Barack Hoover Obama

hoover-150 Marshall Auerback here with a post which I originally published at New Deal 2.0.

Every instinct the President has honed, every voice he hears in Washington, every inclination of our political culture urges incrementalism, urges deliberation, and an abundance of caution, particularly in regard to our “unsustainable government spending.” And for all of his apparent newfound populist vigour, it now appears that the President is about to heed these voices of caution. The moves against the banks, coupled with yesterday’s announcement of a spending freeze and previously voiced support for a bipartisan commission on the deficit, all point to Clinton-style triangulation.

The Wall Street Journal reports that President Obama intends to propose a three-year freeze in spending that accounts for one-sixth of the federal budget. The move is designed “to attack the $1.4 trillion deficit” and would “propose limits on discretionary spending unrelated to the military, veterans, homeland security and international affairs, according to senior administration officials. Also untouched are big entitlement programs such as Social Security and Medicare.”

As with so much else with this president, the effect, then, is likely to be cosmetic, but it sends out an awful statement about Obama’s increasingly “Hoover-esque” governing philosophy, and the future likely direction of fiscal policy. The cuts will apparently be supplemented with some “middle class friendly” proposals to be introduced in the State of the Union Address. But the words of the Who’s Pete Townsend spring to mind from the song “Won’t Get Fooled Again”:

“Meet the new boss / Same as the old boss.”

Any kind of spending cuts in the middle of the worst recession since the Great Depression is insane. What we are beginning to see is the return of Herbert Hoover and the “liquidationists.”

As my friend Mike Norman reminded me, Obama opposed the idea of a spending freeze during the campaign, when it was proposed by McCain. McCain lost the presidency. Now Obama supports it???

What’s next? Raising taxes as the Japanese did in the middle of their recession in the mid-1990s?

Those who rant about the runaway size of government in the US should just go to the BEA statistics page. Bill Mitchell points out that government spending as a percentage of real GDP has actually DECLINED over the past year: “In March 2003 it was 9.4 per cent (and it wasn’t much less than about 10 years earlier as well). It peaked at 12.4 per cent in September 2008 at the height of the crisis when investment was heading south and consumption was still in decline. A year later it was at 11.4 per cent.”

It’s certainly not the image of an out of control, wildly spending, “socialist” government.

If Barack Obama continues to listen to the siren songs of the deficit terrorists, he will almost certainly be a one-term president.

Also see Barack Herbert Hoover Obama? by Brad DeLong

27 Comments
  1. Edward Harrison says

    Well said, Marshall. The Hoover comparison looks more apt every day.

    1. Marshall Auerback says

      Thanks Ed. I wish it wasn’t true.

  2. Jo says

    ‘liquidationists’
    I love invective, so much easier to put across than fact.

    Mark Thoma’s endorsement in 5, 4, 3…

    Continue to spend, our models tell us everything will be ok if you do.

  3. Vangel says

    A history lesson might be in order. Hoover did not cut spending or the size of the government. He was an interventionist who initiated many programs that were supposed to be paid by increased taxes on high income individuals. In 1932, the marginal tax rate went from 25% to 63%. FDR attacked Hoover for reckless spending, for increasing taxes too much, increasing tariffs and increasing the federal debt. He even accused Hoover of being a socialist. After he won the election FDR did Hoover one better and spent and taxed more than Hoover did.

    If Obama had brains and courage he would be following the steps of Harding, not Hoover or FDR. Harding cut the size of the federal government, cut spending by nearly 40% and cut marginal income taxes sharply. By allowing the liquidation of malinvestments and providing incentives for capital accumulation Harding and Mellon allowed the economy to recover very quickly. In a year the economy had recovered and was off and running once again.

    1. Marshall Auerback says

      We’ve had this discussion before, so let’s not bother continuing a stale debate.

      1. Vangel says

        What debate? I see are factual errors on your side that you have not addressed. As I pointed out, FDR ran against Hoover by accusing him of spending too much, not too little. That means that if Obama chooses to reduce spending, which he is not doing because his proposals will be meaningless, he will not be following Hoover and FDR, who were both big spending, big government meddlers.

