More Right Wing Lies - Redux

Foreword

Unlike right-wingers, frex. Amity Shlaes, I like to get things right.  In fact, when one is refuting a liar's lies, I believe its important to be meticulously correct.  Hence this rework of my previous post.

As I was thinking about Graph 3, it occurred to me that the numbers there were far too small, around 100 million at the maximum, when they should be in the billions.  I'm not sure what that graph represents, but it is certainly not the total of income tax revenues.  That sent me on a quest to find better numbers, which I did.  You will find them in Graph 3 and 4 of this rewrite.  Much to my chagrin, I also found I put the wrong data in Graph 2, now corrected here.  Since I want to cross-post this at Angry Bear, I've also made a few editorial changes to make it more Bear-worthy.

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Amity Shlaes, the disinformation bunny, is still going.  In the latest issue of Imprimus, a publication of Hillsdale College, is a transcript adapted from a recent talk she gave there during a conference on the Income Tax, sponsored by Hillsdale's own Center for Constructive Alternatives and the Ludwig von Mises Lecture Series.  Right away, you know this is going to be good.  The Title of her contribution is Calvin Coolidge and the Moral Case for Economy.  Of course, by economy, she means austerity.

There is so much wrong here it's both impressive and depressing.  Rather than give her the full FJM treatment, which would take more time and energy than she deserves, I'll just hit on a couple of the lowlights.  Here is her opening paragraph.

With the Federal debt spiraling out of control, many Americans sense an urgent need to find a political leader who is able to say "no" to spending.

Here we go. Her first sentence is an exercise in made-up right-wing talking point mythology.  I've already exploded the 'Obama is a profligate spender" myth, here, here, and here. Further, we have just lived through three years when federal spending was close to flat line, as Graph 1 shows.  

 Graph 1 - Flat Federal Spending Under Obama 

There is only one comparable period in post WW II history, 1953-56, during Eisenhower's first term, as shown in Graph 2.   Still, over Ike's full term, spending grew by about 30%.

 Graph 2  Not So Flat Spending Growth Under Eisenhower ('53-'60)

To suggest that federal dept is now  "spiraling out of control" due to excessive spending is not merely disingenuous.  It is a sign that either Shlaes has no earthly idea what she's talking about, which in an alleged journalist, is unforgivable, or it's a bare-faced lie, which is unforgivable for anybody.  And if many Americans are feeling the urgent need to curtail government spending, it's because they have been lied to so repeatedly and often that they have no idea what the truth is.  As Krugman recently put it: "And I have to say, it’s extremely telling that conservative Republicans don’t seem able to make their case without resorting, right from the beginning, to obviously dumb fallacies."  The truth is that if we have a debt problem, it is due to a shortfall in revenues.

Yet they fear that finding such a leader is impossible.

Its not clear who made Shlaes the spokesperson for this sorry, disenfranchised segment of the population, nor that this is indeed what they fear.  Perhaps we should introduce Shlaes and the rest of these Real Americans to the real President B. Hoover Obama.

Conservatives long for another Ronald Reagan.

This is probably correct, though as Shlaes goes on to demonstrate, conservatives in this way - and, alas, right-wingers almost always - are rather badly disconnected from reality.

He was of course a tax cutter, reducing the top marginal rate from 70 to 28 percent.  But his tax cuts - which vindicated supply side economics by vastly increasing federal revenue - were bought partly through a bargain with Democrats who were eager to spend that revenue.

Wrong again.  The reality is that Revenue growth under Reagan was the worst of any 20th century President, post Eisenhower, except for the unfortunate Bush, Sr. under who's recession plagued regime Reagan's buzzards came home to roost. And was it really the Democrats who spent that anemic revenue stream, or did it go to Reagan's Star Wars fantasy?

Reagan was no budget cutter.  In fact, the federal budget grew over a third during his administration.

Here, she finally gets something right, if by "federal budget" she means Total Outlays, and by "over a third" she means over 80%  [as measured from 1980 to 1988.]

Things get really egregious further on in the section titled "The Purpose of Tax Cuts."  She informs us that President Coolidge and Treasury Secretary Andrew Mellon campaigned to lower top rates from the 50's to the 20's.

Mellon and Coolidge did not win all they sought.  The top rate of the final law was in the forties.  But even this reduction yielded results - more money flowing into the treasury - suggesting that "scientific taxation" worked.  By 1926, Coolidge was able to sign legislation that brought the top marginal rate down to 25%, and do so retroactively.

I was surprised to learn that Coolidge and Mellon had anticipated the Laffer curve by 6 decades.  Let's have a look at how more money flowed into the treasury. In 1922 and '23, with a top marginal rate of 56%, tax revenues were $2.23 and 1.69 billion respectively. [Per FRED, 1923 was a recession year]  In 1924, with a top rate of 46%, total revenues were $1.79 billion.  This is what Shleas calls "more money flowing into the treasury."  Here's a bigger picture look.  In 1920, when the top marginal rate was 73%, receipts were slightly over $4 billion.  In 1925, when the top marginal rate was 25%, receipts were $1.7 billion, less than half of the 1920 value, and by 1929 had only increased to 2.23 billion.  Graph 3 shows revenues per year [Coolidge's term highlighted in red,] and belies Shlaes' assertion.

 Graph 3 Income Tax Revenues, 1915-1930

Graph 4 shows a scatter plot of this same data, with revenues as a function of top marginal rate, Coolidge years are again highlighted in red.

Graph 4 Top Marginal Rate and Tax Revenues, 1915-1930

A best fit straight line is included.  There's lots of scatter, for a variety of reasons, but the upward trend - the exact opposite of Shleas' assertion, is obvious.

