the Air Vent

Because the world needs another opinion

Why WWII Got Us Out Of The Great Depression, and Why Present Government Spending Would Not Do The Same

Posted by Jeff Id on October 20, 2011

A guest post by:

Leonard Weinstein, ScD

August 16, 2011

The Great Depression, starting about 1929 and running through the 1930’s, had several root causes, including major government actions and the bubble of buying stock on inadequate margin. I will not get into details on the causes, as the issue of the present write-up is how we got out of the Depression.

It is clear that President Roosevelt’s actions to spend large amounts of money on public projects in the 30’s did cause short-term job increases, and many of the projects had a valuable long-term benefit, especially infrastructure development. However, these gains did not end the Great Depression, and may have made it more severe and last longer than otherwise.

Many think WWII caused the end, and this is in fact almost certainly true. However, how the war ended the Depression is badly misunderstood. Some think that just the fact of massive government spending, and temporary employment supporting the war effort was the mechanism. That is wrong.

There were three major factors that ended the Depression:

  1. The destruction during the war of most of the industrial capacity of most of the major industrial powers (including in Europe and Japan), but not including the United States, left us with a near monopoly on production of major items. In fact, many of the factories greatly built up their capacity for the war, and the increased capacity was used to advantage after the war. This advantage lasted several decades, and gave us a long head start on establishing markets.
  2. A pent up needs for automobiles, appliances, and many other items developed due to the manufacturing plants converting to manufacturing supplies for the war. After the war, the conversion back allowed huge amounts of sales of these items. This lasted long enough to establish many businesses solidly.
  3. The GI bill allowed huge numbers of military personal to buy homes, and even more important, go to collage. The large increase in well-educated people resulting had a major effect on the level of technology that could be developed. The middle class grew to a much larger percent of the population, and consumer buying increased greatly.


There were other causes of the end of the depression, but the three mentioned were the major ones. If increased government spending is used to try to stimulate an economy, it may decrease the depth of the lowest level of a recession, and if natural cycles then result in recovery (economies go in cycles up and down due to the chaotic nature of economics), the net effect may be desirable. However, large and long lasting recessions, or depressions are not helped by realistic spending stimulation. The mechanisms similar to the three above are simply not there. The basic mechanisms of modern economies are best helped by actions that help businesses, not direct help to people. A lot of complex and even uncertain rules, high taxes, and the like are all negative factors to business growth. Demands for wages higher than are competitive on international scales drive business either out of the country or out of the market. Making the assumption that because we grew after WWII, and continued to grow for many years after, misses the point that worldwide major industrial economies are now fully recovered, and even the more backward countries are developing a lot. Considerable lower cost labor is available in many countries, and with good transportation means, products from those countries are more competitive. We need to change our paradigm to overcome those factors, but we have to realize that the gravy days of old are gone.

119 Responses to “Why WWII Got Us Out Of The Great Depression, and Why Present Government Spending Would Not Do The Same”

  1. We did not learn much from what Roosevelt did to prolong the Great Depression. This time around we did not build any Hoover dams to create prosperity for decades to come. The money seems to have been frittered away propping up organizations that should have been allowed to fail. No mighty works of long term value were created.

    Obama cannot admit that he ever made a mistake so he wants to follow Porkulus #1 with a mini-Porkulus. Fool me once shame on you; fool me twice shame on me.

    If you are right about what brought about the recovery from the Great Depression it is hard to imagine similar factors kicking in to get us out of the present mess. Have you any strategies to suggest? You talk about changing the paradigm but could you be more specific?

    If I were the president of the USA, my first major initiative would be to create a Messmer plan tasked with creating a minimum of 20 GWe of new nuclear power plants per year. At the same time I would defund the EPA and leave the states to make their own choices about fossil fuel power plants.

  2. Alan D McIntire said

    Your reasoning is right on the money. While WWII was going on, we were not “out” of the depression. With all the rationing during the war, most people were poorer in goods and services received than they were during the 193os. Everyone was supposedly making good money working in defense plants, etc, but there was nothing to spend the money on. After the war there was a run up in prices, so those who had saved weren’t much better of than those who hadn’t. – everyone becamee wealthier due to the
    great increase in goods and services after the war regardless of their income DURING the war.

