...against fictions and other tall tales

Thursday, 22 September 2011

A truth for our times: without improvements in employment there is no true recovery

From Classic Indeed:
Boehner, Cantor & Associates' understanding of basic economic realities is unreliable and incomprehensible for that level of leadership. They should simply acknowledge that without employment there is no spending and there are no sources of Treasury revenue; and without revenue sources, there is no deficit reduction. If they persist on professing that deficit myth: that deficits matter for the US economy, they will make matters worse. They should recognize their own shortage of viable solutions, and grasp the moment to support fiscal spending programs. As for Rating Agency downgrades, they don't matter at this moment. Recently, they have been shrugged off by all sovereign levels.

Unless the US economy is activated, and this won't happen as a result of Federal Reserve monetary policy, the global economy will remain in a state of stagnation for a long time. It is obvious that any solution must come out of Washington. (my emphasis)
I agree entirely. I would also add that what the GOP needs to understand is that if the US federal government tries to sharply reduce spending to reduce its fiscal deficit, it will most likely run massive deficits anyway. In other words, the GOP's plan to cut spending is just self-defeating.

Now, it's obvious that this is bad economics. However, I would argue that this is also very bad politics. How can the GOP believe that its strategy will prove politically beneficial? Surely, at some point the American public will start to realize that the GOP's preferred approach to the economy will have been completely ineffectual. With employment levels poised to stay the same for several more years, the GOP should see that there is little, if any, currency in continuing to propagate such ideas.


  1. I concur with the title. I would even suggest that Employment is the truth for all times. The recovery in the '30's was nothing else but employment stimulus-as you suggested in the your previous blogs on American Infrastructure. Certainly, the war helped to speed up overall economic growth and fine-tune the various engines in the system. However, monetary policy alone doesn't resolve the unemployment issue unless it's a function of price instability. We are not in that context.

    Fed's communication guidelines are 'delicate',sometimes complicated to endorse properly but your link's (nod) argument is completely sound. The Fed is a public institution with a specific role.

    Well done again circuit. The loonie is coming off. That'll help Canada.

  2. The GOP most likely knows that a (fiscal stimulus (preferably globally coordinated) is the only solution to the current situation. When Hoover slashed spending in the early 1930's, praising austerity, he saw unemployment soared from 4% to 25% and democrats then held power for 20+ years. That’s a pretty brutal lesson for a political party and one I'm sure that they haven't forgotten.
    The GOP basically told us why they are chanting the austerity song. They want Obama out ''a one-term president at any cost’’, this is their priority. With BO's stronghold, trashing the economy is their only chance at ousting him and of course they have no problem doing this. Will the American public (or enough of it) realize it? I would think so but only after a whole lot of harm is done.

  3. circuit (nod!!) on the wikilink! juo would have enjoyed that. the link to classicindeed is a nice read. not too many critics appreciate the complexity of a multi-faceted and multi-layered situation like the one Bernanke is confronting. markets have been usually myopic these last few years. it reflects the lack of competence, depth and judgement of wealth engineering on behalf of the public. i appreciate the Fed nod from your link. not too many of those around these days.
    needless to say, MI nuances cb protocal well describing its tone as 'delicate'. it always is.

    @2plates(nod): i will abstain from commenting on Hoover' strategy. it was complicated for an historian to embrace a major crisis. his flaw was augustinian: the mind-set wasn't there and mellon was. but you are correct, austerity is never a solution when unemployment is the challenge. never.

  4. Well done, circuit. You are very generous with your reference. Always a delight to watch your magnanimity. The Classic (nod) link was good because it highlights the perfidy of market behavior when confronted with its failure. It is the epitome of arrogance and self-deception. So much for the underside of life. If the squall as we say is not here yet, early indications are that it's pretty serious. But we'll leave that to someone in the market to inform us in advance(lol)
    To 2plates I say....this is the stuff of dreams. The nightmare is the public electing a GOP President and blaming the incumbent mercilessly for the entries on the menu. By the way, who are they going to replace Bernanke the Brave with? Some Greenspan categorical.
    @jh I agree that juo would have liked these posts.

  5. As usual, these are all great comments. On the issue of the Fed's current dilemmas, I too tend to sympathize with its predicament. 2plates, you're right to point out that the GOP want their goal of Obama being a one-term president. The reality is this might actually work, especially given that many official and backroom Dems are fairly cozy with many of the GOP ideas. I blame (I weigh my words lightly) folks like Jack Lew of the OMB for giving for this deficit reduction nonsense any currency at the moment. Unlike most, I think the 90s were a disaster for the Dems, both in terms of the outcome of the policies that were put in place (on the household and financial sectors) and the consequence on political/economic rhetoric. The Dems performance in the 90s solidified the myth of expansionary fiscal consolidation. Even worse now, the whole world seems to have caught that bug. No wonder I shake my head a lot these days.