So here's the reality.  A decade of tax cutting and deregulation led us into the Great Depression, the worst economic collapse of the 20th century. [You might note that the following decades of high tax rates and robust regulation were free of these horrible events.]  And what happened most recently?  A decade of tax cuts and deregulation - the end game of three decades of this supply-side approach - led to the greatest economic collapse since the Great Depression.  Significantly, the major deregulations of big finance, including the repeal of Glass-Steagall came at the end of Clinton's term, less than a decade prior to the financial melt down.  Last Friday on his radio show, Thom Hartmann pointed out that prior to the regulations put in place in the 30's, the U.S. had never gone for more than 15 years without a major financial collapse.  So this result should have been expected.

The extraordinary thing isn't that right wingers lie.  The simple reality is that they can't make their case without lying, because it has no merit.  The extraordinary thing is that their lies are so easily rooted out and refuted, in the era of free and easily accessible information, but so few people will take the required few minutes to go ahead and do it. Sadly, whenever the truth comes up against a cascade of lies, the liars have a significant tactical advantage. 

Shlaes' presentation is just one more manifestation of the right wing ploy of denying reality.   Sadly, it works, because you really can fool a lot of the people a lot of the time.

More Right Wing Lies

Amity Shlaes, the disinformation bunny, is still going.  In the latest issue of Imprimus, a publication of Hillsdale College, is a transcript adapted from a recent talk she gave there during a conference on the Income Tax, sponsored by Hillsdale's own Center for Constructive Alternatives and the Ludwig von Mises Lecture Series.  Right away, you know this is going to be good.  The Title of her contribution is Calvin Coolidge and the Moral Case for Economy.  Of course, by economy, she means austerity.

There is so much wrong here it's both impressive and depressing.  Rather than give her the full FJM treatment, which would take more time and energy than she deserves, I'll just hit on a couple of the lowlights.  Here is her opening paragraph.

With the Federal debt spiraling out of control, many Americans sense an urgent need to find a political leader who is able to say "no" to spending.

Here we go. Her first sentence is an exercise in right wing talking point mythology.  I've already exploded the 'Obama is a profligate spender" myth, here, here, and here. Further, we have just lived through three years when federal spending was close to flat line, as Graph 1 shows.  

 Graph 1 - Flat Federal Spending Under Obama 

There is no comparable period in post WW II history.  Graph 2 shows the next flattest era under Eisenhower, when spending grew by about 50% over the term.

 Graph 2  Not So Flat Spending Growth Under Eisenhower

To say federal dept is "spiraling out of control" is not merely disingenuous.  It is a sign that either Shlaes has no earthly idea what she's talking about, which in an alleged journalist, is unforgivable, or it's a bare-faced lie, which is unforgivable for anybody.  And if many Americans are feeling the urgent need to curtail spending, it's because they have been lied to so repeatedly and often that they have no idea what the truth is.   The truth is that if we have a debt problem, it is due to a shortfall in revenues.

Yet they fear that finding such a leader is impossible.

Its not clear who made Shlaes the spokesperson for this sorry, disenfranchised segment of the population, nor that this is indeed what they fear.  Perhaps we should introduce Shlaes and the rest of these Real Americans to the real President B. Hoover Obama.

Conservatives long for another Ronald Reagan.

This is probably correct, though as Shlaes goes on to demonstrate, conservatives in this way - and, alas, typically - are rather badly disconnected from reality.

He was of course a tax cutter, reducing the top marginal rate from 70 to 28 percent.  But his tax cuts - which vindicated supply side economics by vastly increasing federal revenue - were bought partly through a bargain with Democrats who were eager to spend that revenue.

 The reality is that Revenue growth under Reagan was the worst of any 20th century President, post Eisenhower, except for the unfortunate Bush, Sr. under who's regime Reagan's buzzards came home to roost. And was it really the Democrats who spent that anemic revenue stream, or did it go to Reagan's Star Wars fantasy?

Reagan was no budget cutter.  In fact, the federal budget grew over a third during his administration.

Here, she finally gets something right, if by "federal budget" she means Total Outlays, and by "over a third" she means over 80%  [as measured from 1980 to 1988.]

Things get really egregious further on in the section titled "The Purpose of Tax Cuts."  She informs us that President Coolidge and Treasury Secretary Andrew Mellon campaigned to lower top rates from the 50's to the 20's.

Mellon and Coolidge did not win all they sought.  The top rate of the final law was in the forties.  But even this reduction yielded results - more money flowing into the treasury - suggesting that "scientific taxation" worked.  By 1926, Coolidge was able to sign legislation that brought the top marginal rate down to 25%, and do so retroactively.

Let's have a look at how more money flowed into the treasury.  In 1919-21, when the top marginal rate was over 70%, receipts were over $120 million.  By 1925, when the top marginal rate was 25%, receipts were in the $60 to 90 million range, and by 1929 had declined to about $50 million.  As Graph3 shows, Shlaes' lie is simply astounding.

Graph 3 Federal Revenues Collapse During the 1920s

So here's the reality.  A decade of tax cutting and deregulation led us into the Great Depression, the worst economic collapse of the 20th century. [You might note that the following decades of high tax rates and robust regulation were free of these horrible events.]  And what happened most recently?  A decade of tax cuts and deregulation - the end game of three decades of this supply-side approach - led to the greatest economic collapse since the Great Depression.  Significantly, the major deregulations of big finance came at the end of Clinton's term, less than a decade prior to the financial melt down.

The extraordinary thing isn't that right wingers lie.  The simple reality is that they can't make their case without lying, because it has no merit.  The extraordinary thing is that their lies are so easily rooted out and refuted, in the era of free and easily accessible information, but so few people will take the required few minutes to go ahead and do it. 

Shlaes' presentation is just one more manifestation of the right wing ploy of denying reality.   Sadly, it works, because you really can fool a lot of the people a lot of the time.

Ad Hoconomics

In the early days of the Other Great Depression, the Roosevelt administration tried out many ideas - some good, some better, some awful - to help America out of an economic nightmare that nobody understood at the time.  This scattershot approach seems to fit both definitions of ad hoc, when used as an adjective:

1. Formed for or concerned with one specific purpose

2. Improvised and often impromptu

Fair enough.  Keynes didn't publish the General Theory until 1936.