        1. Marshall Auerback says

          In a message dated 1/27/2010 06:06:39 Mountain Standard Time,
          writes:

          What debate? I see are factual errors on your side that you have not
          addressed. As I pointed out, FDR ran against Hoover by accusing him of
          spending too much, not too little. That means that if Obama chooses to reduce
          spending, which he is not doing because his proposals will be meaningless,
          he will not be following Hoover and FDR, who were both big spending, big
          government meddlers.

          Yes and FDR also ran on a balanced budget program, but by 1936 1 in 6
          people was employed by the government.

          Hoover’s spending was minimal to cope with the Depression.

          Look, we have had this discussion before. I have shown you data which
          contradicts your obvious biases. I don’t particularly want to re-engage on
          this again.

        2. Kirk Kinder says

          Vangel is correct. Maybe Hoover didn’t spend as much as Marshall thinks was necessary as FDR did. However, FDR’s spending didn’t pull the US out of the Depression. It wasn’t until after WWII when the individual debt ratio was low, savings high, and our biggest competitors were on the mat that the US came out of the Depression.

          1. Marshall Auerback says

            In a message dated 1/28/2010 12:19:07 Mountain Standard Time,
            writes:

            Vangel is correct. Maybe Hoover didn’t spend as much as Marshall thinks
            was necessary as FDR did. However, FDR’s spending didn’t pull the US out of
            the Depression. It wasn’t until after WWII when the individual debt ratio
            was low, savings high, and our biggest competitors were on the mat that the
            US came out of the Depression.

            You’re using historically incorrect data. See: Stanley Lebergott,
            “Manpower in Economic Growth: The American Record since 1800” (New York,
            McGraw-Hill, 1964), table A-3

            Michael R. Darby “Three and-a-Half Million U.S. Employees Have Been
            Mislaid: Or, an Explanation of Unemployment, 1934-1941”, Journal of Political
            Economy 84, #1 (February 1976, pg. 1-16)

            Lebergott said: “These estimates for the years prior to 1940 are intended
            to measure the number of persons who are totally unemployed, having no work
            at all. For the 1930s this concept, however, does not include one large
            group of persons who had both work and income from work–those on emergency
            work. In the United States we are concerned with measuring lack of regular
            work and do not minimize the total by excluding persons with made work or
            emergency jobs. 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.”
            If you incorporate these statistics, unemployment under FDR in his first
            term went from 25% to 9.6%. It rose again in 1938, after FDR began to cut
            back government spending (much as Obama is threatening to do now) to 13% and
            then he began spending again as the country mobilised for war.
            I’ve covered this in greater depth elsewhere:
            _http://www.ritholtz.com/blog/2009/02/time-for-a-new-%E2%80%9Cnew-deal%E2%80%9D/_
            (http://www.ritholtz.com/blog/2009/02/time-for-a-new-“new-deal”/)

    2. Edward Harrison says

      I’m not sure where Marshall stands on malinvestment, but I would say that ‘liquidation’ is what is needed because we have overinvested in the FIRE economy (Finance, Insurance and Real Estate).

      Where I see the Hoover parallel is the desire to maintain overinvestment. I imagine, therefore, Marshall and I disagree there.

      Where I have agreed with Marshall is that it will be a depression-like disaster to reduce spending without reducing taxes.

      1. Vangel says

        My point is that for some reason Americans seem to ignore the historical facts because they do not fit their ideological positions. History shows that Hoover was not the small government, cut spending and taxes type that Marshall claims he is. His record was that of a meddler who interfered with the economy, increased income taxes, signed a bill that increased tariffs, and implemented many government schemes that causes federal spending to rise.

        I maintain that Bog Higgs is right when he follows up on Rothbard’s analysis of the origins of the Great Depression and concludes that it was made as long and deep as it was by regime uncertainty. To create jobs one needs capital formation and people who have money to invest in factories and other productive assets will not do so when there is a populist movement to confiscate their earnings. Private investment dried up not because the high tax rates, new regulations, and populist rhetoric provided no incentive to do. A person of means was better off to stay in cash than to build the factories that were needed to create jobs. It seems to me that if Obama really wanted job creation he would roll back taxes and cut back on federal spending. Bad businesses would be allowed to fail and good ones would no longer be asked to prop them up.