    @MI: thanks for this: "monetary policy alone doesn't resolve the unemployment issue unless it's a function of price instability". One liners like these are gold.

    @JH and B: Appreciate the nods. As for CI, nothing else like it in Canada. A good read. Prescient at times.

  6. 2plates; You’re partly correct that Hoover was instrumental in worsening the crisis, but only because, I suggest, he never went far enough or maybe lost the re-election. I don't think that the solutions were very effective at the moment, but he was on the right track.
    It’s also worthwhile to remember that Hoover was in fact the US Government’s greatest historian (nod JH for the figurative pun). Not only did he know US Government Departments, but to some extent he reorganized the inner structure of the US civil service, and respective departments, over and above actually implementing some of the most daring and ambitious relief schemes in US Government history. He was the master Government historian, and no simple academic historian like W. Wilson, but a rigorous pragmatist formed by his engineering career and a humanitarian ideologue, influenced by his quaker background. He was entrenched in the business culture of a growing and aspiring young nation that had historically promoted private/public partnerships as part of the underlining values. As a successful engineer, he could not appreciate that the whole economic system during his short-lived presidency was slipping beyond everyone’s control, especially his own. The idea that his ‘mind-set’ had constrained his optics on the depressed US economy is an understatement. Hoover suffered from the extreme hubris, that a crisis was actually evolving beyond his control. He could not find any reference in government history, not even the recession of 1920 for the causes effecting the meltdown in the agricultural, manufacturing and financial sectors.

    That Hoover promoted austerity programs, contrary to expectations, I will not engage in it. Paul Krugman has attempted to make this case,(LOL) and in my opinion fell short. Maybe his readers were trolled (I signify the art of fishing, like Herbert Hoover who wrote a book on it, nod swells&juo, for the original anecdote) into it. That is unfortunate.
    Actually, many think that FDR’s interventions were really extensions of Hoover initiatives. In passing, Hoover was a Republican and he taxed the top off the higher income brackets. Am I correct MI and JH? If only Pres. Obama knew history like Hoover! To FDR, Hoover was a great entry for the New Deal, although both men could never become friendly.

  7. Goffredo, your comments reminded me of figures that astonished me the first time I saw them. I am talking about the rise, in percentage, of federal debt during the depression era. According to Herbert Stein, the largest rise in federal debt occurred under Hoover: from 16.7 percent in 1929 to 39.6 percent in 1933. (See "Presidential Economics" (p. 458, table A-4)). Another interesting fact is that Hoover created the Federal Farm Board to address the collapsing economy in rural areas. In '29 he allocated $500M on a total federal budget of $4B; a significant sum indeed. Though the program is now regarded as having been a bust, there's no denying the intention behind the initiative was to promote economic activity. Anyway, I thought these were good figures to highlight for the record. Thanks.

  8. GC was very fair with Hoover. However, it would be correct to sensitize the reader to one historiographical consideration (aside from reflexivity). In comparing Hoover to other Presidents and to Roosevelt, one should recall that Hoover did not have the tools we have today, and FDR did inherit the experience, both good and bad from his predecessor. I will agree that Hoover’s hesitations on what he considered appropriate measures prejudiced the situation; but the situation was definitely jeopardized before his presidency.

    What is anomalous in the assessment of Hoover’s responsibility is that despite the obvious rise in stock values supporting the optimism in the underlying economic strength of the country, basic fundamentals suggested adverse undermining conditions: commodity prices were dropping, residential building was down, manufacturing and retail inventories were rising, installment credit was at an all-time high while consumer spending was slipping. Meanwhile, production output had started to decrease during the spring of ’29.

    (Oops, is this 2011?)

    For some reason, the speculative fever fueling the crisis, although KNOWN by Wall Street, was never contained by Wall Street bankers, until only later in 1929, too late, when Morgan's Lamont and Wall Street tried to contain the panic, but were not successful. To be fair, Pres. Hoover early in the term, lost an experienced Chair of the Federal Reserve with the death of Benjamin Strong. Although some of Strong's decisions actually accentuated the crisis, his experience would have added a moderate voice to the dubious consensus at the time to increase the discount rates in order to deter further speculation. Certainly the hike in rates was problematic and remains controversial for most practitioners and historians; on the other hand, it was one paradigmatic option of the time.

