation ago. We have been living in a world wide credit bubble. You have to step outside the bubble. Not just look at the comparative debt levels of different countries and certainly not just government debt ratios.
When outside the bubble you will see that there was a Ponzi element, no foundation, to the whole credit bubble. Ever increasing amounts of new credit were required to pay off the old debt.
The real estate/mortgage mania was the last engine of credit growth. The moment that mortgage credit growth dropped below the previous period a crisis developed.
To be crude with statistics and how funds flow in an economy; in the US by 07 every dollar borrowed was producing only about a dollar in GDP growth. Thus there was no way to pay off the debt much less get any income from the invested borrowed funds. But then we know much of the borrowing was for consumption which offered no possible income to pay off the debt. The hope, as in real estate was the assets would inflate. Which required new borrowers with new credit to bid up the prices.
Trillions and trillions of dollars of debt are going to be defaulted on. Period. No amount of wishing and hoping will change that. Hell, I'm a hard core Socialist by today's standards and I cannot conceive how this is not going to play out without massive dislocations in the lives of most, no matter what the government does.
Certainly no possible amount of government borrowing is going to overcome the deflation of other debt as it collapses. Central banks are now monetizing to a degree to fill the gap and it's not knowable what the result of that will be. If one country does it their currency will suffer one would suppose. What if all do it?
Oh, and can we add Kevin Hassett into Jim's (1)?
I am curious to what extent that number reflects the smaller workforce during the war.
With a world war and a massive draft going on, a huge number of young men were removed from the civilian workforce. That alone should cause the unemployment numbers to plummet.
rapier,
"this financial crisis is a world wide phenomenon"
"The world is swimming in debt. "
How can that be? Every dollar/yen/euro/yuan of debt, is also a corresponding dollar/yen/euro/yuan denominated asset.
Central banks are now monetizing to a degree to fill the gap and it's not knowable what the result of that will be. If one country does it their currency will suffer one would suppose. What if all do it?
That's my worry. The government is madly pumping up the base money supply. In normal times the banks would multiply this through lending and we'd have inflation.
These aren't normal times. The banks are unwinding an enormous amount of (illegally, in my opinion) leveraged assets, so you don't get the multiplier you would normally get as the new money is going mostly to reserves.
Hopefully this will all work out, and the banks will end up capitalized properly without consumer-level inflation. I have my doubts.
Our currencies are simply bonds of the most fundamental type, and as rapier has pointed out, nominal debt always increases faster than nominal output, and it is output that is the actual wealth, not the paper that you own. Such imbalance can grow for quite a long while (been going on for almost a century), but eventually people notice that the financial instruments they collect won't actually match the future consumption that they hoped to have. When this realization within the population spreads beyond a critical point, you will see a wholesale flight from paper to physical assets.
It is my opinion that we are in the final dislocations. People are crowding into US government debt like never before (a process that has been accelerating for the last 30 years), and when they realize this debt provides no income and no actual safety for acccumulated assets, they will all rush to the exits at the same time, thus imploding the system. The various governments will find themselves short of actual purchasing power, and they will attempt ever more coercive means of taxation. In the US, this will likely lead to escalating tax revolts beginning first at the local level (we are already seeing this begin as local governments attempt to keep property tax levels from falling with the dollar prices of the underlying properties) then spreading to the state and federal levels within 10-12 years as the accumulated legacy debts of SS and Medicare come due.
More simply put- the ratio of debt to physical output cannot grow indefinitely. Reversal must happen eventually, and it happens either with the forgiving of ulimately unpayable debts willingly, or it happens unwillingly with destruction of the currency.
"War Boosts the Economy" is nothing but the Broken Windows Fallacy writ out at its hugest -- even when the war is fought on somebody else's territory.
You are correct, but from the perspective of the country waging the war, they are profiting. The net affect on the world economy is a loss, but individual countries can realize a gain. Of course, waging constant wars in other people's countries to feed your own economy is evil, but it seems to work pretty well in practice.
"How can that be? Every dollar/yen/euro/yuan of debt, is also a corresponding dollar/yen/euro/yuan denominated asset."
Well firstly even productive assets, plant and equipment, which used to account for most debt, depreciates.
Most of the stuff bought with credit during the the final phase of the boom was either pure consumption of non productive stuff or of inflated assets, real estate or financial.
Debt has to be repaid, obviously. Throughout history debt was primarily used to buy assets which would produce income in order to service the debt. Sometimes debt was used for speculation ie. in betting the asset would rise in price so the debt could be paid, with extra for profit. Every transaction that relies upon an increase in the assets price is a speculation, not an investment. This is more than semantics. Every bubble in history was based upon speculation. Every bubble was fueled by credit. Always in a virtuous circle; prices increased, drawing more speculators, prices increase more, more borrow against the inflated asset to buy more. Till one day the last sucker is found.
Then too borrowing for pure enjoyment was often impossible and in any case discouraged. The 1920s saw the very first expansion on a large scale of credit for consumption. A marginal but important part of the Great Depression. In unstable systems the trouble almost always starts at the margin.
Borrowing to buy things not needed carried a social stigma. People knew instinctively also that it was unwise. Being in debt was always associated with loss of freedom. Debt slavery was the term. Now antiquated, sadly.
To really go off into the weeds Christians for over 1000 years were discouraged if not prevented by law church or civil, from lending. A tradition based upon deep moral and ethical views which have been completely forgotten. It's probably impossible to defend a world with no credit but good to remember that credit itself was viewed widely as bad.
Until the 60's usury laws prevailed in the US. Setting the maximum rate of interest that could be charged. Slowly the limits rose, then were eliminated. There were widely accepted social reasons these laws were in place. Now long forgotten. As millions and millions face bankruptcy.
Some genius just figured out that massive forced conscription by the millions lowers unemployment.
WWII created a labor shortage that went beyond the normal bounds of full employment. Or if you prefer, the war allowed us to redefine our notions of capacity utilization so that it included women in roles for which they had been previously rejected.
This is evidenced by the drastic degree to which the workforce changed during the war. Rosie the Riveter was the symbol of the country's shortage of traditional labor. When the war ended, Rosie and most of her friends lost their jobs, which allowed the men to take those jobs back.
The war had funded the growth of corporations with enormous capacity, which provided the basis for a new consumer economy, while the GI Bill gave the returning troops educations and a chance to buy a house in the suburbs, as well as a mortgage that would motivate them to show up to work. Thanks to all of that government money getting things kick started, the Depression ended.
Do recall that unemployment is defined as those who don't have jobs but who are seeking work. A Rosie who returned to homemaking was not, by definition, unemployed.
Have to agree with Megan on this - I'm highly skeptical of any WPA style public works getting us out of this "depression". One thing I've not heard a lot about is the apparent loss of confidence in the economy - what Austin Powers referred to as his 'mojo'. It's as if as a country, there's no confidence that our labor is worth anything, that property is worth it's asking price, that stocks are worth a damn, that money's worth a damn - it's like a bad case of impotence on a national scale. The economy stinks but playing to our worst fears by calling out the big guns (let's have another WPA or another WWII) is only making the problem worse by exacerbating the lack of confidence. Besides, those astronomical deficits are scaring me far more than the unemployment numbers.
Martin Wolf has a great article, insightful with sobering prospects for the next couple of years. It's in the Financial Times Jan 6, 2009. Say 1-2 years ago, net private borrowing was 13% of GDP. With the credit crisis there has been a forced saving of 6% of GDP. Obama's proposed stimulus plan is $750 billion. That's about half the gap, ~ 19% of GDP, which, if filled, might lead back to full employment.
From rapier,
No, it doesn't- if your statement were actually true, there would be no financial crises. A semantic point, I know, but an important one to acknowledge. Indeed, our debts to each other cannot be repaid, now, unless we humans discover immortality, and even then, we would have to find a way to balance output with debt growth.
rapier's last point is well taken.
The foundation for most of our current woes has been the demand for doubled or tripled returns on investment, relative to what was considered a reasonable ROI as little as 30 years ago. When 5 - 10% became considered too little of a return, we started getting into offshoring, over-extraction of resources, etc, with little or no regard as to the long-term consequences. Fast-buck strategies, unsurprisingly, seldom prove sustainable for the long haul. So yes, there are (or were) widely accepted reasons for usury limits and any number of other things, which at one time were accepted by all because it was understood that without these limits, the overall system becomes unbalanced and fails.