        At this time we see the USD benefiting from the poor state of many other currencies and is getting a nice bounce from an oversold condition as short positions are forced to cover. But when that run is over and foreign holders of USDs figure out that California is a much bigger problem than Greece, just how will the US finance its very large deficits? How does Obama go on a spending binge that the followers of failed Keynesianism want without triggering a hyperinflationary bust? While price deflation may be the problem that keeps economists up over the next few months there is no way to keep the USD or the US economy from collapsing if we stay on the current path.

        The bottom line is that if we want real solutions we need real actions to take place. That does not require that we ignore the historical facts and make up stories bout Hoover to justify the same type of policies that he implemented. That does not require more government intervention in the economy at home or more meddling abroad. It requires a severe contraction in the size of government that is accompanied by a cut in taxes and a much better regulatory environment. It requires the freeing of individuals to save and invest without worry about confiscation through taxation or money printing. My bet is that Congress and Obama do not have the courage to do what they must and will play at the margins until the electorate imposes its will on the mainstream political parties at the ballot box.

        Marshall seems to be advocating the opposite approach of what he claims. He wants Obama to ignore the voters, who have clearly signalled that they oppose the big government approach, and take the path of Hoover and FRDR, who managed to turn a much needed correction into a Great Depression.

  4. Spencer says

    Your initial thesis seems ludicrous but then you did recover some credibility with the “new boss/old boss” reference. Nobody can seriously believe “Every instinct…honed, every voice… heard, urges incrementalism,… deliberation,… abundance of caution…” in the face of repeated 1000-2000 page bills that include everything but the kitchen sink and wholesale deconstruction of previous administration initiatives soon after taking office without viable replacements. Any investgation into the backgrounds and philosophy of the many Progressive neo-Marxists surrounding the President in the W.H. demonstrates in their own words this truth.

    Gotta go with Vangel and Harrison on this one and decry M.A.’s cop out non-response to Vangel. You’re better than that. Reduce wasteful, unproductive fed’l spending AND taxes, leaving the currency in the hands of the earners who will do a far better job at driving the economy forward. No pain, no gain.

    1. Marshall Auerback says

      In a message dated 1/26/2010 18:47:13 Mountain Standard Time,
      writes:

      Your initial thesis seems ludicrous but then you did recover some
      credibility with the “new boss/old boss” reference. Nobody can seriously believe
      “Every instinct…honed, every voice… heard, urges incrementalism,…
      deliberation,… abundance of caution…” in the face of repeated 1000-2000
      page bills that include everything but the kitchen sink and wholesale
      deconstruction of previous administration initiatives soon after taking office
      without viable replacements. Any investgation into the backgrounds and
      philosophy of the many Progressive neo-Marxists surrounding the President in the
      W.H. demonstrates in their own words this truth.

      To quote Macbeth, the 1000-2000 pages are all “full of sound and fury,
      signifying nothing.” I’m looking at substance, and seeing what actually
      emerges. The notion that the President is surrounded by neo-Marxists suggests a
      lack of perspective on your side.

      1. Vangel says

        <>

        I would rather avoid the labels and stick to the facts. As far as I can see the fact are very clear.

        First, when he was Secretary of Commerce, Hoover was a strong supporter of the business-government collaboration that was used to guide wartime mobilization. He urged businesses to cooperate with each other by using trade associations as a way of curbing competition, which he considered wasteful. (Ref: Hawley, Ellis W. 1966. The New Deal and the Problem of Monopoly. Princeton: Princeton University Press.)

        Hoover held the same views when he was President and kept pushing all kinds of schemes while he argued for ‘fair competition’ and industry/government cooperation. After the crash he signed Smoot-Hawley and increased spending by so much that Roosevelt denounced him for his extravagance in spending and for raising taxes.