In a Financial Times article* quoted extensively by DeLong, John Kay makes this remark about the first generation of Keynesians, who engaged in ad hoc-ery in trying to determine the consumption function (not this), "which related aggregate spending in a period to current national income," and thus get a handle on the multiplier effect:

But you would not nowadays be able to publish similar work in a good economics journal. You would be told that your model was theoretically inadequate – it lacked rigour, failed to demonstrate consistency. To be “ad hoc” is a cardinal sin. Rigour and consistency are the two most powerful words in economics today.

Kay concludes:

The belief that models are not just useful tools but are capable of yielding comprehensive and universal descriptions of the world blinded proponents to realities that had been staring them in the face. That blindness made a big contribution to our present crisis, and conditions our confused responses to it.

This is a damning indictment of macroeconomics, as practiced by the neoclassical school.   I level this criticism specifically at them, since the opposing Keynesians seem to have rather useful models, and - more importantly - are not bound by giving more credence to the model than they give to the real world.   And perhaps most importantly of all, Keynesians are either roundly criticized as idiots, or simply ignored, and have no influence on current policy.  Neo-classicists and their near equivalents, whether of the Chicago, Austrian or Libertarian persuasions, are the opposite: if the model conflicts with reality (as it sooner or later must, models always and everywhere being simplified and therefore inaccurate approximations) then it is reality that is somehow wrong.  And these are the Very Serious People who determine and influence policy.

A criticism of Keynesian economics is that it was unable to anticipate the stagflation of the 70's.  That's true, it wasn't.  It's funny, though, that neo-classicists, who were also equally clueless about stagflation (though I guess Friedman and Phelps did have a clue) had - and still do not have - any explanation of the high employment of the 30's, and of now, come to think of it, other than the "Great Vacation" theory.

In 1970, Keynes had already been dead for 24 years.  A more vital Keynes perhaps would have made an attempt to analyze, understand and explain stagflation.  That was his approach to difficulties 40 years prior, anyway.  The thing to remember about Keynes is that he did not overthrow the edifice of economics as it existed in the 30's.  He expanded it to include realms that were otherwise incomprehensible.  It's reasonable to assume that he would have done the same in the 70's, had the rather inconvenient passing-away not long since intervened.

The problem with conservative economists of all stripes is not that they are always wrong.  As hard as I am on them and their models, they get some things right, some times.  The problem is that they give full credence and dependence to contrived "comprehensive and universal descriptions of the world" and little or none to contrary facts and data that actually occur in the world their models so inadequately describe.**   Hence, they do not recognize that the universe of economics contains different realms, and that when in these different realms, different policy solutions are needed.

Austerity is right in certain times and places, but not at a time and place when unemployment is high and interest rates are bumping against the zero interest boundary.   That they refuse to acknowledge the need for fiscal stimulus, or even that the zero interest bound is of any relevance is quite telling, ispo facto.

The Keynesian solutions were tried in the 30's, and they worked.  It is quite likely they would work today, if there were the political will to employ them, rather than Very Serious (and Very Painfully Destructive) Austerity.  And, since they are tried and true methods, there would be no need for an ad hoc approach.
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* You have to register with FT to read the article - but go ahead:  it's free, and worth it!
** The 4th pillar of the conservative mental process manifests itself as some sort of denial of reality.
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B. Hoover Obama

 I just heard Krugman tell Keith Olberman that Obama's speeches sound a lot like those from Herbert Hoover in 1932.  "It's really quite depressing," he added, with no apparent sense of irony.

Hoover = Obama.

Why didn't I think of that?

Update (8/04):  Happy birthday, Dear Mr. President.

I thought I was being clever and unique in referring to Mr. Hopey-Changey in Hooverian* terms.  But a few seconds with TEH GOOGLY  has disabused me of that mistaken notion.

Other references provide quotes and react in a range from the quizzical to the severely misguided** (though very well written) to deep disappointment to something bordering on despair.  I am not alone.

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* The earliest use on this blog that I can find quickly is from Feb 2, 2010.
** Seriously - Glenn Freaquing Reynolds!?!
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Worse Than the Great Depression?

Washington's Blog has a long post on the current economic downturn, cross-posted at Naked Capitalism.  You often hear that it's the worst since the great depression.  It may well be the worst ever.

I'm not going get into extensive quotes.  You can go to the source, and you should for all the information, quotes, links  and eye popping charts.  I see Suzan has picked up the whole post, as well..

But I do want to embed the two videos.  The first shows a lot of non-agreement among CNBC financial talking-head types, from this morning's live action on the market floor.  BTW, the DJI finished the day at 12,290.14 down 279.65.





The second is an excerpt from a recent 60 minutes episode that shows that things are so much worse than you might realize.





There's lots more at the link.  Read it and weep.

I will quote the wrap up at the end.

Two fundamental causes of the Great Depression, and of our current economic problems, are fraud and inequality:

• Fraud was one of the main causes of the Depression, but nothing has been done to rein in fraud today

• Inequality was another major cause of downturns - including the Depression - but inequality is currently worse than during the Depression

There are, of course, other reasons the economy is still stuck in a ditch for most Americans, such as encouraging too much leverage, bailing out the big speculators, failing to break up the mammoth banks, and failing to spend wisely, where it will do some good. See this and this. But fraud and inequality were core causes of the Depression, and our failure to address them will only prolong our misery.

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The Official Roster of the Pain Caucus

Any list that includes Niall Feguson, Amity Shlaes and William Kristol is obviously composed of very serious people.

Stock Market Performance Before and After WW II

Thinking more about Henderson's MIRACLE, I wonder --- has there ever been an economic MIRACLE or Boom, or even a pretty good time that was not accompanied by strong gains, or at least some sort of an up-trend in the stock market?

Wouldn't you expect that if there were an actual economic MIRACLE following WW II, there would have been a big gain in the Dow Jones Industrial Average?  Let's have a look.

What we find is that the DJI rose over the year following VJ Day (Aug 15, 1945) from about 160 to around 212 in early-summer of 1946.  Then, Henderson's alleged miracle happened, and stocks fell back down to about 165 before the end of the year.   The 212 level wasn't reached again until spring of 1950.

