The Great Depression

The Great Depression is a frustrating topic.  So many economists and politicians explain the cause(s) of the Great Depression in accordance with their pre-determined narrative.  Some conservatives say that it was caused by government spending.  People who think that we should go back to the gold standard say that the Federal Reserve caused the Great Depression.  Some anti-immigration fanatics even argue that it was caused by immigration.  People on the other side of the political spectrum might argue that it was caused by unrestrained capitalism or inequality.  And they play the same game when explaining what ended the Great Depression.

Hack economist Stephen Moore writes a column in The Washington Times (“How did the Great Depression actually run its course?”) arguing that the rapid decrease in government spending after World War II caused the economy to surge thereby ending the Great Depression.  He is arguing that a decrease in government spending caused the end of the Great Depression and, therefore, in 2014 we should do likewise.

“The Keynesians,” he writes, “were sure that the massive reduction in government spending would catastrophically tank the economy.”  But, according to Moore, the economy “surge[d] after the war was over.”  Moore goes on to say how personal consumption and private investment spending grew after the war.

“In sum, it wasn't government spending, but the shrinkage of government that finally ended the Great Depression. That's what should be in every history book — but isn't,” writes Moore.

His problem is that the economy DIDN’T grow after WWII.  The economy actually declined considerably when the government drastically cut spending at the end of the war, and GDP didn’t fully recover until years later.  In 1945 GDP was measured as $2,217.8 billion.  The following year GDP crap-dived to $1,960.9 billion according to the Bureau of Economic Research, a loss of well over 10%.  It wasn’t until 1951, six years later, when the economy finally recovered its losses.

The lesson here is not that government spending is good for the economy.  It can be, but it can also be damaging to the economy.  The lesson here is, first of all, that Stephen Moore is an incompetent hack.  Second of all sudden, massive cuts in government spending can have an adverse effect on the economy, and it could take years to recover.

Free Market Allocation of Goods and Services

The Center for Economic and Policy Research (“CEPR”) is an economic think tank.  It was co-founded in 1999 by economists Dean Baker and Mark Weisbrot.  They tend to have somewhat of a liberal perspective, but to define them as “liberal” is inadequate.  The guys have unique perspectives on a lot of issues which is why I frequently visit their website.  Weisbrot spends a lot of time on Latin American countries.  Dean Baker had been predicting the residential real estate bubble years before anyone suspected there might be a bubble.  But he’s not right about everything.

Dean has been incessantly promoting the idea that the United States should actively seek to have qualified medical doctors immigrate to the country.   Dean claims that the medical profession has influenced the Federal government to impose barriers on the immigration of foreign born doctors thereby limiting competition thereby boosting the salaries of affected medical professionals.  Dean believes that permitting foreign born medical professionals to practice in the United States would reduce medical costs in the United States.

In a recent column http://tinyurl.com/k5kvbsf, Dean writes:

“We can use trade agreements to open our economy to foreign doctors. Our doctors get paid more than twice as much as the average for doctors in other wealthy countries. The pay gap with doctors in developing countries is even larger.  There are hundreds of thousands of smart kids in countries like Mexico, India, and China who would be happy to train to U.S. standards and work as doctors in the United States for half the pay our doctors receive.”

And he’s right.  Not only will the immigration of more doctors reduce doctors’ salaries and reduce costs of medical care in the United States, it will make more medical care available.  Dean thinks it would be a good idea for doctors from Mexico, India and China to come to the United States to provide care for Americans.  That would be good for America.

The only problem is that it won’t be so good for other countries.

Dean has considered this.  Dean thinks it’s “silly” to discuss how this will hurt the quality of health care in developing countries.  That’s right.  He thinks it’s silly.  We should encourage a doctor in India to leave his malaria and leprosy patients behind and come to the United States to treat soda sipping obese Americans who spent over $10 billion on cosmetic surgery last year.