        Are you saying that FDR could not see what Hoover was doing and confused a sitting president who was in favour of a free market for a man who was a big-spender? Sorry but your view is not supported by the facts.

        Unless you address those facts with evidence (not opinion) that supports your views you will continue to lack credibility on this topic.

      2. Spencer says

        Thanks for noticing, but lack of perspective? Perhaps. Or perhaps just a different perspective than yours. Yes, substance is key and The Bard/MacBeth not withstanding, sound and fury usually does not arise out of, nor signify, nothing. Usually it’s anger, and many if not most Americans, left, right and center, are definately angry. We the People, citizens, voters and taxpayers, deserve better than the obfuscation of unread-but-passed-anyway 1000-2000 page bills and forced to rely on the hopey/changey emergence of substance that may ultimately be detrimental and full of unintended consequences as the beauracracy creates regulations out of a bills language. As often happens with even lesser efforts than reconstructing a sixth of the U.S. economy at one fell swoop, i.e. healthcare. Just one example.

        As for my ideological reference to neo-Marxists, it should be taken as a valid perspective (even if you disagree) as it is based on my observation of actions taken and listening to words spoken by the Administration and actions of Congressional leadership. Words do matter. Where have I heard that before? Actions matter more (to wit, essential bribery of Sen. Nelson and Sen. Landrau in return for their votes). And it is usually best to listen to a person’s words and take them at face value. Particularly when impromptu and unrehearsed statements about wealth redistribution in keeping with “to each according to his needs, from each according to his ability” serve to support the speaker’s (Obama’s) personal history and actions. And when enough importance and forethought is placed on them to warrant reading them from a teleprompter at every occasion, including a grade school classroom, can there be an argument as to intent? Even when the intent is obviuosly to deceive, mislead or redirect? Can a person reportedly as intelligent, educated and “oratoracally gifted” as Obama actually be so shallow as to be not able to voice his beliefs and knowledge from the heart rather than a teleprompter? Not unless the intent is to mask those beliefs.

        And since it is ideology which is influencing, even driving, the economic perspectives and decisions in the efforts to contain and mediate this crisis, it is valid to consider the ideolgies involved, along with history of economics, politics, monetary interventionism and whatever else forms the basis of ones understanding and vision.

        I have to say that it is perfectly acceptable, even mandatory, to reference ideology which is little more than a belief structure upon which one can have faith in his/her ideas and perspectives and upon which we can make judgements, interpretations and decisions, whether economic, spiritual, intellectual, etc. Truth is a matter of perspective for us humans. Problems and dishonesty arises when we try to hide this basis and our biases from those we hope to convince (and ourselves). To his credit, I noticed Ed also refered to ideology last night/today in another post.

        Furthermore, even all the data the you research in formulating your own opinions can be called into question, can it not? What kind of bias entered into it’s gathering, collating and reporting before you saw it. What kind of personal bias influences your interpretation of these “facts”? You mentioned your presentaion of data to Vangel to refute his position. But have you ever lost sight of the forest for the (data) trees? Why is it that Economics is called the “dismal science” anyway?

        For the record, MY “ideology” could generally be described as “classical liberal” in the image of the founding fathers and in support of free markets, minimal governmant and stable money growth at a natural rate of interest determined by market pricing forces and not a price-fixing cartel of central bankers blinded by their own biases, incomplete information about an impossibly complex system, and yes, personal sef-interest and even lust for power. Government, a necessary evil, is usually the problem and not the solution. We’re structured as a federal republic and not a democracy for a reason. It was the usurpation of power by the federal governement from the States and the destruction of the dollar by the federal reserve which led to the corrupting influence of Congressional incumbency over the People’s economy and the vesting of power in the financial sector over Congress via special interests, lobbyists and financial gain which resulted in this crisis. “Wall Street” only did what came natural and what markets are designed to do (considering also the fallibility of personal self-interest by the bankers). The results were destructive and potentially (even more) catastophic since we’re not even into the end game, due to the corrupting and distorting influence of government power. The individual generally knows best what is in his/her own self interest and self interest is perhaps the most reliable motivator in terms of anticipating desired actions and outcomes.