But we're just now emerging from a 30 year period where the public has been told over and over again that there is no good beyond what's good for the individual, there should be no limits, for example, on the amount of wealth or market share one person or corporation can attain, and so on and so forth. When the very plain common sense that any average man on the street was born with should have told everyone a few simple things, such as: you can't have an economy if one guy owns everything and has all the money and everyone else has nothing; you can't rely on a "service economy" for a stable or rising standard of living for the simple fact that trade deficits are not infinitely supportable and factory workers in China and India aren't going to be commuting over here for a fast-food lunch; you can't overextract a resource to boost short-term gains and expect long-term profits to remain steady; and a lot of other no-brainer stuff that I had figured out by the time I graduated high school.
esmense -
Americans tolerated a 73% tax rate on the wealthiest Americans under Hoover. What did that get them? Idled factories.
To an extent, I agree that government services outside of simple police and the military can increase productivity. Good public education, in theory, can do this since it increases productivity. Public health. Public transport. Building the Hoover Dam has probably paid dividends. But high tax rates on businesses reduce the profitability of businesses, decreasing people's willingness to invest and create real, sustainable growth.
If we can agree that spending is required to get out of a depression, it should be at least noted that high taxes on businesses to fund government spending reduces private business spending even more dramatically than such taxes increase government spending. And the re-allocation away from businesses often increases inefficiency.
And yes, you can buy prosperity on government credit, but this is neither magic nor sustainable and you have to pay for it eventually.
But out here in California everyone wanted to increase government spending when the coffers were full and everyone is loathe to reduce government spending when the coffers are dead empty. Eventually, something's gotta give.
http://www.cato.org/pub_display.php?pub_id=5693
http://www.conservativemusings.com/blog/2008/11/tax-rates-during-the-depression.html
The thing about total war is that it's the one case where a command economy works. People are willing to put up with all the crap coming down from the planners, because they see it as necessary and important, and thus they actually try to do a good job instead of slacking like they would normally when they see no benefit to their labour.
Also, total war basically wrecks every standard economic measuring tool - what is the market price for an Iowa battleship or a Sherman tank? What's a CPI when the market demand consists entirely of quartermasters and ration stamps? What's unemployment when demand for labour is so high that they'll force you at gunpoint to risk your life for them? The economy didn't recover during the war, it ceased to exist, and the fresh start in 1946 went well for the US and Canada(though the rest of the world was still pretty much screwed).
Thing is, neither of those apply to building rail lines. It's not a war economy they'd be creating, it's a socialist economy. Rhetoric won't change that - war economies function because you throw everything out the window and tell people to work 80 hours a week doing things of arbitrary value and then actually have them do it. Unless Obama is planning on doing exactly that, a "war economy" is just another line of BS to justify questionable economics.
The reasons people aren't spending isn't because of confidence, it's because they don't have the money.
http://www.calculatedriskblog.com/2008/10/q2-2008-mortgage-equity-withdrawal.html
Take a look at how much money was being withdrawn the last few years and how much is being withdrawn right now. The reality is that the last few years have seen stagnant to negative wage increases. The only reason spending was up over time was the $800B a year in home equity withdrawals. This doesn't count as "Income" when calculating the US savings rate, so when spent artificially lowers that number. The reason spending is down is because the American consumer doesn't have money to spend.
When I was in the fifth grade (and I remember this moment well, as my father had just given all his children a $100 bill for Christmas), I realized that money was essentially a figment of the imagination.
The reason for this revelation? While my parents were trying to instill in us the goodness of savings, they had required us to put our $100 "bonus" into a savings account. The revelation came in April of the following year when my parents had to "borrow" our savings to pay their income taxes.
I've had a truly skewed view of economics ever since. BTW, does anyone here remember the origin of the phrase "bought the farm"?
Amy P wrote, "Wasn't Bush's lavish military and domestic spending essentially the sort of thing MM is talking about? We've already tried that way out and it didn't work."
Actually, Amy P, since you've apparently forgotten, the military spending the past 8 years has been driven by fighting some radicals who would like to see that the US' way of life ceases as it has been......and your assessment that it hasn't worked is incorrect.
That's my worry. The government is madly pumping up the base money supply.
Actually, the Fed just engineered the first reduction of the size of its balance sheet since the crisis began. Maybe it thinks it's "over the hump" as far as the financial system problems go -- although it a pretty huge hump with a damn big other side.
See Jim Hamilton on Signs of a Thaw.
Jim Glass: If your argument about WWII mobilization were valid, unemployment should have promptly jumped back up to 16% when the trooops came home.
~~~
If you noticed all those news stories all over yesterday, "Yearly Job Loss Worst Since 1945"...
... that 2.75 million was from a labor force of about 55 million (compared to 154 million last year), about 5% right there, and what was beginning in 1945?
But more to the point...
If the massive increase in govt spending for WWII -- 2.5x by GDP already by 1942, 5x by 1944 -- really "fixed" the former Depression economy, we'd expect to see the big benefits of the fix reflected in basic economic indicators such as stock market capitalization (business welfare) and real consumption per capita (personal welfare). Wouldn't we?
Yet stock market capitalization plunged from $11.4 billion in 1939 to only $4.3 billion in 1942 -- in spite of that 2.5 x increase in govt spending -- and recovered to only $9.8 billion in 1944, even less when adjusted for inflation, still well below the 1939 Depression level.
Meanwhile, real consumption per capita fell from an index # of 104 in 1940, a year before Pearl Harbor, to only 102 in 1944 (as calculated by Friedman and Schwarz).
So from 1939 to 1944, as government expenditures more than quintupled, from $14.3 billion to $74.7 billion, both the stock market and personal consumption fell.
Does that make it look to you like that massive increase in government spending bought a real powerful economic recovery?
Better luck this time!
BTW, does anyone here remember the origin of the phrase "bought the farm"?
In the early years of barnstorming pilots, if a pilot had to make a force landing on a farm, he had to pay for the damages. So if he got killed, people would say he "bought the farm". I.e. he did so much damage that he paid for the whole farm.
Re: Whatever the importance of winning the war, that was all deadweight loss to the economy.
No it wasn't. You are making a purely subjective value judgment that has no place in economics. If Americans of 1942 demanded tanks and bombers then those things had value to Americans and that's something that lies beyoind your judgment.
RE:That's my worry. The government is madly pumping up the base money supply.
Actually, the Fed just engineered the first reduction of the size of its balance sheet since the crisis began. Maybe it thinks it's "over the hump" as far as the financial system problems go -- although it a pretty huge hump with a damn big other side.
Who here knows what the base money supply is?
Is it the "government" who "pumps" it?
Well the base money supply is the Feds system open market account which is referred to in the second paragraph in "size of it's balance sheet"
Did the Fed engineer that shrinkage? Well it's highly unlikely. Does the Fed think we are over the hump? A better question is why should we think the Fed knows anything?
This blind faith in the Fed is insane and a root of our problem. Fed governor Yellen admitted in comments last week all the Fed was doing was a big "experiment". Got that? THey do not know WTF they are doing. They almost certainly did not "engineer" a shrinkage in their balance sheet. It shrunk due to trends that require technical explanations but the bottom line is it shrunk because banks don't want to borrow or lend.
The Fed is in a panic. Bernanke is now learning that everything he thought he knew about how the Feds mistakes prolonged the depression are wrong. Which means everything Freidman thought about it was wrong. Both happily avoided discussions of what started the panic which lead to the depression in the first place.
Excess credit leading to unsound banks. Sound familiar? Bernanke's cure? More credit, to paper over the old. Bigger doses of heroin for the addict. Now Bernanke is like a pusher who can't sell his product, cash which the banks are supposed to lend, because so many of his customers are dead.
Tom Mahon wrote:
"BTW, does anyone here remember the origin of the phrase "bought the farm"?
In the early years of barnstorming pilots, if a pilot had to make a force landing on a farm, he had to pay for the damages. So if he got killed, people would say he "bought the farm". I.e. he did so much damage that he paid for the whole farm."
No. The phrase "bought the farm" is much older than aviation; variants go back hundreds of years. This is one of many made-up stories about word origins. ("The whole nine yards" doesn't refer to the length of an ammunition belt and "rule of thumb" has nothing to do with men beating their wives.) See, for instance, www.wordorigins.org.
Does that make it look to you like that massive increase in government spending bought a real powerful economic recovery?
It certainly created employment. The unemployment rate in 1941 was 9.9%. By 1944, it had fallen to 1.2%. In real world terms, the latter somewhat understates wartime employment, as the 2+ million in the military were not included in the workforce or unemployment statistics.