    My mother’s family were farmers at the time, so gasoline wasn’t a problem for them, but she told me how rationing boards screwed them over. They had a stove, but it was a wood stove- unbearbly hot. When they applied to buy an updated electric stove, their request was denied, while neighbors DID get approval for an electric stove for their second vacation home because it had no stove.

  3. Brian H said

    Another factor: WWII more or less ended the artificial make-work meddling. When money is spent to a purpose, it causes growth. When it’s spent to cause growth, it turns into an implosion.

  4. Frankly, I’d much rather take the word (and the memories) of my very own father who died in 1983, aged 83 i.e. born 1900.

    He had been kicked off his pig farm at the start of the Depression by a rapacious bank, then started a successful construction company (pre-WWII) with his brother, then spent all of WWII in the US Army bossing the fast construction of air fields, beach heads and field hospitals across the entire Pacific all the way to Okinawa, then built 1000s of house for the returning vets and their wives and kids from 1945 – to about 1965 i.e. not long after Leonard started shaving, got outta college and went straight into NASA.

    My Dad was crystal clear on why and how FDR was a great man – a smart but pragmatic politician who pulled America out of the Depression and turned WWII around with the collaboration of that other great interventionist politician, Winston Churchill (and that butcher Stalin).

    My Dad lived, fought and died an FDR man. I threw the framed, autographed photo of FDR 9and his medals) into his coffin before it all went through the flames.

    His sons, daughters and grandchildren were left with the very clear knowledge of how and why FDR and his government did a good job – a damn sight better job than all the modern presidents since that weasel Nixon trashed the gold standard.

    Personally, I think it is a bit rich for Leonard Weinstein who enjoyed a very nice (thank you) 40 year government employment career at NASA starting in the early 1960s during the golden age of of the space race, of reasonably controlled government expenditure, and of a fair level of taxation of business and of the rich to be taking the tack he does.

    After all, Leonard can barely remember WWII he was so damned young!

  5. Mark T said

    I’m sorry, but WW2 did not get us out of the great depression. That’s Keynesian myth.

    Mark

  6. TGSG said

    methinks someone didn’t actually read the article.

  7. Pat O'Connor said

    Interesting article and I wouldn’t disagree with the general thrust of it, but there is one word missing in all of it…debt!
    I note that you don’t want to get into a discussion about the causes of the Depression, but I think that there would be general consensus that the cause was too much debt and my thinking is that come WWll the debt had worked its way out of the system by people and companies defaulting. The long and slow climb back to normality then began after the war had finished.
    There are 3 ways out of a situation of excessive debt, such as we have now. Pay it back, inflate your way out (Govt) or default.
    Pay it back is not going to happen. The printing press has been around for a long time and no Govt. has been able to inflate its way out of debt without destroying the country (Weimar), so that leaves default.
    Let’s get it over and done with.

  8. kim said

    Roosevelt was the executive of the Depression, and World War II a badly broken window.
    =======

  9. Leonard Weinstein said

    gallopingcamel
    1) Cutting the excessive government regulations
    2) Cutting spending, and spending more efficiently. (Note: many trillions have been spent on subsidized housing, medicaid, welfare, war on drugs, and many other programs, with little or no real resulting average benefit. More people are poor after the so called help and government efforts than before these were all started. Some help is clearly needed, but the way these programs were done were not successful, and are a major part of the cause of the current huge deficit.)
    3) Torte reform would be a bigger help than realized by most
    4) Improve education (I have an old white paper on this but I would need to update it before I would show it).
    5) Realize that with all changes that are practical, it would be a long time to recover (no short fixes), so we need to adjust our life style somewhat. The bubble of prosperity after WW2 was a unique factor of the items I showed, and will not be repeated.