        Thanks, again. Keep up the good work, even that which I may not agree as we should all be seeking a learning experience and open minds.

        1. Marshall Auerback says

          Well, I certainly would agree that we’re all angry, and I never said words
          don’t matter, but merely pointed out that words in the absence of any
          action is empty rhetoric. And there’s certainly no indication that any of the
          people whom you describe as “Progressive neo-Marxists” would fit that
          description accurately. In that regard, I don’t it’s a question of having a
          different perspective than me, as it is a characterisation which is not
          justified by fact.

          Differences of opinion don’t bother me in the slightest. I would also
          consider myself a classic liberal in the sense of encouraging full freedom of
          expression and range of viewpoints, but that’s a separate issue. The very
          idea that an administration run by Barack Obama and Rahm Emanuel and staffed
          with centrists, Wall Street mavens, and former Bush officials — and a
          Congress beholden to Blue Dogs and Lieberdems — has been captive to
          “progressive neo Marxists” is so patently false that everyone should be too
          embarrassed to utter it. For better or worse, the Democratic strategy has long been
          and still is to steer clear of their leftist base and instead govern as
          “pragmatists” and centrists — which means keeping the permanent Washington
          factions pleased. It’s a party of crony capitalists, dominated by Wall
          Street centric policy makers, which is why they emphasise ludicrous banking
          “reforms” and deficit terrorism (except when it comes to their own handouts of
          course). That strategy may or not be politically shrewd, but it is just a
          fact that the dreaded “Left” has gotten very little of what it wanted the
          entire year. Is there anyone who actually believes that “The Left” is in
          control of anything, let alone the Democratic Party? The fact that Lanny
          Davis — to prove the Left’s dominance — has to cite one provision that was
          jettisoned (the public option) and another which the Left hates (the mandate)
          reflects how false that claim is. What are all of the Far Left policies
          the Democrats have been enacting and Obama has been advocating? I’d
          honestly love to know.

          Can you think of one genuinely progressive thing that Obama has done this
          year? The fact that we had a bill of over 2000 pages on health care, just
          speaks to the complexity of the issue. But it was so riddled with
          loopholes, that it was denuded of any significant reform.

          The politics underlying his proposals do not represent any kind of
          “change”, however amorphous that notion might be. But he’s managed to antagonise
          people on both sides, not because he has been particularly “socialistic”,
          but more because he has acted like a cynical crony capitalist under the
          guise of a faux progressivism. Obama cobbled together a presidential victory
          from diverse groups across the political spectrum: independents in the
          center, a few Republican defections, socially conservative blue-collar workers,
          minorities who do not tend to vote, and independents and progressives on
          the left who have usually been too disenchanted with politics to vote. There
          are huge defections from all of these camps. Obviously, incessantly
          falling employment and incomes have played a big role.

          Those on the right dislike Obama’s government incursions into the economy
          and the exploding fiscal deficits and government debt.

          Those on the left feel betrayed by a man who ran as an agent of change who
          would resist the usual influence of vested interests and has instead caved
          to those interests in myriad ways. His administration is populated by
          people perceived to be agents of the hated financial lobby. He has caved to
          big pharmacy and the insurance lobby. Worst of all he is seen as having
          bailed out the bankers at the expense of the people.

          Obama must move to reverse at least some of these defections. Given the
          state of the economy he is not likely to do more than the mere cosmetic in
          reining in deficits and curbing government spending. That means he must
          somehow restore his image as a man of change who opposes vested interests and
          does not act at the behest of Wall Street. The president has realized the
          pickle he is in only with the loss of Teddy Kennedy’s seat in Massachusetts.
          But I’m not particularly confident that he’ll make his way out.

          1. Edward Harrison says

            Marshall, I am with you on Obama’s economic policy. If he were running left,
            you wouldn’t screams of bloody murder from the left. As I have said in the
            past, Obama is in the New Democrat tradition and his coterie of Clintonites
            have convinced him the corporatist New Democrat agenda will work as well on
            2010 as it did in 1994.