Big DJI Deal!

While we're at it, have a look at how the market performed during the New Deal.  As you can see above, from the 1932 daily closing low of 41.2, it rose to 194 in the Spring of 1937.  That's when FDR tried to balance the budget, and the wheels came off the still-recovering economy.  The market never fully recovered from that blow until after the war was over.

Just for kicks, I put DJI performance from the 1932 low and the 1944 low on a percentage gain scale to see how they stack up.

X-axis is calendar days after the respective lows, running out for six years.

Speaks Volumes, doesn't it.  Even after the 1937-8 kick in the teeth, New Deal performance was still far above what the first few post-war years were able to accomplish.
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Private Investment Pre and Post WW II

This is another swipe at Henderson.

Data in his working paper (Table 2, Pg. 15) clearly indicates that gross private investment increased during the new deal at a higher and more enduring rate than in the post war period.  Mike Kimel makes this point at AB, using NIPA data, but you can use Henderson's own data against him, and I love that.

Here is growth of gross private investment following designated base years of 1933 and 1944, using both Henderson's data and the NIPA data.  Data sets match very nicely, though Henderson's ends in 1950 (more cherry picking.)  You can quibble over what year to take as your base, but it won't change things by very much.  Mike Kimel uses 1932 and 1944.

Once again, except for the anti-New Deal year of 1938, the New Deal trumps the post war period in rate of growth, and duration of growth.   And this information was staring Henderson right in the face.

The BIG IDEA to be gleaned here is that Government investment does not drive out private investment.  The pie can grow.
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More Thoughts on the 1920-21 Depression

Barkley Rosser on the Laissez Faire approach.

Check it out.
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Krugman Derangement Syndrome

I've exposed Krugman's would-be critics before:

-   Sloppy methodology and lazy thinking by an economist who wants to be taken seriously, though I've concluded he's insane.
-  Cherry picked, out of context quotes by some college kid.
-  Making shit up, by a deranged politician.

Well, here is more making up of shit by Steven Horowitz, another college professor of economics.

The title, The Newspeak of Paul Krugman, sets just the right Orwellian tone, I'd say - and with the typical right wing blow-hard's tone deafness to irony.  Here is the beginning of the text.

In his September 28 New York Times blog post, Paul Krugman announced that “economics is not a morality play.” That turn of phrase is his way of defending the idea that in unusual times, such as the sort of deep recession we are in, we can get strange relationships between economic cause and effect. The result is that actions which we might find highly distasteful can have positive effects. Thus we cannot afford to be overly concerned with morality if the goal is to get out of the recession.

Specifically, Krugman defends the claim that World War II got us out of the Great Depression, because “this is a situation in which virtue becomes vice and prudence is folly; what we need above all is for someone to spend more, even if the spending isn’t particularly wise.” Even spending on something destructive like war, he argues, is what is needed to solve the problem, especially when the “political consensus for [domestic] spending on a sufficient scale” is not available. In Krugman’s version of Orwell’s Newspeak, destruction creates wealth, and war, though not ideal, is morally acceptable because it produces economic growth.

Where's My Democracy, Dude?

BT rails against the Stupidity of Americans in continuously reelecting corrupt congressmen who work (directly or indirectly) for the wealthy elite and/or international corporations.

We've had a pretty good run here in the U.S. in my life-time.  (I was born at the leading edge of the first wave of the post-war baby boom.)   Since Reagan, it's been slipping away.  This is the motivation for my economics, Deep Stupid, and Republican = Wrong posts.  I'm trying to rattle the pots and pans (as the late Molly Ivins urged) and maybe help the scales fall of the eyes of one or two people who might stumble across this blog.

Here is my comment on BT's post.

When you have an aggregate of over 300 million, you're talking about human nature. If Americans are stupid, it's because humans are stupid.

But there's a lot more to it than that. There is a powerful and very well funded right wing talk machine that has enormous influence over the ignorant and the prejudiced, as well as the merely uninformed, who get duped by their potent misinformation campaign.

The wealthy elite, at all times and places, work hard to keep their advantage - and that comes at the expense of all the rest of us. Same as it ever was.

These days, most people are too damned busy dealing with the problems of their own life to be able to get a good handle on politics and economics as well. Plus, regressives have succeeded in diluting education so that people don't understand civics. And many don't have a good grasp of rational thought processes.

As I think about what is slipping away, it occurs to me that the best time and place to have been alive - maybe ever, was the post WWII U.S. And, in a strange way, we owe a great deal of what we've had to the Great Depression. No GD -- no New Deal, no unemployment compensation, no Social Security, no strong union movement; i.e, no strong middle class.

And this is what we are losing, because it is what the rich and their minions are taking away. Historically, the life time of a democracy is about 200 years. Look where we are.

Good bye, America. It was good while it lasted.

If Obama is progressive at all, it is in a very tepid way.  Repugs are likely to make gains in both houses this next mid-term election, stifling any chance for Obama to make any headway with any progressive agenda.  I think a double dip into deep recession is now inevitable, and it could well be Great Depression II.

The first time it lead to progressive populism in the U.S. but regressive, nationalistic populism in Germany.  My read of the national mood is that now, moving down the fascist path will be very easy.  And the rest of the world is likely going that way as well.

We are truly, seriously screwed.

Lebergott got it all wrong

And he did it on purpose.

Lebergott's data on unemployment counts those working in New Deal stimulus programs as unemployed.

That's right. They went to work everyday, building things, painting murals -- whatever, but Lebergott refused to count them, saying:

This contrasts sharply, for example, with the German practice during the 1930′s when persons in the labor-force camps were classed as employed, and Soviet practice which includes employment in labor camps, if it includes it at all, as employment.

Robert Waldman renders it thus:

Lebergott assertst that it is reasonable to considert the WPA to be essnetially the same as Buchenwald, Dachau and the gulag (I am not exaggerating at all[1]).