    Steve Short
    I am glad you respect your grandfather. He sounds like an exceptional man. I certainly can’t help when I was born. Your vitriolic comments on me seem strange. All that I stated is supported by analysis and facts. By the way, I worked at NASA 45 years (not 40), and now am working at the NIA. Much of what I have done was aimed at helping, not just gravy. I designed and built a visual aid for the seeing impaired. I have two patents on ice thickness gages inspired by the air crash in DC due to icing. I developed methods to put out oil fires, and methods to clean up oil spills. I have a patent I am working on myself to make potable water for emergency uses. I have numerous other ideas and patents I work on. Please tell me what you have done useful?

  10. RB said

    Thank God for GE’s GI Bill.

  11. Neil said

    #9 All good points. There has been much debate here and elsewhere (globally) about tax, fairness, equity and wealth distribution. There is very little focus on the size and quality of government spending, the complexity and purpose of regulation and too much focus on distributional issues. Redistribution by govenment generally creates very little value, infact it is generally value destroying. Redistribution can not create more rich people, it can definitely have effects on equity, but it also tends to have bad impacts on incentives. At the end of the day one of the building blocks of economics is incentives. Unfortunately it is usually an economic disaster that finally creates the incentive for change, many of the decisions to that point are merely fingers in the leaky dyke made to keep politicians in power and so as to not scare the voters.

  12. DeWitt Payne said

    Re: Pat O’Connor (Oct 21 06:07),

    You left out a fourth way: Increase income so the debt to income ratio declines, i.e. grow your way out of debt. The debt incurred by the US government during WWII didn’t vanish. But the economy grew fast enough that the debt soon became a small fraction of GDP. We need to stop shoveling money out of helicopters and cut taxes. And the tax cuts have to be permanent, or as permanent as anything can be. Uncertainty about future government actions may well be the largest drag on the economy.

  13. DeWitt Payne said

    Steve Short,

    A nice anecdote, but that’s all it is. I dare say you could have found a lot of people in your father’s generation that hated Roosevelt with as much passion as your father loved him. There were lots of people who wouldn’t even speak his name and referred to him as ‘that man’.

  14. RB said

    The debt incurred by the US government during WWII didn’t vanish.
    Is it possible for the private sector debt and the government sector debt for the world as a whole to disappear?

  15. Anonymous said

    RB said
    October 21, 2011 at 10:43 am
    “The debt incurred by the US government during WWII didn’t vanish.”

    The U.S. sold bonds during the war. At the end of the war there was high inflation, gypping those savings bond holders. Of course. with increased productivity, EVERYONE benefitted from the increase in goods and services AFTER the war, but the bondholders paid for the war by buying expensive bonds and cashing in cheap bonds.

  16. Kenneth Fritsch said

    I am of the age to have known many in the preceding generation that went through the depression and WWII and idolized Roosevelt at the time for his efforts fighting the Depression and the war. I think it derives from the times when people were rather uninformed about how governments operate and how they could take advantage of “emergencies” whether they be economic or military. Politicians were held in higher (and I think undeserved) esteem then and I think primarily because they were shielded from the public eye (thank the gods for the Nixon tapes and what they revealed about politicians and more recently blogging). Roosevelt rather successfully concealed that he was not able to walk due to an earlier bout with polio.

    While some of those who idolized Roosevelt then, continued to do so, some were able to put their emotional attachment for the times aside and view the Roosevelt administration more objectively later in life. Most historians have taken a pass on being critical of Roosevelt, just as they have Lincoln, and primarily, I think, because it would take more courage than they have in criticizing the heroes of the good wars and separating the weaknesses of government and politicians from the cause.

    I think much of the confusion we see in the Keynesian efforts to recover from an economic downturn have to do with the broken window fallacy portrayed famously by Frederic Bastiat, whereby people see money being spent and the results, but do not think about the alternative uses for that same money and comparing those potential benefits with those of the money spent. I see this same fallacy used by politicians today (and swallowed by a number of the gullible voting public) who say things like if we spend such and such money the benefit will be X jobs and never mentioning where that money comes and how it might have provided benefits. Even a well-quoted economist, like Paul Krugman, can write about the advantages of a threat from aliens from outer space having a beneficial effect of forcing government spending during a economic downturn. Krugman could have said a war, but I think political correctness got the better of him. I went through WWII as a very young boy and I know the sacrifices that were required, by not only those directly involved in the military, but those supporting the effort at home. Perhaps Krugman is too young or too Keynesian to remember.