            The only reason we hear the word socialist is because Obama’s policies have
            failed and those who are seeking to advantage themselves from this failure
            are framing the events to their own advantage. In truth, the two major
            parties are not very different.

            From my viewpoint, the reductionism that terms like socialist or hard-right
            engender are distracting. Perhaps I should be more cognizant of this as I
            write as well.

            Let’s all agree at a minimum that this administration like its predecessor
            is beholden to special interests in a way that compromises their objectivity
            and is detrimental to our republic and leave it at that.

            Sent from my Nexus One

  5. Vangel says

    Edward writes:

    “Marshall, I am with you on Obama’s economic policy. If he were running left, you wouldn’t screams of bloody murder from the left….”

    We need a reality check. The American ‘left’ is not some narrow band that agrees on everything so one would expect screams of bloody murder from someone on the left no matter what Obama did. When it comes to his economic policies there is no way to argue that Obama is not running well left of centre. He is pro big-government and pro spending. He has nationalized much of the auto industry and the GSEs, and is looking to nationalize health care. Those are the actions of someone on the left, even if Marshall does not believe him to be left enough.

    1. Marshall Auerback says

      In a message dated 1/28/2010 14:38:10 Mountain Standard Time,
      writes:

      We need a reality check. The American ‘left’ is not some narrow band that
      agrees on everything so one would expect screams of bloody murder from
      someone on the left no matter what Obama did. When it comes to his economic
      policies there is no way to argue that Obama is not running well left of
      centre. He is pro big-government and pro spending. He has nationalized much
      of the auto industry and the GSEs, and is looking to nationalize health
      care. Those are the actions of someone on the left, even if Marshall does
      not believe him to be left enough.

      A lot of these actions were undertaken by the Bush Administration. I’m
      not for or against government spending per se. Government spending per se is
      not “leftist”. Today it seems to represent something closer to Mussolini
      style fascism. So if we’re going to use labels, I wouldn’t necessarily
      characterise these actions as “someone on the left”.

      The problem is that labels obscure, rather than eludicate. I used the
      term “left” simply in response to criticism that Obama had been captured by the
      “left”. I think this is an incorrect assumption.
      As far as government spending itself, when you’re in a recession, my
      feeling is that you should not wait for economic growth before you intervene to
      create employment. By then it is too late – long-term unemployment has risen
      and the more likely it is that the unemployed workers will experience
      skill atrophy.
      Further the related costs of unemployment rises – the increased poverty
      becomes entrenched; family breakdown acceleratesl; crime rates rise; alcohol
      and substance abuse rises; physical and mental ill health worsens. All of
      the costs are real and require further public attention.
      As Professor Bill Mitchell has argued
      (_http://bilbo.economicoutlook.net/blog/?p=7576#more-7576_
      (http://bilbo.economicoutlook.net/blog/?p=7576#more-7576) ) ultimately neglect of public purpose generates more costs than
      dealing with the issues in the first place. This was very starkly seen during
      Thatcher’s period in government where the breakdown of public infrastructure
      (sewers, etc) ended up costing much more to replace than maintaining them
      as required.
      In that context, the US government could have offered jobs to anyone who
      wanted them at a living wage to undertake a myriad of productive activities
      which would have arrested a significant part of the damage that long-term
      unemployment brings and would have added value to local communities in the
      form of public infrastructure development and personal care services etc.
      Waiting for growth is a nonsensical paradigm. It is the government’s
      responsibility to push ahead of the growth to ensure it returns as quickly as
      possible.

      1. Vangel says

        First, I agree with you that many actions pursued by Obama were initiated by the Bush Administration. That is my point entirely; that Obama is trying to outdo Bush’s big government policies by spending even more than Bush did.

        Marshall:

        “I’m not for or against government spending per se. Government spending per se is not “leftist”. Today it seems to represent something closer to Mussolini style fascism. So if we’re going to use labels, I wouldn’t necessarily characterise these actions as “someone on the left”.”