It brings up the issue of free trade.  Most economists believe that free trade increases economic growth and raises living standards.  Studies of economies over the years have almost unanimously confirmed this belief.  Free trade and free markets are also the best way to allocate resources, theoretically. People in Brisbane are generally willing to pay more for surfboards than people in Nebraska.  This is because surfboards are of more use in Brisbane.  Therefore, surfboard manufacturers ship their product to sell them in Brisbane where they will get more money.  The surfboards are used for their intended purpose in Brisbane instead of occupying a shelf in the garage in Nebraska.  The free market system works so that the surfboards are put to their most beneficial use to society.  There’s no debate.

The problem that I have is that free trade and free markets do not always allocate resources efficiently.  If a doctor treating children for cholera in Haiti moves to Los Angeles and sets up a liposuction and bariatric surgery practice, this will benefit the doctor who will be able to earn more money, and his family will be able to live a better lifestyle.  It will benefit those in Los Angeles seeking liposuction and bariatric surgery because they will have more options and probably lower cost service.  But what about the kids in Haiti?  Is this situation really the best allocation of resources?  Is it best for society as a whole for a doctor to treat lazy-assed fat bastards in Los Angeles than to save the lives of children?

Dean Baker considers this discussion to be “silly”.

Bowyer Intentionally Misleads in Exchange for Payment.

They call them “talking heads”.  On almost every news show a so-called “expert” is presented to comment on the current topic being presented.  When Gabriel Giffords was shot, news agencies hauled in brain surgeons to discuss brain injuries and possible recovery scenarios.  During coverage of wars, politicians, generals, former generals and others are brought in to discuss weaponry and war strategy.

These talking heads seem to be in abundance on opinion oriented talk shows.  Hannity, O’Reilly, Greta Van Sustren…  They usually have them piped in from a studio in another city, but on the Sunday morning talk shows they usually have them all sitting together.

One assumes that the so-called experts are speaking of their own volition what they truly believe based on the available facts.  On hotbed political issues one assumes that politicians and their supporters will spin facts and argue their bent to the advantage of themselves and/or their political party.

But you would never assume that any of these guys are taking a certain position simply because they’re paid by the host to do so.  That would be pretty low.  In a recent column entitled “As Its Ratings Slide, The Confessions Of A Recovering CNBC Pundit”, Jerry Bowyer admits to doing just that.

In his column, Bowyer claims to have been a paid CNBC contributor for two years, 2008 and 2009.  In his column he makes it seem like Fox Ness and CNBC were fighting each other to get him to be a talking head on their networks.  After puffing himself up quite sensationally, he reveals that most of his appearances were on Larry Kudlows “Kudlow Report”.

“My job,” he writes, “was to come on the air and make the bull case.”

He says that Larry Kudlow was bullish on the economy even into 2008 and 2009 when the rest of the civilized world was well aware that a recession had arrived.  Bowyer claims that he himself was “very bullish” to about the middle of 2007.  But that didn’t stop him from arguing the bull case even though.

He describes how Kudlow was always “looking for the bull case”.  When the show had other talking heads who did not agree with Kudlow’s ignorance, Bowyer was called on to “body check them”. “I was willing to do that,” he writes.  Bowyer describes his years as a paid “contributor” as bending his mind and principles to continue in Kudlow’s good graces and get publicity “continuing to automatically look for the bull case even after the bull case was no longer the strongest case.”

I’m going to put forth my opinion here (and, mind you, I’m not getting paid for it) and say that it is my belief that Bowyer didn’t bend his principles solely for the money.  He did it to get on television where he could inflate his ego pretending to be an economic expert.

A Comedy of Myths

Peter Ferrara is a graduate of Harvard Law School and holds various positions including Senior Advisor for Entitlement Reform and Budget Policy at the National Tax Limitation Foundation and Senior Fellow at the National Center for Policy Analysis. He served in the Reagan administration and the first Bush administration.  He’s also clueless.

In a recent column a Forbes dot com http://tinyurl.com/cwt7kay Ferrara sets out to debunk what he believes are fiscal policy myths.  Some of the myths Ferrara claims to debunk were never really myths in the first place. Maybe Nancy Pelosi passed some of them on to her constituents in a lame attempt to smear an opponent. It is true that both parties have a few Todd Akins and Louie Gohmerts who are clueless, classless and beyond correction and hold some wacky beliefs, but for the most part, the so-called myths debunked [sic] by Ferrara are hardly widely embraced.