The real benefit of WWII is that Uncle Sam generated profits for private businesses that could use those profits to prosper once the war had ended. They had an eager base of consumers with pent up demand and money to spend.
Meanwhile, real consumption per capita fell from an index # of 104 in 1940, a year before Pearl Harbor, to only 102 in 1944 (as calculated by Friedman and Schwarz).
You seem to have forgotten a little issue called rationing. What, pray tell, was the public going to consume in 1944 when no cars and few consumer luxuries were being built and the government was pitching constantly for war bonds?
The economic recovery certainly begin during the war, but there were wage and price controls and broad legal prohibitions against various types of consumption. The real effects are seen in the years following the war.
mortgage bond traders - the new example for structural unemployment
Does big government CREATE wealth? Thats the only relevant question, otherwise you are merely rearranging chairs on the Titanic (with the usual graft and waste). Now a high speed train etc would create some wealth, the question is will it create more than it squanders. When you look at the lavish pensions and the layers of bureaucracy inherint in government jobs, the answer is almost certainly not. So you employ people on a temporary basis, but you in fact create a greater net drag on the GDP. You spend more than you create, and in jobs that are almost impossible to get rid of.
Thats why REAL tax cuts are the only real engine for helping the economy. Holidays and temporary breaks don't allow for the type of long term planning that creates real wealth. If i have an extra hundred bucks in my pocket, i'm not going to open a business. If i have an extra hundred bucks a week in my pocket, it might make more sense to.
So you employ people on a temporary basis, but you in fact create a greater net drag on the GDP.
There's no logic in arguing that cops and government transportation workers are any more of a drag on the economic system than are barristas or parking lot attendants. The economic system works because money has some degree of velocity, which feeds the growth that we all crave.
If money disappears into mattresses, it provides no macro benefit. If it gets spent, it does have benefit. The source of that money isn't terribly relevant, just so long that it ends up moving. If you want growth, you need spending and investment, which will be driven by confidence, cash and credit.
In any case, much of what the government takes in ends up being put right back into the private sector, directly or indirectly. Highways and military equipment are built by private contractors, Medicare hands out cash to private hospitals, and government wages get spent by government workers in the broader economy. If it contributes to velocity and is reasonably efficient, then it's a net positive.
The economy recovered after WWII because of a variety of things- firstly, the bad debts paralyzing the economic system during the depression had finally been cleared and written off; secondly, the very worst aspects of Roosevelt's interventions were discontinued along with the price controls from WWII.
RW,
I have read your comments, and they display what should be a stunning lack of economic sense, but based on what I hear coming out of various pundits and politicians, I am no longer shocked by anything. If your beliefs about WWII actually had any validity, we could build our way out of the present problem by raising government spending to 50% of the economy through borrowing, conscripting 30 million men and women into the military, send them overseas to simply sit in tents, conscript everyone else into producing weapons while rationing their wages and consumption to a depression era level, and ship those weapons out and sink them to the bottom of the ocean. We would decrease unemployment, companies could get profits from the built and destroyed weapons, and when we brought the 30 million home, we would have pent up demand to grow the economy once more. If you believe your story about WWII, then you have to believe what I outlined will actually work to solve our present problem, do you not?
"Whatever the importance of winning the war, that was all deadweight loss to the economy.
No it wasn't. You are making a purely subjective value judgment that has no place in economics. If Americans of 1942 demanded tanks and bombers then those things had value to Americans and that's something that lies beyoind your judgment."
I think the point was that a mustachioed fellow in Berlin and his buddy Tojo, with some help from feckless Italians, forced people in America to adopt a sub-optimal set of economic choices. The decision to build tanks, etc. was to avoid even worse outcomes due to the aggression of the fascists. Left to their own devices, though, Americans would have made other decisions.
So there was some loss in foregone opportunities.
If you believe your story about WWII, then you have to believe what I outlined will actually work to solve our present problem, do you not?
Thanks for that, but you really didn't refute anything I said. I'm merely stating what actually happened, so I can't be blamed if that rocks your political boat.
It should be obvious that defense contractors of the day were on the government tab, that consumers couldn't spend their money on stuff that they weren't allowed to buy, and that unemployment consequently plummeted. There isn't much to debate there, that's simply a summation of the history.
As noted, the benefit of government spending was the creation of infrastructure that could be used by consumers and private industry. Since consumers and industry didn't have the money or impetus to spend it during the 30's, thanks to the bursting of the asset bubble, it had to come from somewhere else.
Nobody is talking about building ships just to sink them, so you can drop that straw man argument now. As is the case in the private sector, some government spending works and some of it doesn't. The key to deploying it effectively is to use it judiciously and appropriately.
To argue that all government spending is ineffective by design makes no sense at all. Government spending is a component of GDP -- go look it up if you don't believe that -- and we should all know that money velocity contributes to growth.
Governments around the world are enacting stimulus packages because the other parties that contribute to GDP are (understandably) not doing enough. If you don't have a plan to create spending and investment, then you have no plan.
RW,
You were arguing that the war spending brought the country out of the depression. That is nonsense- if it isn't nonsense, then we can do the exact same thing we did in WWII to get ourselves out of this one, but minus the killing. Do you believe that would work? If you don't, then you don't really believe that WWII solved the first one.
All I am getting at is that the measure of a successful economic system is the satisfaction of individual wants. WWII doesn't fit the bill since you yourself have admitted that the citizenry were kept in a state of deprivation through rationing and the redirection of activity to the production of weapons and other materials of warfare. Government can, of course, produce any number on the headline GDP and call it good, but if all that economica activity isn't satisfying the wants and needs of the individuals doing the production, then the success is simply an illusion.
The scientific method gets denied more than the Disciples denied Christ:
So, here we have a prediction, a prediction, further, that Jim Glass agrees with, and apparently admits was falsified.
Does this change Jim's assertions one iota?
Of course not.
Guys, this is really an honest question, so please think about it, and give me an honest answer. How come you don't abide by the scientific method? What's wrong with it, and why is it differentially applied?
I pick this particular point of insertion because Jim did not argue that this was an incorrect conclusion and that the prediction did not follow from what he wrote, he just countered with an 'oh yeah?' For someone supposedly trained in the 'science' of economics, this is . . . not appropriate.
_"There's no logic in arguing that cops and government transportation workers are any more of a drag on the economic system than are barristas or parking lot attendants."_
Of course there is. To pay a government employee you tax a productive part of society, shifting money they would spend elsewhere, and you do it outside of market forces (paying all sorts of premiums on pensions, etc). Worse, there is a great deal of friction getting that money to the employee. We don't even really know how many pennies on a tax dollar reach the job in question, but its certainly a significant loss.
Meanwhile if I hand a valet five bucks, that goes in his pocket, less the taxes in question that need to filter through the government pork machine. That money goes directly into the economy, eventually the valet company hires another valet (or an accountant, or a manager etc). Meanwhile the more taxes that are taken out to pay Paul, the less likely that additional economic activity is to take place.
The idea that you can shift money from the private sector to the public and create wealth seems like a free energy argument. Perpetual motion of government spending?
Let me also add that I have also long thought that our military can be better employed at home, digging ditches, caring for the old and sick, etc.
I say cut military spending way back. We don't need it, and it only adds to the deficit. Give anyone going into the services some sort of incentive, and while they are there, employee them for useful labor at home until they are needed abroad. I'm thinking that four years of service buys you four years of job training or college, for example, perhaps preferential insurance and medical treatment as well.
It strikes me that this would be an excellent time to preform this sort of experimentation and let the chips fly where they may. And unlike some people held in the thrall of a defunct ideology, I think most of us would be willing to abide by the results and shape future policy accordingly.
Finally, the problem as always, is well-paying jobs. There aren't any, not for large swathes of people who were once gainfully employed in any of a number of now defunct industries. I can remember a time, for example, when Zenith was considered the premier television brand, when Burlington textiles was king. And of course, when Detroit was the Motor City. Sure, there's been a lot of breeze about 'working smarter, not harder', 'high-paying service jobs' (never explicitly mentioned), etc. But nothing concrete. If anyone has a serious proposal for bumping up median pay, I'd sure like to hear it.
"To argue that all government spending is ineffective by design makes no sense at all. Government spending is a component of GDP -- go look it up if you don't believe that -- and we should all know that money velocity contributes to growth."
And that's a cult cargo argument. Yes, of course government spending is a component of GDP. If you gave me a trillion dollars of other people's money and I spent it on pizza and porno, it would be a component of the GDP.