        If you want to say that Obama is pursuing policies that will lead to state control of privately owned assets as Mussolini did, I will not object. But Obama’s healthcare proposals were certainly those of someone on the left because the goal was to push people into a government run scheme. Perhaps we need to move away from the left/right labels and simply admit that Obama is a statist, just as Bush was.

        Marshall:

        “As far as government spending itself, when you’re in a recession, my feeling is that you should not wait for economic growth before you intervene to create employment. By then it is too late – long-term unemployment has risen and the more likely it is that the unemployed workers will experience skill atrophy. Further the related costs of unemployment rises – the increased poverty becomes entrenched; family breakdown accelerates; crime rates rise; alcohol and substance abuse rises; physical and mental ill health worsens. All of the costs are real and require further public attention.”

        I disagree. History shows us that the Harding approach worked much better than the path taken by Hoover and FDR. If we want a viable economy we have to let the markets work and liquidate malinvestments. Using taxpayer receipts to save inefficient companies that have been abandoned by consumers makes no sense because the inefficient use of labour, material, and capital needs to end and resources need to be freed up for those who are better able to use them efficiently. There is no point in meddling just to temporarily save jobs when the meddling prevents the much needed correction that is necessary for the economy to recover and for new jobs to be created.

        Has the Japanese government’s meddling helped the economy? No. Japan has had nearly two decades of low growth and still has very weak companies. All the meddling accomplished was a massive debt level that will cause interest rates to explode and help to destroy the currency when the crackup boom shows up sometimes in the next few years.

        Marshall:

        “As Professor Bill Mitchell has argued
        (_http://bilbo.economicoutlook.net/blog/?p=7576#more-7576_
        (http://bilbo.economicoutlook.net/blog/?p=7576#m…) ) ultimately neglect of public purpose generates more costs than dealing with the issues in the first place. This was very starkly seen during Thatcher’s period in government where the breakdown of public infrastructure (sewers, etc) ended up costing much more to replace than maintaining them as required.”

        I prefer Mises to Mitchell. As Mises wrote in his great book, Human Action, “If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.”

        Frankly, I don’t see an easy way out and suspect that you and Mitchell will get what you are hoping for. The way I see it, there are trillions of dollars outside of the US. It is clear that if the US government allows a price collapse to take place, America’s creditors will use their holdings to pick up assets from American investors at liquidation prices.

        That won’t play well at the ballot box so I suspect that the Fed will help the feds by printing money and extending credit to prevent a price collapse. By doing so, the Fed will help borrowers as it inflates away the purchasing power of those dumb enough to be savers.

        But that won’t work because eventually the holders of US treasuries abroad will refuse to roll over maturing debt and will try to exchange dollars for whatever they can get while they still have some purchasing power left. We get the crackup boom and the financial system is destroyed by hyperinflation.

        Marshall:

        “In that context, the US government could have offered jobs to anyone who wanted them at a living wage to undertake a myriad of productive activities which would have arrested a significant part of the damage that long-term
        unemployment brings and would have added value to local communities in the form of public infrastructure development and personal care services etc. Waiting for growth is a nonsensical paradigm. It is the government’s responsibility to push ahead of the growth to ensure it returns as quickly as possible.”

        Where exactly does the US government get the funds to pay for the schemes that you want it to implement? And how do make-work projects lead to prosperity in the US when they have never led to prosperity in the US (or anywhere else) before? For the record, the government has never been good in undertaking ‘productive activities’ because its goals are primarily political.

        From what I can see, the US got very lucky because the idiots who run the EU and Japan have implemented policies that have taken the Euro and Yen to the verge of collapse. That made the USD more attractive to the degenerate gamblers in the forex markets at a time when the dollar was oversold. That gives Obama and Congress a bit of time because the short sellers will have to cover their positions.

        But each day brings California, Illinois, and other states closer to bankruptcy proceedings that will make foreign USD holders nervous. If the Obama Administration and Congress go off the deep end as you suggest, we are likely to see a reversal in sentiment that will take the purchasing power of the USD much closer to its intrinsic value.