Lebergott's data series is, of course, beloved of right wing regressives who want to bend reality to their own warped vision.

For context and more, see Delong. 

Waldman's legitimately impassioned  comment appears here.

Hmmmm . . .

Every new thing I learn about the 20's makes me even more pessimistic than I have been about our near to medium term future.

That's right, kids - I have been growing ever more pessimistic for the greatest part of a decade.

Here is information on Sophisticated Financial Securitization, back in the 20's.

So, once again, we are SO screwed.

Quote of The Day

On History repeating itself.  (Emphasis added.)

In all our thoughts and feelings and projects for the betterment of things, we should have it at the back of our heads that this is not a crisis of poverty, but a crisis of abundance. It is not the harshness and the niggardliness of nature which are oppressing us, but our own incompetence and wrong-headedness which hinder us from making use of the bountifulness of inventive science and cause us to be overwhelmed by its generous fruits. The voices which -- in such a conjuncture -- tell us that the path of escape is to be found in strict economy and in refraining, wherever possible, from utilizing the world's potential production are the voices of fools and madmen. There is a passage from David Hume in which he says: 'Though the ancients maintained that, in order to reach the gifts of prophecy, a certain divine fury or madness was requisite, one may safely affirm that, in order to deliver such prophecies as these, no more is necessary than merely to be in one's senses, free from the influence of popular madness and delusion.'

Obviously it is much more difficult to solve the problem to-day than it would have been a year ago. But I believe even now, as I believed then, that we could still be, if we would, the masters of our fate. The obstacles to recovery are not material. They reside in the state of knowledge, judgment, and opinion of those who sit in the seat of authority. Unluckily the traditional and ingrained beliefs of those who hold responsible positions throughout the world grew out of experiences which contained no parallel to the present, and are often the opposite of what one would wish them to believe to-day. In France the weight of authoritative opinion and public sentiment is genuinely and sincerely opposed to the whole line of thought which runs through what I have been saying. In the United States it is almost inconceivable what rubbish a public man has to utter to-day if he is to keep respectable. Serious and sensible bankers, who as men of common sense are trying to do what they can to stem the tide of liquidation and to stimulate the forces of expansion, have to go about assuring the world of their conviction that there is no serious risk of inflation, when what they really mean is that they cannot yet see good enough grounds for daring to hope for it. In Great Britain opinion is probably more advanced. I believe that the ideas of British bankers are on sounder lines than those current elsewhere. What we in London have to fear is timidity and a reluctance to act boldly.

Nothing could be a greater advantage to the world than that the United States should solve her own domestic problems, and, by solving them, provide the stimulus and the example to other countries. But observing from a distance, -- a nearer view of the prospect might modify my pessimism, -- I am unable to imagine a course of events which could restore health to American industry in the near future. I even fancy that, so far from the United States giving the example, she will herself have to wait for stimulus from outside. I, therefore, dare to hope -- however improbable it may seem in the light of recent experience -- that relief may come first of all to Great Britain and the group of overseas countries which look to her for financial leadership. It is a dim hope, I confess. But I discern less light elsewhere.

May 1932

John Maynard Keynes

H/T to Delong

$hriveling

That's the best word I can think of for something that has been shrinking since the Reagan Administration Regime, even without the recent collapse.

And what would this $hriveling thing be?

The M1 Money Supply multiplier, which has been below 1 for over a year, and, after a dead cat bounce, is now at .79, with every indication of falling further.

What this means is

for every $1 increase in the monetary base – the money supply only increases by 79 cents.

And it's not just here.

"Money multipliers have collapsed everywhere. What M3 is telling us is that confidence is missing.  I don't see any way to stabilise M3 in such circumstances," he said.

Professor Tim Congdon from International Monetary Research called on the ECB to buy state bonds in a blitz of QE to insure against a double-dip recession.  He said: "2010 is going to be very difficult."

Could this long range drop be the behind-the-scenes actor that has been responsible for lagging GDP growth over the period?

At any rate, this is NOT a good thing.  (Emphasis added)

The chain of causes of the Great Depression thus leads back to the restrictive monetary policies of the Federal Reserve System. Those policies led to fear of bank collapses which caused the money multiplier to decline thus leading to a decrease in the money supply. This decrease in the money supply led to deflation which raised the real interest rate to extraordinary levels. This drastically discouraged investment purchases causing the level to decline by about 90 percent. Businesses found they were not selling as much as they had been producing. This led to cutbacks in production and layoffs of the labor force. The decline in employment then resulted in reduced incomes and consequently reduced consumer purchases leading to further cutbacks in employment and reductions of income.

One of the differences between the Depressions of 1921 and 1929 was that in '21, deflation, though deep, was a specifically U.S phenomenon.  In the 30's, it was world wide.  Like it is now.

Every new thing I learn just increases my pessimism.
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What Decade Is It?

I'm still pondering the Depression of 1920-21 and its aftermath.

It's difficult to find hard data on the peiod.  Beareau of Labor Statistics information only goes back to the 40's.

Anecdotal information from J and Tux about the 20's are consistent with the same kind of top-only "recovery" we have experience over the last decade.  For a while, I though that 2000 was a 1929 equivalent, and that the stock market rebound of the last 12 months was something like the ups and downs of the 30's.  My feeling has been that we are about to fall into the second depression leg, a la 1938.

Analogies are never perfect, but now I wonder if 2000 wasn't like 1919, and the Bush years weren't the roaring twenties, but with better record keeping.  The recent recovery, such as it was (or might it have been a sham?) was jobless.  Income and wealth disparity have continued to rise over the last decade.  That was they way in went it the 20's, but was not the main thrust of the 30's, as regulations were put into place.

Nothing in the last several years has happened to dampen my pessimism.  What is the best analogy for today?  Is it 1929 or 1937?

Or do I have this all completely wrong, and recovery is a shiny package waiting on the door step?  If this is true, please convince me so I can stop worrying about my grandchildren.

Meanwhile, idiots like John Kyl spew this kind of dreck. (Emphasis added.)