The question is, would that money be more productively spent in the free market to create wealth. The answer is clearly yes.
Otherwise communism would work like a champ, with all resources collected and spent by the government. Obviously that doesnt work effectively. We give money to the government for a lot of reasons, but expecting them to turn that money into more wealth isnt one of them (short of treasuries I suppose).
You were arguing that the war spending brought the country out of the depression. That is nonsense- if it isn't nonsense, then we can do the exact same thing we did in WWII to get ourselves out of this one, but minus the killing.
Again, you haven't proven your point. Clearly, you have an ideological dog in this fight that bars you from seeing what actually happened.
There is no denying that unemployment went down, and that consumerism took off in the post-war period, fueled by corporations that profited from the war. Those are simply facts, and we would be foolish ideologues to deny the facts.
That doesn't mean that we should replicate everything that they did. Since nobody claimed that we should mimic them precisely, you need to punt that argument as the logical bridge to nowhere that it is.
In any case, we have no way of doing exactly the same thing, because the circumstances today are different in many respects. While we can learn from what worked and didn't work in the 40's, we cannot and should not necessarily duplicate it today.
Obviously, the current approach is to inject capital into the system, in the hopes that the money multiplier does the rest. That's not a bad theory, but the implementation appears to have been inadequate thus far. Mr. Paulson seems to have been wearing some ideological blinders of his own when he handed out money without enough strings.
All I am getting at is that the measure of a successful economic system is the satisfaction of individual wants
To be blunt, I have no idea what that's supposed to mean in this context. It's Austrian, to be sure, but not particularly pragmatic.
Right now, the individual consumer is cowering in a corner, praying that he doesn't get laid off, while avoiding all of the consumption that feeds the other actors in the economy. If you want growth, that needs to be fixed.
The real problem here is that we are stuck with the need to fix this because our failure to do so could create massive additional deleveraging that could have tragic consequences. That aspect is very similar to what happened in the Great Depression, but our use of structured products has made the problems of the 30's look like child's play.
Ironically, I agree with your earlier point about controlling debt over the long run and I disagree strongly with Judis with his propensity to confuse his political goals with a proper analysis of the economic problem. But at this point, we need to have other priorities that prioritize stimulating growth, otherwise we're going to bleed out, so some form of stimulus is needed. The credit system may be the most effective and efficient way to achieve that today; I am personally skeptical that government sponsored employment could possibly reach the scale that it did during WWII, given that globalization puts an effective cap of how much we can get away with borrowing.
Nonetheless, the situation is quite precarious, thanks to the interconnected spiral of leverage that is presently in the system. We are going to have to borrow and spend our way of it, like it or not. Fortunately, the US presently has the debt capacity to accomplish that. When we reach that day that we no longer do, that's when we are going to be in a world of hurt.
<sarcasm>Right. Because the government never does anything productive. Student loan programs are better administered with less money in the private sector, and deregulation and privatization of monopolistic utilities is always a win for the consumer. And of course, private police and private courts would be so much better than the public kind.</sarcasm>
As an added bonus, the fact that there are legions of conservatives clamoring to tell this fellow that his little screed Just Ain't So shows that conservatism is a thoroughly reputable ideology that always examines the facts before making a pronouncement.
I don't think I need any sarcasm tags for that one.
The question is, would that money be more productively spent in the free market to create wealth. The answer is clearly yes.
The question during a crisis period is not one of efficiency, but one of which party is more likely to create velocity.
During periods like this, the normal actors in the economy are afraid to act or don't have the debt capacity to act. The point of a stimulus is to get them to act. Since the government has more resources, it can initiate broad initiatives that the others cannot. The consequences of their failure to act could be grave, hence our motivations to get them to act.
Accordingly, given the circumstances, the benefit of a given government initiative should be measured by whether it will produce these results in the short run. I don't see high speed rail doing that anytime soon, so that specific agenda makes little sense, but that doesn't mean that government should do nothing at all.
Political ideology tends to blind people to these basic realities. We'd all be better off if the political ideologues on both left and right stayed away from the economy altogether, leaving it to pragmatists who can assess the problem without preconceived notions.
"Student loan programs are better administered with less money in the private sector, and deregulation and privatization of monopolistic utilities is always a win for the consumer. And of course, private police and private courts would be so much better than the public kind"
You're confusing two issues. We have student loan and police departments programs to create wealth? Oh? How is that monitored and audited? What is the rate of return?
I didn't say government doesn't do certain things better than the private sector, of course it does. But that doesn't mean it is generating wealth, growing the pie. We are taking some of the wealth that others have created and using it for purposes most of us agree are important... which is the POINT of having wealth in the first place.
Really the only way you can argue that taxation is shifting wealth to a higher return would be if potential tax dollars were flowing out of the country. But in fact taxation pushes money offshore more effectively than anything else. There is a diminishing returns problem, and it gets worse and worse the greater percentage of income taxes are payed by the smaller percentage of (wealthy) tax payers. They are far more likely and able to shield their income, so even trying to tax them saps wealth from the country.
We have student loan and police departments programs to create wealth?
Of course we do. A safe, educated society is more productive and prosperous than an unsafe, uneducated one.
If a business has to worry about being firebombed and has no opportunity to find workers with adequate skills, then there will be less wealth. If consumers can't get to the business because the trip is too dangerous or can't work there because they lack the ability, then the consumer can't buy and the business can't sell.
I know that some people will find this hard to believe, but as is the case in the private sector, some government spending is useful and some of it is not. Discerning minds can figure out what spending works and what spending doesn't. Pigeonholing 100% of it as being either Double Plus Good or the Spawn of the Antichrist isn't a particularly useful exercise.
You don't know what you mean when you say 'generating wealth', do you? To you, it's just a buzz phrase.
That's why privatized student loans don't 'generate wealth', nor do privatized utilities; it's a definition idiosyncratic to you. Shareholders holding stock in a privatized utility? Such a thing is inconceivable!
It may be heretical to say so, but I expect war spending itself didn't reinvigorate the postwar economy so much as 16 years of pent-up demand in the US and global demand (for US exports) from countries whose nearly-everything was destroyed by bombing. Unless we're willing to have the world bombed to smithereens and go through 16 years of deprivation, we should look to another model for economic revitalization. Perhaps recoveries from other depressions than the Great one would be instructive.
That is what is weird about these people, RW. I think that most people, even most 'liberals', believe in the efficacy of price signalling, markets, etc. In fact, I would go so far as to say that most people, even most 'liberals' believe that the private, market-based solution should be tried first, or that it should be the default solution.
And when the market-based solution fails, then - and only then - is it time to consider something else. Would you say this is a fair characterization?
It's just that, it seems, there's a certain ideology that is bound and determined to throw off the lessons of history. No one, for example, thought that hey, why don't we - just blue skying here - have the government regulate food production? No, the government stepped in only after it was determined that the industry was incapable of policing itself. 'The Jungle' was not a work of fiction, and exploding sausages were a fact. Ditto for a lot of other functions.
Now, I'm amenable to the argument that things have changed since then, and that now there is no longer the need for government interference. But the people making that argument have to acknowledge that there was a prior need, and they have to give a really good, really convincing presentation, as well as make a good-faith effort to answer any objections. But the people making these claims, people like Mark here, aren't willing to do this. We get simplistic buzz phrases, accusations that the skeptics "don't understand economics", and slanders involving the epithets 'Communism', 'Socialism', 'the Nanny State', etc. This is, to put mildly, not convincing.
The gov't collects a bit over $1T in income tax receipts annually. You could give every single tax payer an income tax holiday for a full year and equal the number bandied about for "stimulus."
Just to show how ridiculous this "stimulus" discussion is, and how much money it will shovel into a black hole of bribery.
"Of course we do. A safe, educated society is more productive and prosperous than an unsafe, uneducated one."
In which case we are preserving wealth, not creating it. There is a distinction. Getting the homeless out from in front of the mall preserves wealth, it doesn't create it. That's a laudable goal, and can have many of the same effects, but it isn't making a bigger pie. You can tell because there is a very sharp limit to how much wealth can be preserved by such measures. On the other hand the free market has no such limitations. Aside from the natural business cycle it will continue to grow unless saddled by outside interference, which is almost always government in some form.