        As I wrote before, history supports my view and not yours. Job growth recovers much faster when governments stand aside and markets are allowed to liquidate malinvestments. I have no idea why you would prefer the long misery of the Great Depression over the very deep but short 1921-1922 recession. I do not see how the Japan approach is going to be good for the US just because you want to save some GM jobs and elevate the big reckless banks over the prudent ones. We live in the real world where we have to respond to real conditions. Make believe Keynesian mythology that has been discredited over and over again has little place among the rational. Why a smart person like you continues to hang on to that mythology is a mystery that I cannot figure out.

        1. Marshall Auerback says

          Obama’s health care proposals simply entrench the dominance of the health insurance oligopoly – more corporate cronyism, not a “leftist” policy.
          You seem to equate every gov’t action with “left wing politics”. There’s nothing left wing about the President at all.
          Would you be happier if I renamed my piece “Barack Hussein Mussolini”?

          On Japan, I think you are resorting to a caricature. The big deficits there are the product of a lousy economy and insufficient aggregate demand. The Japanese RAISED taxes in 1997. They attempted to CUT BACK gov’t spending from 2001-2003. Only when the Koizumi Administration relented with fiscal consolidation did the economy begin to grow rapidly again. Read Richard Koo’s account.

    2. Edward Harrison says

      Marshall’s beaten me to it, but those are “corporatist” actions. C’mon Vangel, you know that. George W. Bush, Hillary Clinton, or John McCain would have made many of the exact same actions. Bush did, in fact, on banks and autos do the same thing. Remember, Bush was a big government type and no one would call him far left of center. So it has nothing to do with running well left of center. It has everything to do with a Corporate big business agenda which I find anti-thetical to the free market. The point on labels is they are meaningless when it comes to public policy. What we care about is outcomes. And the outcomes we can expect from the policies enacted by Obama to date are not going to get it done.

      If you want a more Libertarian interpretation of the Republicans (Bush and McCain), this is spot on:

      http://econlog.econlib.org/archives/2009/11/the_party_of_no.html

      1. Vangel says

        Edward:

        “C’mon Vangel, you know that. George W. Bush, Hillary Clinton, or John McCain would have made many of the exact same actions.”

        Of course I know that because they are all statists. But that would not make the actions correct. I prefer the Ron Paul approach. You remember him; he was the guy warning Congress about the reckless actions taken by Fannie and Freddie and about the damage that would be done by the Fed’s credit expansion schemes designed to prevent the economy from correcting mistakes.

        Edward:

        “Bush did, in fact, on banks and autos do the same thing. Remember, Bush was a big government type and no one would call him far left of center. So it has nothing to do with running well left of center. It has everything to do with a Corporate big business agenda which I find anti-thetical to the free market.”

        Bush was a statist. Statists love big government whether they are left or right of center.

        Please take the ten question quiz and figure out where you stand. I came up as a Libertarian with a 100% score on both social and economic liberty. That makes me oppose the policies of Bush, Obama, Clinton, and McCain.

        http://www.theadvocates.org/quizp/index.html

        Edward:

        “The point on labels is they are meaningless when it comes to public policy.”

        I agree that left, right and center make no sense. That is why I gave you the link to the quiz. In my case I strongly agree with the left on social issues and with the right on economic issues. As such, you can’t apply the left/right label on me either.

        Edward:

        “What we care about is outcomes. And the outcomes we can expect from the policies enacted by Obama to date are not going to get it done.”

        I agree. But you and Marshall seem to be advocating that Obama take a road that leads to failure. Hoover and FDR, as well as the Japanese governments of the past 20 years have already tried that road and found that it leads to misery. I do not see why Obama has to follow them when the road taken by Harding leads to success.

        Edward:

        “f you want a more Libertarian interpretation of the Republicans (Bush and McCain), this is spot on:

        http://econlog.econlib.org/archives/2009/11/the…”

        I like Kling but do not always agree with him. (His book, From Poverty to Prosperity: Intangible Assets, Hidden Liabilities and the Lasting Triumph over Scarcity, is on my reading desk awaiting its turn.) That said, Kling has admitted that he is quite ignorant of the economic history of the 1920s and 1930s. As such, he is a poor judge of what is likely to work.

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