Sen. Jon Kyl (R-Ariz.) did not join Bunning's effort, but he defended his colleague's point of view. Kyl told the Senate he questioned why anyone would see unemployment benefits as helpful to the economy, or to the job market.


"If anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work," Kyl said. "I am sure most of them would like work and probably have tried to seek it, but you can't argue it is a job enhancer."
 
Andrew Stettner, deputy director of the National Employment Law Center, says there's a good reason people are out of work for so long. There are six unemployed Americans for every available job, he said.

In other words, according to Kyl, unemployment is a nice cushy vacation, so why would these new welfare queens go back to work?   As Mark Thoma puts it:

Conservatives whine about everything, and the noise they make is often quite disconnected from the importance of the problem, so the mere fact that they are making noise doesn't say much. The real problem is those who refused to give the help that was needed, people like Jon Kyl. The people sitting at home jobless as a consequence of this failure, people just trying to get by until there are jobs again, are not the ones to blame.

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More Thoughts on the Depression of 1920-21

Comments by J and Bad Tux in Friday's post got me thinking.  That blog entry discussed exogenous factors contemporary with the 1921 depression.  But what about endogenous factors?  What J and BT suggested is that this depression was characterized by a surplus of finished goods, commodities and labor resources.

There is an old description of inflation as too many dollars chasing too few goods.  Here, we see deflation as not enough dollars and too many goods - exactly the opposite.  My hypothesis on the difference between the 1920 and 1929 depressions now is that, in addition to the many exogenous factors which could have influence the depth and duration of these deflationary depressions, there is a fundamental endogenous difference as well.

The 1920 depression resulted from supply factors - an over-abundance of labor resources and material goods that the economy could not absorb.  This difficulty was made considerably more difficult by restrictive fed interest rate policy.

The 1929 depression resulted from demand factors - the severe loss of wealth and purchasing power in the general population.

Any ideas on how to gather the relevant data are welcome.

Meanwhile, here is an excerpt from the Wikipedia entry on the 1920 depression, relating to Government activity.

President Warren Harding convened a President's Conference on Unemployment at the instigation of then Commerce Secretary Herbert Hoover as a result of rising unemployment during the recession. About 300 eminent members of industry, banking and labor were called together in September 1921 to discuss the problem of unemployment. Hoover organized the economic conference and a committee on unemployment. The committee established a branch in every state having substantial unemployment, along with sub-branches in local communities and mayors' emergency committees in 31 cities. The committee contributed relief to the unemployed, and also organized collaboration between the local and federal governments.

The Unemployment Conference stands as a watershed in federal policy with respect to depressions and unemployment relief. In sharp contrast to the total inaction and benign neglect that had characterized the response of previous administrations, the Conference not only conducted studies aimed at preventing future depressions through better management of the business cycle, but also provided practical assistance to local committees and encouraged a variety of local actions. These included the stimulation of public works and clean-up projects, advice on the organization and techniques of fund raising, and exhorting employers to adopt "work-sharing" plans. The Conference soon became an effective clearinghouse, disseminating ideas that local committees had found effective in providing jobs and temporary relief.

Field representatives were dispatched to assist local committees and to monitor their progress. Thus they not only facilitated the sharing of ideas, but provided vital situation reports by which overall progress could be measured. Reports from hundreds of cities provide interesting insights into conditions, responses and attitudes toward relief. In a few instances, field representatives discovered that very little was being done and that city fathers were not interested in cooperation. In such instances, the realization that their inactivity was being reported usually had the effect of prodding them into action.

Here is a better graph of Fed interest rate movements around the time of the 1920 depression.

Clearly, and contrary to the Austrian allegations, there was considerable government and Fed activity aimed toward influencing the business cycle.
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What the Hell Friday - The Depression of 1921

Austrian Economists and their acolytes claim that the depression of 1921, which was deep but short, (January 1920 to July 1921) refutes Keynesian economics, since the recovery occurred with no government action.   The corollary is that Government  action interferes with the economy, distorts asset allocation and other economic factors and either causes or prolongs times of economic hardship.

As is always the case with people who reason based on dogma rather than data, the 1921 depression is a cherry-picked instance.  I suspect they keep coming back to it because it is the only data point that is consistent with their view of the world.

For example, one can look at Federal spending and see that the Government did not run a deficit to recover from the 1921depression .

The blue line is receipts, the pink line is expenditures, and the yellow line is the surplus or deficit.  Sure enough, no deficit spending in 1920 or 21, following the deficits of the WW I years.

But what gets ignored is the entire economic background was different in1921 as compared to 1929.  First off, the graph indicates that in 1918 and 1919, there were sizable deficits.  In 1920, the budget ran a tiny surplus, and surpluses are slight through most of the roaring 20's.  So - the 1921 depression was preceded by two years of large deficits, the 1929 depression was preceded by several years of steady surpluses.

It is worth noting that the 1921 depression came on the heels of WW I.  Coincidentally, there was a sharp, rather short recession following WW II, as well.

Van Mises acolyte Robert Murphy recently posted this graph on his blog.

His point is that deflation couldn't have caused the lengthy 1929 depression, since the deflation in 1921was steeper and deeper, and that depression was short-lived.  Wow!  Look at that cliff-fall in CPI in 1921.  Nothing like that happened in the 30's.  OK - fair enough.  If everything else is equal.  We've already had a hint of how they weren't, but let's examine this graph a little more closely.  The years from about 1915 to 1920 were characterized by high inflation - way over 10% that entire time, and popping up above 20%, just before the crash.  On the other hand, the years leading up to 1929 were characterized by no inflation at all. 

So, deflation in 1921 is a crash from several years of high inflation, the slump starting in 1929 followed several years of no inflation.

Let's look at Fed activity.  I was not able to come up with much information, but did find some on the St. Louis Fed website.