One such myth is the notion that Keynesian policy includes a belief that increased government spending stimulates the economy during recession. This is not true.  Keynesian theory does not hold that Government spending stimulates the economy, but fiscal policy can and does stabilize the economy.

The Obama stimulus [sic] is a good example of this. It stopped a freefalling economy. It prevented a lot of people from losing their jobs. Did it stimulate economic growth? No way. Take a look at the cash-for-clunkers program. During the program, sales of new cars jumped noticeably, but when it ended sales of new cars tanked again. The program had an undeniable effect. However, it didn’t stimulate any economic growth.

Another myth propagated by Ferrara is the blatantly ignorant belief that the money supply is fixed. Ferrara nails this one: “If the government spends more, where does the money for that increased spending come from? Either from increased borrowing, or increased taxes, which both take an equal amount of resources and spending out of the private economy as they finance in increased government spending.” This is ridiculous. The Fed can and does create money out of thin air. Everyone knows this except those that fell asleep during Intro to Monetary Policy class.

[There is the threat of inflation when the Fed does this. However, the Fed’s actions only increase the monetary base. In a recessionary deflationary economy, that doesn’t lead to inflation. There is a risk of inflation in the future, but that can be easily addressed when the time comes.]

Here’s another one: “Demand can never be inadequate in a market economy. If the demand for any product or service is not strong enough, the price of the good or service will fall, until demand equals supply.” The actual statement is theoretically true (except for the Jessica Simpson Christmas CD a few years ago – they couldn’t lower the price enough to sell them so they ended up shit-canning tens of thousands of dollars of product), but Ferrara uses it to argue that a shift in aggregate demand does not affect economic growth.

In fact, in 2007 the aggregate demand curve began a long migration to the left, and it is this low aggregate demand that is the primary reason the economy isn’t growing. People are too indebted with underwater mortgages, student debt and consumer debt. This reduced the quantity of goods and services they can purchase at any given price level thereby affecting the quantity of goods and services supplied. I mean come on. Why produce more cars, houses or other products when consumers can’t or won’t purchase them?  This is actually a widely held belief among supply-siders and appears in a 2004 book written by Stephen Moore and Arthur Laffer.

And another: “The people can never spend more than they produce…” This is stupid because the U.S. has been spending more than they produce for nearly the past 3 decades. We’ve gone from the world’s largest creditor nation to the world’s largest debtor nation using mortgage debt, credit card debt and other borrowings to finance the appearance of prosperity. As I mentioned earlier, the major factor holding back the economy is the overwhelming consumer debt.

Ferrara continues (he’s on a roll, baby): “And they will never spend less than they produce, leaving demand inadequate, for they will either consume or save every dime that they earn or produce. The consumption goes into consumer spending, and the savings goes into capital spending.” The fact is that not all savings goes into capital spending especially right now. Banks and businesses are sitting on assets. The reason they’re sitting on cash and not investing was already mentioned above. With consumers so deeply in debt from spending more than they produced for so long, investment in new production is not expected to reap a high return.

One thing that Ferrara does get right is this: “Another myth is that raising tax rates will not harm the economy”. But this is another one of those things that everyone really does agree with. Raising taxes can have a significant adverse effect on the economy. In dispute is the degree of the effect. Reducing a marginal tax rate from 70% or to 28% has a significant effect. When people raise the argument that raising a tax rate from 35% to 39% might not have such a dramatic effect on the economy, they have a valid point.

Good Tax Policy

In a recent column posted at Forbes http://tinyurl.com/d3pg4eo, Peter Ferrara argues that President Obama is a socialist.  What label one wishes to place on another is of little importance to me.  Whether you want to call the President a socialist or a liberal is of little importance to me.  I think name-calling is immature.  Someone called me “Big Nose” once.  It hurt my feelings, but it didn’t facilitate an informative discussion of the issues.

But what I want to discuss here is a statement made by Ferrara that illuminates a common error in thinking among many economic hacks.