Education is probably one of the few areas you can point to with the potential for the long term creation of wealth. Education is also one of the most fundamentally flawed areas government intrudes on... outside of college loans, which seem to be relatively effective. On the other hand I seem to recall some data that an awful lot of college educations these days aren't producing more wealthy graduates (more informed surely, but thats a different facet). Again, if the point of the loans program was to create a more prosperous future, somebody ought to do a study to find out if that goal is being realized. But that is actually only a small part of why we have college loans, mainly its just a popular program for social reasons.
RW,
If the government borrows $5 trillion dollars, uses the money to build giant blocks of concrete and sinks them in the ocean, and we agree that GDP increases by $5 trillion dollars, is the country wealthier? A simple yes or no will suffice.
And when the market-based solution fails, then - and only then - is it time to consider something else. Would you say this is a fair characterization?
Of course. Liberals who aren't socialists tend to believe in the free market. But we are also willing to recognize that the free market doesn't always work 100% of the time.
Ironically, the need for all of this government interference comes from a zeal for too little regulation where and when it could have counted. Had the feds put curbs on the use of debt, we would now be having a mild recession that could be managed with monetary policy, a bit of patience and little other interference. But that didn't happen, and unfortunately, we can now see where some players in the free market were willing to take us when given the opportunity.
We have to go overboard now only because of a lack of preventative measures that could have kept us from reaching this precipice. Ideology often leads to disaster, and I'd like to see a world with a lot less of it.
Reference has been made earlier to the use of stimulus in Sweden and Germany in resolution of their Depression experience. At least in Germany, along with the stimulus, the 'power of the unions was broken.' Obviously a stimulus amount, 'cash,' can be seen as a product of 'a x b' where 'a' is the number of workers and 'b' is the hourly wage. At the extreme we could spent it on one person, e.g. the fellow above who would spend it on 'pizza and porn.'
If the government borrows $5 trillion dollars, uses the money to build giant blocks of concrete and sinks them in the ocean, and we agree that GDP increases by $5 trillion dollars, is the country wealthier? A simple yes or no will suffice.
I previously address that point, and it's a straw man argument.
If you can point out where I argued for such spending, I'd like to see it. But since you can't, why are you bringing this up as if I did?
"But the people making these claims, people like Mark here, aren't willing to do this. We get simplistic buzz phrases, accusations that the skeptics "don't understand economics", and slanders involving the epithets 'Communism', 'Socialism', 'the Nanny State', etc."
I think you are mistaking me and my argument. I'm not a big L libertarian. Government has a lot of roles to play. My argument is that if you are suggesting that government spending in and of itself is a way to "create wealth" more effectively than the market, you should provide some evidence. The fact that nobody EVER studies government spending to find out if there is a return on investment should tell you all you need to know.
If you want to tax and spend for a social agenda, great, lets debate it. That is a question of priorities in a free society that will always take place. But this is a much different argument. This argument is saying the government should take more money from people in order to return MORE to society. Now if somebody i knew made that claim i'd sure as heck want some evidence that they weren't just going to the race track with it. Is that crazy right wing supply sider paranoia? And if not, point to some studies where transfers of wealth to the private sector produce more wealth than they consume. I'd urge you to really think about the raw dollar amounts we are talking about, and what you could build or produce with a FRACTION of that amount. A tiny fraction.
In which case we are preserving wealth, not creating it.
That is incorrect. You wouldn't have had the wealth in the first place had the circumstances not been created to stimulate the wealth creation.
If the society is unstable and unskilled, less gets accomplished than otherwise would. You honestly believe that a society of illiterates will produce at the same levels as a society of the skilled?
RW,
Your claim that WWII ended the depression is not a straw man argument I have assigned to you- you actually made this very argument in two earlier comments, and you made it again in the your next-to-last comment addressed to me. Did the production of weapons of war make the United States wealthier in WWII? You have, twice now, pointed to war profits as a source of economic wealth created by the war, but where did those profits come from?
"You honestly believe that a society of illiterates will produce at the same levels as a society of the skilled?"
You honestly think if the government wasn't providing education the country would be illiterate? There is a lot of evidence that the government is doing a fine job of keeping people badly educated. Exactly what does the federal government do for education anyway, quantitatively speaking?
Did the production of weapons of war make the United States wealthier in WWII?
Again, I have already addressed this. If you think that my answer was confined to weapons production and to a three-year period, then you miss the larger point.
You honestly think if the government wasn't providing education the country would be illiterate?
Literacy rates have obviously soared since government got into the education business. Based upon the historical data, it's clear that the answer to that question is "yes."
The US has a more privatized system than is found in other developed countries, and our results are fair-to-middling. Whether there is a direct correlation is hard to say, but it's clear from that outcome that privatization does not ensure top performance.
Government spending, spent intelligently, doesn't create profits, it creates value; an educated workforce, safer communities, a healthier population, cultural, social and material infrastructure that contributes to private sector opportunity and wealth creation. All of these things are of great value to society as a whole as well as to individual members (which is why they are worth paying for through taxes). Most of these things can't be done by the private sector in a way that is BOTH profitable AND universally, or at least broadly, available. We ask government to do those thing that, when applied universally, are likely to generate much greater value (for society as a whole) than profit (for the service or product providers). Consider, for instance, education -- with its requirements of an educated workforce, high plant, maintenance and security costs, etc. A system motivated solely by profit would by necessity restrict quality education to those who could afford to pay its real costs; a number of educated people likely to be significantly smaller than what is required for a healthy, modern economy.
"Literacy rates have obviously soared since government got into the education business. Based upon the historical data, it's clear that the answer to that question is "yes."
Oh, come on now. So have immunization rates and ownership of motorcars. You're arguing we'd still be in little red schoolhouses with the school marm if it wasn't for the government? That's ridiculous. Society has evolved and if government based education was so efficient we wouldn't have this huge private school industry, even in poor areas. And that's competing with a government able to compel people to pay their bills, like it or not, effective or not.
You want to argue that when the free market breaks down or isnt efficient, sometimes the government can perform better? Great. How about when the government breaks down and the free market is shown to perform better? Why doesn't the shoe ever end up on the other foot?
The burden of proof is on you Mark to provide evidence for your claims. Not on anyone else to refute them; no if you want to play the "If you can't make me say I'm wrong I win" game, go elsewhere. Though in fact, I'm puzzled, given that utility deregulation has already been tried and found wanting:
I'm guessing this is a case where you simply don't want to admit to the facts on the ground, and that's why you are demanding that other people convince you. So much easier that way, isn't it? And also dishonest as all get-out.
Again, the burden of proof is on you. And since there is 'a lot of evidence', it shouldn't be hard at all to cite it, right?
You really need to stop this sort of dishonesty.
Government-sponsored and guaranteed student loan and grant programs do nothing but harm.
1) They foster a misguided belief that everyone should attend college.
2) This belief pushes teachers to create massive frauds in grading that trickle all the way down to the high school and in some cases middle school level.
3) Because of both of the above, many more under-educated students are getting degress. Their numbers are polluting the workforce, lowering starting wages, and diluting the overall value of the diploma.
4) Because of all three of the above, many misguided individuals are graduating (or not) to find themselves saddled with massive amounts of debt that they cannot repay and cannot discharge via bankruptcy. They've sold their soul to the devil for a sack of silver duly exchanged for a worthless piece of sheepskin or a pile of empty dreams.
So no, I don't in fact believe that the student loan/grant programs create wealth. In fact, exactly the opposite is true.
How about when the government breaks down and the free market is shown to perform better? Why doesn't the shoe ever end up on the other foot?
If that comment is an effort to summarize my points, then clearly my points were not understood.
Again, let's step back. There are occasions when government does do a better job. They don't happen that often, but they do happen, and it behooves us to be able to identify these accurately.
In many cases, the private sector does do a better job, but there are obviously occasions when it does not. We can either work ourselves into a pro-market or pro-government froth by pretending that one is always superior to the other, or else we can discern when and where each has its advantages.
The price required to provide an education is often so high that many cannot afford it without a subsidy. Private education can obviously serve some, but if the goal is to distribute education resources broadly, the free market does poorly with it.
The free market produces a price point for education that sets the supply of education to a given profit level that makes suppliers willing to provide it. That is not necessarily a price that ensures that everyone will be able to get an education. The pricing places a natural limit on consumption, a result that is acceptable for the distribution of many goods, but not necessarily this one. Since society loses when educations aren't widely distributed, it's ultimately to society's benefit to get many people to consume it.
And so of course Nick, you oppose privatized GSL programs too, I trust? Without going into whether your claim is true[1] or not, let's at least hope you are consistent.
[1]Again, there is absolutely no evidence given for this claim, only a personal - and unsubstantiated - belief.