Here is the Discount Rate during years of both depressions.  Depression times are indicated in red, non-depression times in blue.  Selected dates of Fed activity are noted.  The rate was raised to 6% on 1/24/1920, and lowered on  to 5% 11/03/1921, and again to 4.5% on 4/06/1922.  A cynic might say the interest rate hike of 1920 helped bring on the depression, while the quantitative easing of 1921-2 secured its end, but we won't go there.  Based on this graph alone, it does look as if the interest rate situation were nowhere near the 0-rate bound in 1921, and might have been approaching it in the 30's.  At any rate, the statement that the economy quickly recovered after 1920 in the absence of fed and Government activity is simply false.

One criticism leveled against the Fed from a modern perspective (but not by Austrians) is that in the 30's there was no appreciation that during deflation real interest rates are higher than nominal rates.  Rates were going down, so the contemporary understanding was that easing was taking place.  Unfortunately, real rates were rising, and the economy was effectively being choked.

 Randall Parker explains: 

The giving/taking of credit to/by the Federal Reserve has particular value pertaining to the recession of 1920–21. Although suggesting the Federal Reserve probably tightened too much, too late, Friedman and Schwartz (1963) call this episode “the first real trial of the new system of monetary control introduced by the Federal Reserve Act.” It is clear from the history of the time that the Federal Reserve felt as though it had successfully passed this test. The data showed that the economy had quickly recovered and brisk growth followed the recession of 1920–21 for the remainder of the decade.

Another reason to criticize the early Fed is that they did not have a proper understanding of the devastating effects of deflation.  Parker continues (emphasis added):

Moreover, Eichengreen (1992) suggests that the episode of 1920–21 led the Federal Reserve System to believe that the economy could be successfully deflated or “liquidated” without paying a severe penalty in terms of reduced output. This conclusion, however, proved to be mistaken at the onset of the Depression. As argued by Eichengreen (1992), the Federal Reserve did not appreciate the extent to which the successful deflation could be attributed to the unique circumstances that prevailed during 1920–21. The European economies were still devastated after World War I, so the demand for United States’ exports remained strong many years after the War. Moreover, the gold standard was not in operation at the time. Therefore, European countries were not forced to match the deflation initiated in the United States by the Federal Reserve (explained below pertaining to the gold standard hypothesis).

So, countering the effects of the depression we have strong U.S. exports.  And what's this about gold?  Because of WW I, the gold standard was abandoned by the involved countries.  Later in the 20's the U.S. and Europe went back on the gold standard, but at the time of the 1920 depression, nobody important was on it.

This is not a trivial point, when we consider he part gold played in the Great Depression of 1929.  Parker again:

Looking back, we observe that the record of departure from the gold standard and subsequent recovery was different for many different countries. For some countries recovery came sooner. For some it came later. It is in this timing of departure from the gold standard that recent research has produced a remarkable empirical finding. From the work of Choudri and Kochin (1980), Eichengreen and Sachs (1985), Temin (1989), and Bernanke and James (1991), we now know that the sooner a country abandoned the gold standard, the quicker recovery commenced. Spain, which never restored its participation in the gold standard, missed the ravages of the Depression altogether. Britain left the gold standard in September 1931, and started to recover. Sweden left the gold standard at the same time as Britain, and started to recover. The United States left in March 1933, and recovery commenced. France, Holland, and Poland continued to have their economies struggle after the United States’ recovery began as they continued to adhere to the gold standard until 1936. Only after they left did recovery start; departure from the gold standard freed a country from the ravages of deflation.

Summary:
The depressions of 1920-21 and 1929-4? (pick an number) occurred in very different circumstances.  My cursory check uncovered this list:

1920 preceded by large deficits, 1929 preceded by surpluses.
1920 preceded by inflation, 1929 preceded by no inflation.
1920 preceded by war, 1929 preceded by peace.
1920 depression possibly softened by export strength, 1929 ???
1920 evidently not near the 0-interest rate bound, 1929 probably approaching it.
1920 gold standard not in force, 1929, gold standard in force.

Every bit of this gets ignored by Austrians.  Some of this is probably more important than the rest.  I find the gold facts to be especially intriguing. There are probably more differences than can be discovered in 20 minutes of fumbling around on the intertubes.   I welcome any additional information.

UPDATE:
In comments, J points out some other relevant historical information.  In addition there is the matter of debt ratio that I spoke about in a different context recently.  In 1920-21 the ratio of debt to GDP increased from about 150 to 190% during the course of the depression.   In 1929, this ratio started at about 190%, and by 1933, had increased to 299%.

Update 2:
Rereading the second Parker quote above, I gleaned the following inference.  During the 1920-1 depression, deflation was a local U.S. phenomenon.  In the 1929 depression, deflation was a nearly world-wide phenomenon.
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Debt and GDP

In reading This Blog, I found the following graph linked in one of the comments.

Most of the time since 1870, Total Debt has been between 130 and 170% of GDP.  Whether this is a good thing or not, I'm not prepared to say.  But, we can see that whenever the debt ratio gets above that range, bad things are happening.  In 1933, FDR had just been elected, and the New Deal had not yet happened.  As the New Deal kicked in, with all that wasteful government spending, the ratio FELL.  Hmmm.

While the debt ratio was unwinding during the 30's, the only blip up came around 1937-8, when FDR made the blunder of attempting to balance the budget long before the economy had fully recovered.  Except for the necessary spending caused by WW II, it stayed within the historical limits until the early 80's.  It climbed a bit under Eisenhower, seems to have leveled off under Kennedy and Johnson, then inched up in the 70.'s   During the Reagan years, the climb was almost vertical.  Clinton slowed things down for a while.  Looks like the curve started to shoot up again, late in his term, while he was balancing the budget.  (Wha . . .?)

The Bush years piled on the debt.  Cutting taxes, while lying the country into a war which may never end, has to have some sort of economic effect - right?

The depth of the Great Depression corresponded with the 1933 peak.  The graph only goes through 2008, so I don't know where we are now.  But the 30-year trend looks unsustainable, and the unwinding is bound to be very painful indeed.