  17. Leonard,

    I like your list but most of the items are beyond my ability to make a meaningful contribution. The exception would be education. Since 1998 I have started seven charter schools and six of them are still operating.

    Currently I see an opportunity for improving K-12 education by developing “Virtual Schools”; they have a huge potential for raising education achievement while lowering costs.

    Home schooling is growing rapidly and when combined with “Virtual Schools” a total transformation of education may be possible.

  18. stan said

    The depression was worse in the US than in some other similar countries. FDR’s assault on business and investors during the 1936 election campaign was so bad that the US experienced 2 years of negative net investment — the only 2 such years in the period (yes, even after the crash and in the early 30s during bank runs investment was still net positive). A number of academic studies have concuded that he deepened and lengthened the suffering by a number of years. See e.g. http://www.washingtonpost.com/wp-dyn/content/article/2009/01/30/AR2009013002760.html

  19. Kenneth Fritsch said

    “Is it possible for the private sector debt and the government sector debt for the world as a whole to disappear?”

    RB, that is perhaps a rhetorical question, but I am sure you are aware from history that government debt can diappear Greek-like (and Argentina and Russia-like) by default. I recently had a discussion with my oldest son about my thoughts that the future generations may not necessarily feel obligated to pay off the government debt for which they were not responsible. They could hardly be blamed.

    Private debt is written off every day through bankruptcies. The point that most would make about debt is whether the debt is greater than the available assets and the potential to repay. Governments have the advantage that rating agencies and willing lenders do not necessarily look at the financial state but rather the willingness of the government to impose its monopoly on force to collect the moneys required to pay off the debt. Bankruptcies and defaults occur more or less by a triage process where the worst offenders declare and suffer the consequences. The consequences have to have meaning or nobody will be willing to lend money. Finally to answer your query: Yes all government and private debt could theoretically disappear and with the result that the entire global lending system that required a contractual agreement would be shut down. You might still want to lend to a family member of friend without a contract – even though those type of lendings are probably the worst under the best of economic conditions.

    Governments have been known in the past to inflate the money supply in order to pay off debts with “cheap” money so that is another strategy. That process collaterally benefits you if you are a borrower and hurts you if you are a lender.

    The strategy of increasing taxes never works because the increased taxes do two detrimental things: First if allows the government to continue to spend with reckless abandonment, and second, a higher taxation rate slows economic activity and thus lowers expected tax revenues.

  20. Kenneth Fritsch said

    RB, I should have added that under an internationally controlled economy, where the state controlled all wealth, debts could be written off immediately and the state could impose whatever the state could impose, i.e. it would not have to make any economic sense.

    • Brian H said

      And the point must be re-iterated: if there is little or no expectation of being repaid, all lending and most investment will cease. “Debt cancellation” thus amounts to “economy cancellation”.

  21. Brian H said

    Note that in a bankruptcy, the usable assets are redistributed at auction to those who can make better use of them. Blocking that process, as with GM, leaves said assets in the hands of the proven incompetent.

  22. RB said

    Kenneth,
    One could imagine a world with no governments and net world private sector savings would be zero. No need to get rid of contractual loan agreements in such a world. For any given country,its domestic government sector, domestic private sector and foreign sector cannot all simultaneously run budget surpluses. I guess you could call that accounting’s conservation identity.

  23. Geoff said

    WWII did not end the depression, but obviously the superior status of US manufacturing capacity after the war was advantageous. For a scholarly review see Robert Higgs (http://www.colorado.edu/ibs/eb/alston/econ4524/readings/Higgs,%20Wartime%20Prosperity.pdf ).

    With regards to causes and solutions, I hope I may be forgiven for quoting my letter to the Financial Times which was published last month (in response to some discussions and dismissal of “austerity”:

    “Rather than balance the budget, federal spending under Hoover rose by 39 per cent from $3.3bn in 1930 to more than $4.6bn in 1933, with no declines along the way. The deficit rose to $2.6bn for 1933 (the largest ever in peacetime, 4.5 per cent of gross domestic product) while revenues stagnated due to the depression.