Let me also add some anecdotal data here: the people who tend to perform the worst and complain the loudest about receiving poor grades for poor performance are the more well-off kids, or rather, their parents.
I've had parents saying with a straight face that their kid is a business major, and that he/she doesn't need all that math stuff. Iow, what these well-heeled, well-placed parents are after are credentials. And they are the ones who try to exert downward pressure.
imho, of course, and it's just anecdotal, yadda yadda.
The burden of proof is on me to prove my government isn't being efficient? Is that REALLY the kind of country you want to live in? You want to take my tax dollars on the ASSUMPTION that the government isnt wasting my money? Would you accept that from any other source regarding your hard earned dollars? Would you hire an investment adviser who told YOU to figure out if your retirement was sound?
Would you guys like to rethink that one?
The US has a more privatized [education] system than is found in other developed countries, and our results are fair-to-middling. Whether there is a direct correlation is hard to say, but it's clear from that outcome that privatization does not ensure top performance.
My understanding that the areas where the US's educational system is more privatized (university education) is where US performance exceeds other countries. In the areas where it's less privatized (primary/secondary education) is where results are fair-to-middling.
Looking back, I see yet more hilarity:
Y'know, if that's really the case, that in certain instances 'the government breaks down and the free market is shown to perform better', why, then I'd be all for the free market taking over those in those instances. Not a problem.
Note, however, that Mark never gets around to actually specifying when this has occurred, let alone citing any reputable sources that this is really the case.
No, the last thing we need is more ideology. Particularly the same ideology that has brought so much ruin in the first place, and provably so.
"Again, let's step back. There are occasions when government does do a better job. They don't happen that often, but they do happen, and it behooves us to be able to identify these accurately."
Ok, im with you. You would agree that its important to have tools and data to determine that, correct? How does that jive with ME, john q citizen, proving that the government ISNT spending my money wisely? Corporations put out prospectus for investors, plenty of data is available. The government, on the other hand, often goes to great lengths to make judging their effectiveness impossible, with plenty of help from ideologues who don't want to make comparisons.
"The price required to provide an education is often so high that many cannot afford it without a subsidy. Private education can obviously serve some, but if the goal is to distribute education resources broadly, the free market does poorly with it."
Subsidies are different than running the show. Obviously we have to subsidize education. It doesnt follow that government runs schools most efficiently, particularly without feeling competition (or oversight for that matter).
"The free market produces a price point for education that sets the supply of education to a given profit level that makes suppliers willing to provide it."
Sure. And there is nothing to say the government can't take the money it collects for education and hand back vouchers to parents to pick their own schools, and let the market reward those that perform the best. Nothing except statists that prefer students in government institutions for whatever their ideological reasons.
"Note, however, that Mark never gets around to actually specifying when this has occurred, let alone citing any reputable sources that this is really the case."
See above. I trust i don't need to site any of the overwhelming sources that show our public education system to be a complete joke in many, many places? Despite the vast resources spent?
Here's some real up-front honesty for ya:
Er, no Mark, here's what you originally said:
If you want to claim that government work "isn't productive", or that privatization for profit is better than the alternative, it's up to you to support it, not on anyone else. If you want to claim that 'there is a lot of evidence that the government is doing a fine job of keeping people badly educated', it's up to you to present it. Not on anyone else to refute it.
If you think that people don't see that you're spending far more energy trying to shift the burden of proof than actually presenting any evidence, you're sadly mistaken.
My understanding that the areas where the US's educational system is more privatized (university education) is where US performance exceeds other countries. In the areas where it's less privatized (primary/secondary education) is where results are fair-to-middling.
The supply of private education is self selecting, the suppliers are free to reject low performers. In addition, the wealth of the students allows them to access more resources outside of the school that can be used to improve their performance.
Public educators have to accept everyone. With a lower bar, you would expect the results to be lower, by definition.
A base case analysis is required. The question becomes one of what would happen without public education. It's fair to say that the situation would decline from its present state, because fewer people would be in the system. Even if the results that some receive today are not optimal, those results are likely better than what we would have if we had nothing at all. It would be more sensible to figure out how to improve the system, rather than completely dismantle it.
Scent, you are the one making the novel claim here. I've never heard the justification before that my tax dollars are going to a government bureaucracy because they can magically produce golden eggs with it. I've heard that having roads and soldiers and cops is a good thing for society in and of itself, but not that they are more likely to help me land a high paying job someday.
THAT is an extraordinary claim, and it requires extraordinary evidence. Claiming that the private sector produces wealth is a very well established fact. It's called 'commerce'.
"The supply of private education is self selecting, the suppliers are free to reject low performers. In addition, the wealth of the students allows them to access more resources outside of the school that can be used to improve their performance."
In some cases it is, in some cases not. Charter schools perform well, and many religious schools accept all types of kids. Moreover you can stipulate that accepting government vouchers requires you to accept all students (by lottery if necessary). This argument is a convenient excuse for poor performance, of course. A larger problem is many public school systems have made it virtually impossible to get rid of bad teachers, which is obviously a problem. A private school would never survive with that kind of bad service.
"Public educators have to accept everyone. With a lower bar, you would expect the results to be lower, by definition."
Yet year by year that bar keeps dropping. Are we getting stupider? Or is education getting worse? Occam's Razor suggests its the schools.
What's wrong with vouchers, exactly?
We need to build decent rail infrastructure in this country for the sake of having decent rail infrastructure.
I say we stop pretending the argument should be limited to what spending generates the greatest multiplier and employment in the shortest period of time, and realize that there's a lot of spending required to build the things we need that this country hasn't invested in since WWII.
And what's wrong with the Amtrak subsidy? Passenger rail should be subsidized by the government. Private cars are subsidized, remember, through the billions of tax dollars spent every year on roads.
RW,
No, you never really "dealt" with it. What you have claimed is this- WWII spending greatly "reduced unemployment" and "provided profits" to war material producers. We can even agree that the GDP was numerically increased by the government borrowing and spending, but the essential point of contention is this- did such activity improve the material good of the American people. In an earlier comment, you seem to indicate this question is irrelevant since there was rationing of the consumer goods still in production, plus there was little allowed to be produced that didn't actually go into the war effort, but that is precisely the point I am getting at, and you now seem to want to ignore completely by waving it away. Increasing output numbers isn't the actual point of economic activity- that output has to be able to satisfy consumer desires. To do otherwise is simply wasting physical resources and people's labor.
I belabor this point for a reason- a lot of stimulus proponents believe it doesn't really matter how the government spends the money, just that it does, and does so on an even grander scale than Obama is proposing himself. That kind of thinking is madness. Are you one of those kinds of proponents? Your beliefs about war spending seem to indicate that you are.
TH wrote:
Is this really a subsidy. Remember, gasoline/diesel taxes produce billions of dollars a year. Property taxes, registration fees, and licensing fees also produce billions per year, as do tolls and other use fees for the roads. Is the spending on roads a net plus taking these user fees into account?
It's important to remember that education and health care resources have NEVER been provided solely on a for profit or "free market" basis. Historically, providers of both have mostly been religious or community institutions significantly dependent on charitable and community contributions for funding. "Government" doesn't step into these areas to replace the free market -- it steps in in order to fill the gap between the real costs of these resources and what a majority of people can afford to pay -- and to provide more widely distributed resources than can be provided by voluntary contributions alone.
Re ...
"So, here we have a prediction, a prediction, further, that Jim Glass agrees with, and apparently admits was falsified. Does this change Jim's assertions one iota? Of course not."
... somebody wasn't paying attention before the discussion turned to schools, or somebody would know Jim Glass neither agreed with nor admitted any one thing.
A little History of the Depression 101: It contained two distinct segments, the great collapse of 1929-33 while the country was on the gold standard, which is irrelevant here; and the slow recovery, 1933-194xx, much slower anywhere else in the world, which caused double-digit unemployment to drag on until 1940.
As Cole and Ohanian explain, the prolonged unemployment was caused by FDR's New Deal policies that fostered high prices in major industries for goods and labor by fostering monopolies and cartels, monopoly labor unions, price floors, and supply restrictions (farmers paid not to farm, chickens slaughtered en masse while the poor are hungry, etc.) The result was that affected prices were 25% above the market-clearing level.
What happens when you increase prices so far above the market-clearing level? Markets don't clear, and you get double-digit unemployment.
Now Cole and Ohanian also point out that during WWII, the government imposed wage and price controls that knocked prices down by as much as they'd previously artificially increased, back to market clearing levels. Then post-war the controls were lifted, so prices and wages went down back to market levels.