In short -- we're screwed.
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New Deal Denialism

One of the ways right wingers manifest their disdain for reality is through the dogma of New Deal denialism.

In short, it goes like this.  (In fact, why not just go to the link and read the whole article.  all I've done is grab excerpts and make a few comments that don't add much.)

The New Deal was an unmitigated failure. For all his widely touted Keynesian innovations, it is said, Roosevelt presided over sluggish gains in employment, a skittish stock market and, in 1937-38, a “depression within the Depression” that would have finally exposed him as the patrician fraud he was, had not World War II conveniently come along to turn him into a successful war president.

The reality is, FDR and his associates were making it up as they went along: improvising and innovating.  Some things worked, some didn't.  But, since they were realists, they kept the things that worked and scrapped the failures.  They didn't become particularly Keynesian until the aftermath of the 1937-38 fiasco.  But innovation is anathema to the conservative, successful innovation doubly so.  New Deal denialism has been in full flourish since the 2007 publication of Amity Shlaes depression-era fantasy posing as journalism, The Forgotten Man.  Shlaes, who is neither an economist nor a historian, has become a hero of the right with her alleged economic history of the depression

All this frantic rearranging of intellectual furniture takes place within the first 15 pages of The Forgotten Man. The dreary, yet somehow also overheated 380 or so ensuing pages only multiply the confusion. A central strain of Shlaes’ argument— borrowed from the Hayek school of delusionally classical economics—is that FDR’s occasional policy reversals, such as the waffling that preceded the end of the gold standard, created “regime uncertainty,” which “made Americans doubt themselves as investors.” There are at least two difficulties with this line of argument. One is that the business community itself—and bankers in particular—lobbied aggressively to retire the gold standard, since retaining it bred no small amount of uncertainty, amid rampant deflation and a credit freeze provoked in part by bank panics.

But more fundamentally, here and throughout The Forgotten Man, FDR’s character shifts depending on what narrative use Shlaes wants to make of it: He carries 46 of 48 states in his 1936 landside victory because of his sinister drive to draft policy to serve political ends—so much so, she writes, that “the country was splitting into those who were Roosevelt favorites and everyone else.” But when framing those devilish policies, Roosevelt is both capricious and feckless—Shlaes refers repeatedly, and without evidence, to FDR’s alleged view that taxing the wealthy was “amusing,” as though he were short-sheeting the beds in his Harvard dorm. It seems unlikely that such a distractible Bertie Wooster sort of chap could engineer four successive presidential victories,—but in the insular logic of Shlaes-land, Roosevelt’s successes at the ballot box can only attest to the supreme cunning of his interest-group-fueled agenda.

The reason for these vain attempts to discredit the New Deal is to provide an opening for policies based on the classical economics "Austrian" ideas of the the Hayek variety.  Hayek is the genius who surmised that German high unemployment in the 30's occurred because the unemployed chose not to work.  This is the kind of nonsense that happens when reality and right wing ideology collide.

Letting the free market administer its mystic remedies—reallocating capital and labor in more efficient fashion—is the de facto position of all right-wing Thirties revisionists, from the impressionistic Shlaes to the various von Mises hardliners. But nothing like that outcome would ensue in a laissez-faire approach—then or now—for the simple reason that laissez-faire conditions are what eroded demand and pumped up speculation in the first place. It’s very much like trying to cure pneumonia by standing out in the rain.

Well, I don't actually believe that you catch pnuemonia from standing in the rain, but you get the point.

Then there is the massive contradiction behind the corollary talking point that seeks to deny the New Deal by insisting that only World War II brought the Depression to an end. After all, the Second World War was a mobilization of deficit-funded economic power that made the New Deal look like the work of pikers. One could go further and note that the uneven prosperity of the Reagan and George W. Bush eras were likewise textbook studies in deficit stimulus efforts—only without any pretense of finding adequate tax revenues to cover the spending costs. Weighed in the full balance of the historical record, Shlaes’ argument is not a brief about the eternally destructive character of government intervention in the economy; it is, rather, an unusually shrill insistence that government intervention is illegitimate when it serves liberal domestic policy interests.

Where Shlaes leads, van Mises acolyte Robert Murphy follows.

Murphy seems to dismiss the notion (as any consistent free market purist must) that there was anything seriously awry in 1929—or at least not anything that a little Mellon-style liquidating couldn’t rectify in short order. There could be no crisis of overproduction, or demand, or credit, or unemployment, since the market—i.e., nature—has made these things; the crisis only comes when government gets involved. “The free market, by its very nature, is self-regulating,” Murphy patiently explains. “It is government interventions that inevitably distort it, often with unintended consequences.” 

Of course, to make all market outcomes seem like undeviatingly intended consequences requires some acrobatic reasoning, on a whole other plane than mere editorialists like Shlaes can manage. So rather than reflecting longer-term income and wealth inequities from the Twenties boom, the Depression itself was entirely a government creation. After all, our Austrian evangelist confidently declares, “the boom-bust cycle is not a natural feature of capitalism, but rather is caused by the Federal Reserve’s manipulation of interest rates”—specifically in this instance a decision to loosen up credit in 1927 in order to counteract drawdowns in the gold supply from British investors. That original fiscal sin fatally set the stage, Murphy argues, for “the extraordinary meddling with wage rates by Hoover and then FDR” that “prevented workers from moving to more sensible niches in the economy.” How Murphy and his fellow Miseans account for the many panics and depressions that preceded the Fed’s founding in 1913 is a mystery left largely unplumbed.

Such is the true shape of the present economic fiasco—as workers have realized steady gains in productivity over the past two decades, income and wealth have been deliberately channeled out of their hands. I guess it’s no surprise that, in the face of this dismal record, ideologues on the right prefer to talk of the mythical failures of the New Deal. The only real wonder is that at this late stage of their own intellectual bankruptcy anyone still bothers to listen.

Well, wonder or not, they are listening: teabaggers, and those poor misguided fools who get their disinformation from any of Rupert Murdoch's various outlets.  Which is a big part of why we are SO screwed!
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