    Hoover took one more terrible step. In 1932, he signed the largest tax increase in American history to date. Income tax rates at the lower levels were more than doubled, and the top marginal rate was increased from 25 per cent to 63 per cent. Corporate taxes were raised by 15 per cent. (On a historical note, the Democratic party platform for the election of 1932 promised a 25 per cent spending reduction in the federal budget, and Roosevelt campaigned on that platform. Of course he changed his policy when elected, but did in fact achieve a balanced budget in 1938.)

    In contrast, in response to the severe recession in 1921-22, Calvin Coolidge dramatically cut spending (from $6.4bn in 1920 to $3.3bn in 1923). He further cut taxes, so revenues were reduced from $6.7bn in 1920 to $4bn in 1923, with budget surpluses in every year. Public debt was also reduced by almost 10 per cent over the same period (which would be the equivalent of a $1,400bn reduction of today’s US public debt).

    The 1921-22 recession was severe, but the recovery was strong. According to the Federal Reserve index of production (based on the average of 1923-1925) the physical volume of production dropped from 89 in July 1920 to 65 in July of 1921. Moderate improvement began in August of 1921, through 1922 there was strong improvement and by March of 1923 the index had risen to a new high of 103, and it rose further to 106 in April of 1923″.

  24. “Many think WWII caused the end [of the Great Depression], and this is in fact almost certainly true.” This is conventionally believed to be true, but it is false, as economic historian Robert Higgs has shown at length.

    HERE is something brief:

    “With regard to the Great Escape [from the Great Depression], economists have also reached substantial agreement, but unfortunately they have come to agree on an interpretation that is almost completely wrong.

    “It is wrong factually because it places the Great Escape in the early 1940s, around the time the United States became a declared belligerent in World War II, whereas the economy did not return to what we may properly describe as prosperity until after the war. Economists have misconstrued the specious ‘wartime prosperity’ as the real thing, but diverting nearly 40 percent of the total labor force into military-related employment and producing mountains of guns and ammunition do not create genuine, sustainable prosperity, as people would discover if they tried to operate an economy on this basis for more than a brief period. The true Great Escape did not occur until 1946. _ _ _

    “Perhaps the main reason why economists have misunderstood the remarkably smooth transition is that they have first misunderstood the war economy itself. They have viewed the war “boom” in simple Keynesian terms: Government spending, financed by huge budget deficits and accommodated by rapid increases in the money stock, propelled the economy from the lingering depression to unprecedented heights—indeed, during the peak years of war production the economy appeared to be operating far beyond its ‘capacity to produce,’ even though by 1945 more than 16 million prime-age men had been pulled from the labor force at some point and replaced by teenagers, women with little or no experience in the paid labor force, and elderly men.

    “In truth, however, this apparent Keynesian ‘miracle of production,’ during which the unemployment rate had been pushed to an all-time low of less than 2 percent, rested not on shrewd fiscal and monetary policy, but on massive military conscription, which had directly pulled more than 10 million men out of the labor force and indirectly induced millions of others to enlist in hopes of avoiding service in the dreaded infantry. _ _ _

    “The Keynesians had failed completely to understand that the prewar depression had persisted in large part because during the Second New Deal (1935–38) the Roosevelt administration had created extreme apprehension in the minds of investors and businessmen about the security of private property rights, and hence had discouraged these parties from making the large volume of long-term investments necessary for the economy’s full recovery and for its sustained long-run growth. During the war, investor-friendly businessmen in temporary government service had administered the command economy for the most part, but concentration on winning the war had kept the civilian economy starved for resources.

    “By the war’s end, however, Franklin D. Roosevelt was dead, the Second New Deal’s most zealous advisers and administrators had left the government or had been pushed into less influential positions, and therefore the future security of private property rights looked considerably more auspicious than it had looked before the war—a change in outlook sufficient to induce a great deal of long-term private investment for the first time since 1929. Because ‘regime uncertainty,’ which had dominated the later 1930s, no longer cast such a dark shadow over business and investment, the economy finally recovered from the Great Depression and the economic hardships of the war years, even as it simultaneously reallocated about 40 percent of the labor force from war-related uses to civilian uses.