Surprise, markets could clear! Unemployment could go down! Not due to the war, but do the artificial distortion of prices and wages being eliminated. In a world where billions of dollars of consumer purchases had been put off for years (harming consumer welfare) building up immense pent up demand. Hey, Detroit hadn't built cars for five years, etc.
And fixing government-mandated price distortions and market concentrations by just eliminating them is so much simpler and cheaper than fighting a Wold War!
So why ever would Jim Glass think unemployment should have shot back up to 16% in 1946? Just what is "falsified" by the fact that it didn't?
On the other hand, as to falsification not changing a person's assertions by one iota, regarding the assertion that WWII boosted the economy to cure the Depression, we have....
.... with government spending going up by 5x as both stock market capitalization and personal consumption fell, what happens to the assertion that all that massive new spending on war "fixed" the economy to improve the state of business and consumer welfare?Which surely would have happened if all that spending really had "ended the Depression", eh?
If you noticed all those news stories all over yesterday, "Yearly Job Loss Worst Since 1945"...
Jim Glass: I'm guessing you're not an idiot, but rather are being disingenuous, when you post a comment like the one above. But for the record, the country's population and work force are twice as large as they were in 1945. So, no, the job losses for 2008 weren't nearly as dramatic as the Axis surrender-induced drop in employment of 1945.
If the massive increase in govt spending for WWII -- 2.5x by GDP already by 1942, 5x by 1944 -- really "fixed" the former Depression economy, we'd expect to see the big benefits of the fix reflected in basic economic indicators such as stock market capitalization (business welfare) and real consumption per capita (personal welfare). Wouldn't we?
But we did see improvement in basic economic indicators. Are you seriously suggesting that the economy in, say, the twelve years after WWII, wasn't dramatically better than the economy in the twelve years prior to Pearl Harbor?
So from 1939 to 1944, as government expenditures more than quintupled, from $14.3 billion to $74.7 billion, both the stock market and personal consumption fell.
Um, consumption was held down by government fiat during the war. Your cite re: the stock market is pretty meaningless, too. A stock market's value is simply what investors are willing to pay for its component equities, and any number of factors can affect investors' perceptions on a short-term basis. In 1944, for instance, American equities plunged after the Germans launched their December offensive; understandably, a temporary bit of bad news spooked investors.
I belabor this point for a reason- a lot of stimulus proponents believe it doesn't really matter how the government spends the money, just that it does...
Yancey: Nearly every serious pundit I've read who supports Keynesian measures seems to be aware there's quite a bit of analysis indicating some types stimulus (food stamps, say, or aid to state governments) work better than others (stimulus checks). My impression is that there's some debate about which measures work best, but not whether or not all measures are equally efficient.
What you have claimed is this- WWII spending greatly "reduced unemployment" and "provided profits" to war material producers
This is a statistical fact. There is no disputing that this occurred.
did such activity improve the material good of the American people.
Compare the 50's to the 30's. Americans seemed to prefer tailfins and life in Levittown to bread lines and flight from the dust bowl.
I belabor this point for a reason- a lot of stimulus proponents believe it doesn't really matter how the government spends the money
I'm not sure why you've made that determination when I've made several comments to the contrary, such as: "Nobody is talking about building ships just to sink them, so you can drop that straw man argument now. As is the case in the private sector, some government spending works and some of it doesn't. The key to deploying it effectively is to use it judiciously and appropriately."
I obviously do care, and I'm sure that I'm not alone. You're arguing with straw men here. Feel free to make that argument with someone who is making it, but I'm not one of them.
In some cases it is, in some cases not. Charter schools perform well, and many religious schools accept all types of kids.
If some schools are selective and others are not, the mean of the selective pool will be higher than it would be for a pool that is not selective. Statistically, the outcome is clear from the onset.
Yet year by year that bar keeps dropping. Are we getting stupider?
There's no proof of that, at least not any of which I am aware. For example, comparisons of TIMSS scores don't exhibit any appreciable degradation.
This is not to say that I believe that the US system is a role model to the world or that the status quo is optimal. But given that most of the superior systems abroad are often also public, it's clear that private systems don't necessarily ensure a better result or that a public system is inherently dysfunctional. The devil may lay in the details of the execution, not in whether or not the school is privately operated.
What's wrong with vouchers, exactly?
That's the wrong question. A better question is one that tackles what needs to be done to deliver a better quality product to a large number of people.
There doesn't seem to be much evidence that a competitive model for schools necessarily leads to a better result when delivered to a non-selective pool, or that a public model guarantees poor results. I don't see why we wouldn't try to fix the present system when it is within our power to fix it if we choose.
Bulding a new high speed train corridor in the Northeast would cost a lot more than $30-odd billion; and most of that money would go not to construction workers or steel workers or to railcar manufacturers, but rather to the landowners whose very valuable lands would have to be taken by eminent domain to create a high speed rail line. You tell me: is giving tens or even hundreds of billions of dollars to landowners after years of eminent domain litigation the best way to jump start the economy?
@Scent
Yes - If it is a "government guaranteed" loan, then I oppose it.
When the government guarantees a loan, the risk is assumed not by the lender, but by the taxpayer. It means that the originator will always be paid back even if the fed has to use taxpayer money to do it and then extract their ten pounds of flesh from the would-be college student or graduate.
If banks wish to be in the student loan business they should be assuming the risk themselves. That would make them far more picky about which students get said loans.
What's wrong with vouchers, exactly?
Nothing at all.
Sweden's entire national school system is fully voucherized, everybody is happy with it, and it succeeds at providing exactly the benefits that voucher proponents expect...
[this danged system won't allow two links in one comment, so this continues in the next one ...]
[continued]
... and it succeeds at providing exactly the benefits that voucher proponents expect.
The problem in the US is schools union/Democratic/liberal politics -- Swedish social policy is too right-wing for it.
Jim Glass: I'm guessing you're not an idiot, but rather are being disingenuous, when you post a comment like the one above. But for the record, the country's population and work force are twice as large as they were in 1945. So, no, the job losses for 2008 weren't nearly as dramatic as the Axis surrender-induced drop in employment of 1945.
Jasper: Apparently you answered before bothering to read what I wrote...
"that 2.75 million [in 1945] was from a labor force of about 55 million (compared to 154 million last year), about 5% right there".
So thank you for agreeing with the very point I was making while I was being either an idiot or disingenuous.
But we did see improvement in basic economic indicators. Are you seriously suggesting that the economy in, say, the twelve years after WWII, wasn't dramatically better than the economy in the twelve years prior to Pearl Harbor?
Um ... the argument was that the huge spending increase of WWII ended the Depression and so should have improved basic economic indicators while it took place -- not that after the war was over and all that spending was knocked down by half those indicators improved for a decade.
During the WWII 1939-44 period, as government expenditures grew 5x, stock market capitalization plunged and personal consumption fell to below original pre-war Depression levels. Then during the 1945-on period after govt expenditures were quickly cut in half, stock capitalization and consumption started shooting up.
You conclude from this data that it was the 5x increase in govt spending that improved these things, yet only after that spending was slashed. OK ... but I do find that a curious reading of the data.
Um, consumption was held down by government fiat during the war.
Yes, yes, it was. Which raises an interesting point about how WWII "cured" the Depression.
Why are recessions bad, and depressions worse, anyhow? Exactly because they reduce consumer welfare by reducing consumption. As Keynes himself said: "The purpose of all economic activity is consumption". Less economic activity in a recession (much less in a depression) means less consumption.
So your argument here seems to be that WWII ended the Depression, the evil of which was that it slashed consumer consumption, in part through government policies that reduced consumer consumption even further. OK ... but equally curious.
As to what actually ended the circa 15% unemployment that persisted to 1940, look at "Cole and Ohanian" in my comment just above.
So your argument here seems to be that WWII ended the Depression, the evil of which was that it slashed consumer consumption, in part through government policies that reduced consumer consumption even further.
Economics aside, delayed gratification (consumption) in exchange for wiping out fascism seems like a pretty good deal.
(In other words, you're reallllly reaching with that argument.)
All right, here is where I stop treating you as anything but a troll and a liar. You made the claim that government spending wasn't productive, and then an amended claim that it was never as productive as private enterprise.
I haven't said anything, except to point out that, for example, the history deregulating utilities doesn't seem to support this narrative. It's up to you and only you to support your claims.