Tea Party Patriots national coordinator Jenny Beth Martin, right, with Reps. Michele Bachmann, left, and Louie Gohmert this March. (Chip Somodevilla / Getty Images)

 “Good tax policy is not guided by ‘need.’  It is guided by what is needed to establish the incentives to maximize economic growth.”

This is a good illustration of how pop-economics has deteriorated over the years.  This guy thinks that tax policy should be guided on incentives to maximize economic growth.

Tax policy should actually be guided towards allocating the costs of government services to those that benefit from them.  Ideally, all expenses should be matched against the revenue.  If this doesn’t happen, then resources can be misallocated resulting in a net loss to society.  For example, there was a sitcom where a boy was making burritos and selling them to his friends.  He would buy the ingredients at the grocery store and charge them to his mother’s account.  Then he’d sell the burritos for $1 each.  When the expenses were paid by his mom, he thought he was making a profit.  Thus, resources were allocated towards an unprofitable endeavor thereby resulting in a net loss to society.

The same for a business.  Part of the expenses of a business are the roads that the delivery trucks drive on, the cost of the court system to enforce contracts and the CIA agent in Afghanistan preventing terrorist attacks.  A perfect tax policy would allocate the costs of all government services to the individuals and businesses that benefit from them.  A toll booth or a gas tax allocates costs to those that use roads.  An entrance fee allocates costs of public parks to those that enjoy them.  However, a lot of services (like national defense, police protection and cutting the grass on the National Mall) are more difficult to allocate to those that benefit, but the objective should be the same.

But what’s been happening these past few decades is that mom, or perhaps I should say “Mǔqīn”, has been picking up a lot of the bill.  This is where tax policy can establish incentives to maximize economic growth.  The government can establish trade relations with foreign nations, spend billions to protect shipping lanes, build roads and bridges, and provide a judicial system to enforce contracts.  But if these costs are not appropriately passed on to those that benefit (i.e. consumers and businesses), then the costs are not included in the prices of the products and services generated thereby resulting in misallocation of resources resulting in a net loss to society as a whole.

Tell me.  Who should pay for your latte?  Should you pay for it?  Who should pay to protect us from terrorists?  You think you’re paying for it.  Truth be told you are paying for some of it, but a portion of it is being paid by whoever is going to inherit the national debt, most likely your children and grandchildren.

Let’s go back to the boy who was making so much money selling burritos.  Who should pay for the ingredients?  If the boy can convince his mom to make his little sister pay, then the boy can reap profits and enjoy a lavish lifestyle.  Meanwhile the boy’s mom struggles to pay her bills, and the little sister gets screwed.

Another result is that society produces more burritos than it wants.  Suppose it costs more to produce a burrito than a taco.  But because the boy’s mom picks up the costs, the boy can sell the burrito for less than the taco thereby putting the taco boy out of business.

A real world example of this would be transportation.  People want gasoline.  Americans like to drive their cars, and they want the gasoline to be inexpensive.  In addition, gasoline diesel fuel and gasoline are used to ship goods to market.  If the price of gasoline and diesel fuel go up, then the prices of many goods will increase from tomatoes to lumber.  What would cheap gasoline be without roads on which to drive.  Americans want pothole free roads.

The government spends hundreds of billions on securing shipping lanes and making deals with oil producing nations.  Seemingly uncountable amounts of money are spent by federal, state and local governments on road construction, repairs and maintenance.  When Bob Hamilton gets into his car to drive to the Starbucks to get a cup ‘o jo, he pays, let’s say, one dollar for the cost of the round trip in addition to his coffee.  However, if all the costs were included, it might cost, let’s say, ten bucks.  Thus the government is subsidizing this lifestyle.  If Bob had to pay the total cost, he might reconsider his plan.  He might pick up the coffee on the way home from work or combine his daily errands thereby reducing his costs.  To go to his job he might consider taking public transportation.  And he might buy a more fuel-efficient car instead of that Hummer.

Do Americans like their cars?  Yes, they do.  Should the government subsidize it?  That’s the question.  If you want to drive your car, then drive your car.  Get a Ford Excursion or a Hummer and drive just for the fun of it.  But should part of the cost be paid by someone else?