    The Federal Reserve continued to increase its discount rates to deter borrowing towards the speculative markets. The increase in rates certainly curtailed economic activity and dampened overall consumer and corporate sentiment. The Great Depression resulted, as most major events, from a convergence of factors: Wall St. speculation (Galbraith) , gold standard problematics (Temin), banking crisis (Friedman & Schwartz) meltdown of the agricultural sector, misconceived fiscal policy (Hawley-Smoot Tariff Act triggered global retaliatory measures thereby stifling US exports to the rest of the trading world: Lewis and later Meltzer). Certainly Hoover was there; but only Hoover to blame for thew depth and the length, I doubt very much

  9. @circuit: that the Federal Farm Board was a ‘bust’ is too harsh. I would suggest ‘inadequate’. Although Hoover wanted the Govt to intervene somehow more directly in subsidizing the farmers, others in his administration and Washington did not think it appropriate. So he left the stewardship to local state and regional authorities in the matter. The intention was that the subsidy channel itself down through the sector’s intermediaries to the farmer in order to compensate for desired production decreases, and ensure some price stability. Unfortunately external price pressures from foreign producers undermined Hoover’s efforts to remedy a long and deep-rooted decline in the agricultural sector that dated back to the early ‘20s. when wheat priced at over $3.00/bushel.

    During Hoover’s presidency, the farm sector had financed their 1930 crops at over $1.00 per bushel. By crop time, prices for wheat were edging $.80/bushel, in 1931 about $0.60 and in 1932 about $.30/bushel. During that time, FedFarmBoard had accumulated incredible losses and the well-intentioned Grain Stabilization plan had been dismantled. As the agricultural sector collapsed commercially and naturally (wrought with droughts), the supporting financial sector strained and it brought down the industrial sector, as former commitments to maintain wage levels and employment were abandoned. Inevitably unemployment rose and the vicious spiral and tumble of bust and bust persisted. Foreign pressures, such as foreign debt repayments and other war-related issues, including problems around the gold standard, converged with domestic realities to exacerbate the situation. Perhaps the worst decision attributable to Pres. Hoover was not vetoing the Hawley-Smoot Tariff Act of 1929. The legislation was globally damaging and completely misconceived, showing little, if no understanding of macroeconomics.

    If anything, at least one facet (aside from the gold standard problematic) of the Depression had been in guised contagion since the early ‘20s-agriculture. It continued treacherously through FDR's presidency although the narrative spun was entirely attributed to Hoover, and quite unfairly so. Hoover, although humanitarian, felt that the role of government was limited to promoting efficiency and cooperation between public and private sectors, whereas his Sec. of the Treasury, Andrew Mellon, was ideologically opposed to any intervention at all. As far as Mellon was concerned, he would allow the system to collapse, believing that it would regenerate itself. The ensuing pain was not the Government’s problem. Hoover's detachment haunted him throughout his life-time. It was not until Eugene Meyer, from the Federal Reserve and then as replacement of Mellon at Treasury, that quasi-interventionist thinking became respectable. The RFC was formed in 1932, and was latter expanded through the Emergency Relief Construction Act. But again it was ‘indirect intervention.’

    On taxation, Hoover’ s Revenue Tax Act of 1932 legislated an increase in corporate taxes as well as an increase in the tax rate for the wealthy.

    To 2plates., I am not sure that Hoover ever ‘slashed spending’. He certainly strived for a balanced budget, hence resisting government expenditures, and expansion was slowed down by restrictive monetary policy, but I do not recall deliberate legislated contraction by Pres. Hoover.

  10. Excellent account. You do well to highlight that Hoover was not an ideologue. The FFB hurt Hoover politically. Many conservatives despised the President for getting involved in this area. Indeed, he deserves to be applauded for it. Mellon, on the other hand, I think it is fair to say was an ideologue (as you clearly mention). Perhaps most people associate the latter with the former. Or, at the very least, are unable to extract differences between both men given our modern perception of what governing (and government) is all about. For this reason, I appreciate you including in your comments the differences in character of the individuals you depict.

    Also, to follow-up on my previous comment to GC on the size of the federal debt, I noticed that I didn't provide a comparison with FDR. So here it is: Under Hoover, debt rose from 17 to 40 percent of GDP between '29 and '33, while under Roosevelt, federal debt increased from 40 to 46 percent between '33 to '39. Could this be proof that attempting to balance the budget in a slump is simply self-defeating, as I mentioned in my post above?

  11. For some reason, my second comment to 2plates was not posted. My apology to 2plates:

    "To 2plates (nod!): On the other hand, I concur with your analysis of the political situation. I cannot confirm that the nation wants Pres. Obama to be a one-term President. I do not think that the American people view presidential politics in the same manner as Congressional politics; however, I agree with you entirely that the GOP have set out on a course to demean (nod) Pres. Obama and designate his term as a stumbling and bumbling period in American economic history."