But you won't do that because you're only here to troll. Until you admit that the burden of proof is on you, and until you actually start backing up your mouth with some verifiable cites, I see no reason to indulge you.
**What you have claimed is this-WWII spending greatly "reduced unemployment" and "provided profits" to war material producers**
This is a statistical fact. There is no disputing that this occurred.
In 1939 unemployment was circa 15%, and during WWII more than 20% of the work force was inducted into the military. Yes, that did reduce unemployment, it is a fact. And during the great war, profits to "war material producers" increased greatly too. Yes, obviously, another true fact.
Of course, the belief that new profits for "war material producers" increase the economic welfare of the citizenry is a perfect example of the Broken Windows Fallacy -- we see the increase in income to Daddy Warbucks and his employees, but ignore the destruction of wealth to the community, thus we fantasize that we come out richer rather than poorer.
Daddy Warbucks profits mightily by making tanks, halftracks, cruisers, bombers, etc., that either are destroyed during the war or immediately junked afterward, as they have no productive economic use. For the economy this is a deadweight loss just as if all the stuff was dropped in the middle of the ocean directly after coming off the assembly line.
The nation is made permanently poorer because the resources consumed in the tanks, cruisers, bombers, etc., now can never be used to make trucks, cars, factory equipment, railroad engines, airliners, etc, with a positive wealth value that would provide a positive economic return and create more wealth for the community for years to come.
Yes indeed, Daddy Warbucks & Co. reap great profits from manufacturing all this deadweight loss. This is why people hate war profiteers.
** did such activity improve the material good of the American people.**
By providing Daddy Warbucks with all those "war supply" profits while destroying all that wealth? By inducting 12 million people into the military?
Would your "material good" have been improved if you'd been drafted and sent to Alaska or Okinawa or North Africa or some such place for years at sub-minimum wage (even without getting killed)? Would your family's have been, as your wife had to go get a job and make up in all other ways for you not being there, and they all had to deal with rationing coupons? No, of course not.
Compare the 50's to the 30's. Americans seemed to prefer tailfins and life in Levittown to bread lines and flight from the dust bowl.
Ah, by the ever-persuasive logic of post hoc ergo proper hoc, tailfins and Levittown followed WWII in time so they were created by conscription and Daddy Warbucks's war supplier's profits -- just as surely as morning sun is created by the rooster's crowing.
Economics aside, delayed gratification (consumption) in exchange for wiping out fascism seems like a pretty good deal.
Ah, there's a switch in argument!
Saying that the great economic cost of the WWII was worth it to achieve the non-economic, political benefit of defeating the Axis is very different thing than saying the war provided the great economic benefit of ending the Depression and thus making all Americans richer for decades to come.
I'm no pacifist, I'm all for spending wealth to kick the appropiate bad guy's ass.
IMHO the billions spent on the Cold War to contain and topple Communism and free the billion-plus people it subjugated was well worth the cost too. But I don't kid myself that all those billions weren't a real cost that made us economically poorer, to claim that somehow they were a boost to the economy that's made us all richer.
That latter logic is the economics that supported the perpetual war of Oceana v Eurasia v Eastasia.
Jim, you need to cool it big time:
Somebody is being a stone liar and dishonest. Somebody doesn't have a leg to stand on, and thinks that people are incapable of scrolling up the page. In fact, this is what Jim said, and what prompted my initial response:
My my why. What have we here? Why, here's Jim making noises about real consumption falling as proof that there wasn't any sort of economic recovery. And it's not until after it's been pointed out that there were all sorts of price controls during the war that he switches his argument to averring it's all about getting rid of price distortions! Note also that, yes, he did accept the premise, and that he was going on about "well, there's a 5% bump in unemployment right there." Er, no, 5% is not 16%. And no, there was no prior discussion that I missed that would point to your revised history as being valid.
You know what? I'm a sciency sort of guy. Why don't you actually point to where this discussion went on that I supposedly missed? Why don't you quote this discussion, as well as the time of the post?
This is the sort of behaviour I find contemptible, the sort of behaviour that causes one to be dismissed out of hand as a hopelessly biased ideologue. And nobody forced you to do this. Why you types just can't say 'I made a mistake' or 'I was wrong on that count' and move on . . . well, we've been over this ground before.
I don't think I'm alone in thinking that, right now, the best place for a mortgage bond trader on a high speed rail network is on the tracks in front of a train.
Of course, the belief that new profits for "war material producers" increase the economic welfare of the citizenry is a perfect example of the Broken Windows Fallacy.
Jim Glass: This certainly doesn't demonstrate what you seem to think it does. While military spending is not the most efficient variety of Keynesian stimulus, there were certainly permanent, productivity and wealth-enhancing improvements associated with the explosion in military spending during the war years. Modern factories that were built or expanded for the production of tanks could be converted to civilian uses. Improvements in infrastructure designed to speed the production of war material continued to enhance productivity during peace time. The increased production of metals needed for aircraft plants benefited non-military uses after the war. The development of antibiotics necessitated by the challenges of keeping millions of soldiers healthy formed the basis for increased pharmaceutical production in the post-war period. Etc., etc., and so on and so forth.
So your argument here seems to be that WWII ended the Depression...
It's not just my opinion. Lots of economists -- including a certain Nobel prize winner who writes a column for the New York Times -- share my opinion.
In 1939 unemployment was circa 15%, and during WWII more than 20% of the work force was inducted into the military. Yes, that did reduce unemployment, it is a fact
Your grasp of these facts is a bit tenuous. Those definitions of employment and unemployment specifically measured the civilian workforce and excluded those who were in the military. So no, you got that wrong, as those who served in the mlitary were not incorporated into that data at all. Had they been included, unemployment would have been even lower than the sub-2% rate that I posted above.
Saying that the great economic cost of the WWII was worth it to achieve the non-economic, political benefit of defeating the Axis is very different thing than saying the war provided the great economic benefit of ending the Depression and thus making all Americans richer for decades to come.
Once again, you have little knowledge of the historical timeline in question.
The point being made is that the consumerism created by war-related government spending was delayed until the end of rationing and the realignment of the economy toward civilian production. Those benefits were pushed into the late 40's and 50's because fighting the war between late 1941 and 1945 necessarily took priority.
It is undeniable that we had laws that restricted the production and consumption of many goods during and in the immediate aftermath of the war. Once those restrictions were lifted, the country experienced a degree of prosperity and employment well above the level of the 30's.
The differences between the pre- and post-war periods are obvious and cannot be disputed. As the data makes this clear, it makes absolutely no sense at all to pretend that it didn't happen. If you can offer an argument that can fairly attribute these occurrences to other factors, then go ahead and make it. But you can't pretend that the recovery didn't occur at all if you wish to be taken seriously.
esmense - "Government" doesn't step into these areas to replace the free market -- it steps in in order to fill the gap between the real costs of these resources and what a majority of people can afford to pay -- and to provide more widely distributed resources than can be provided by voluntary contributions alone.
Higher taxes will, inevitably, diminish private charity to some degree. There are only so many resources in a society. Therefore proponents of government spending have to show their program more capable of effectively allocating resources.
It's not enough to simply show that Grandma can't get the kidney transplant. We also have to look at whether she could have avoided it if she could have afforded more leisure for exercise, better food and so forth (which she may have without taxes for medical care.) We have to look at whether public funding of the operation is better than the private sector investing that money and providing a job to some 21 year old with a family.
Jasper, RW, I wish to note that none of what you say is controversial, or anything less than the accepted wisdom for, oh, four or five decades.
I comment on this for the same reason I made my first comment - to explain the importance of evidentiary standards and to emphasize the necessity of following the procedures of the scientific method. That we have trolls crawling out of the woodwork trying to revise history is only to be expected, given the behaviours of the modern conservative movement. But what to me is unexpected is how weak they really are. Their chief weapons seem to be undermining proof standards, a blatant disregard of scientific procedures, a - shall we say - certain ahistoricity, and last but not least, a machine to get their synthetic cosmos into the public eye.
As I've mentioned up above Ryan, this is what we do already. And, to use your example of health care, the consensus of a lot of people is that the private system is broken, and that some sort of public alternative is better.
I think you would do well to remember that people who are advocating for this change don't have to 'convince' you, or for that matter anyone who is ideologically opposed to some sort of public health care system. They have to convince the public, and through them, their representatives.
And these people who are ideologically opposed to the alternative to private health care? Well, they don't get to sit back and declare rather dishonestly that they're 'not convinced', they have to work just as hard as the reformers do to make their case.