    “The year 1946, when civilian output increased by about 30 percent, was the most glorious single year in the entire history of the U.S. economy. By 1948, real output was back on its long-run growth trend, and during the decades that followed, the economy was spared the sort of deep and long debacle that a congeries of wrongheaded government policies had caused during the 1930s.”

    http://www.thefreemanonline.org/columns/our-economic-past-the-great-escape-from-the-great-depression/

    In other words, military conscription, combined with the wartime command economy which starved consumers of resources, ended the apparent effects of the Great Depression. Conscription ended high unemployment and waging war stifled consumption. But regime uncertainty kept these chronic pains going until the war diverted them utterly, And by the end, these little Hiters were gone from power.

    This suggests that the current crisis of regime uncertainty, represented by Obamacare as well as the financial “reforms” can abate, given a turnover of power in Washington an an agenda of repeal.

  25. The war sucked up 22 percent of the labor force under below market wage rates.

    HERE is a more focused and more recent look at what ended WWII by Higgs:
    http://www.mygovcost.org/2011/09/09/world-war-ii-did-not-end-the-great-depression-lessons-for-today/

  26. LRT said

    What actually happened was this. Roosevelt continued Hoover’s policies, which were basically to foster cartels and keep wages high and prevent liquidations. The result was stablization of the economy at low levels of output, and large unemployment because people were priced out of the market. This turned the crash into the depression.

    In ’36 the Roosevelt administration started to adopt basically modern IMF policies, to free the labor markets, enforce anti-trust, reduce regulation. The result was growth. The growth had resumed before re-armament took effect.

    The fundamental cause of the crash was that it was the result of a previous government produced credit bubble. These always end in crashes, and the crash is made worse by government attempts to avert them or minimize their consequences.

  27. Kenneth Fritsch said

    We have some referenced and in my view reasoned thesis on the Depression in this post. Unfortunately the majority of the current intelligentsia holds more the view of a Keynesian, like Paul Krugman, and, in fact, so do much of Wall Street and those who run large businesses. It will be interesting to see how the current Keynesian attempts to revive the economy play out with a backdrop of at least some on the population who are no longer enamored with Roosevelt or are too young to remember.

    There are also more of the population who would think twice about going to war and not allow government propoganda to change their views. Their were those involved with the Roosevelt administration who were pointing to the fact that reasonablly large projects for the Keynesian spending in attempts to revive the economy were already used and that something bigger was needed to spur further spending. Paul Krugman has already pointed recently to the value of a preparedness for a military action against space aliens as something that would get us out of the recession in 18 months. I wonder if he sees the need for conscription and government propoganda to help his cause along.

    Keynesians are famous for their thoughts on spending in attempts to revive an economy being not what the consumer/spender chooses to make their life better, but rather what and how much the government spends on projects that may or may not have any value to the consumer. No wonder Keynes thought his economic system would work better under a command economy and suggested that to a fascist Germany.

  28. Alan D McIntire said

    Since this thread is bashing Roosevelt and his handling of the economy, I thought I’d post this quote by Douglas MacArthur:

    “Well, the old man has gone, a man who never told the truth when a lie would suffice.”

  29. Leonard Weinstein said

    Orson Olson
    Either you did not read my post well or misunderstand it. I clearly stated it was post war activity that ended the depression, but the war was the underlying cause. This is exactly in agreement with your following statements.

    Alan D McIntire
    This was not specifically a bashing of just Roosevelt, but the actions from before him to after, and clearly including congress.

  30. Joe said

    What a simplistic load of rubbish. So, we just need to bomb some of those pesky foreign competitors who are spanking our bottoms in the market, shut down the automotive plants for a few years to let demand build up, and have the government buy (more) homes for folks and send lots of people to get their MS and PhDs (since they’ve purchased a worthless BS for most everyone already). Hey I know what, we could also destroy a bunch of existing homes, cars, household appliances, etc. Then there’d really be demand for things to be built and jobs for people to do. Go read a Bastiat book. They’ve only been around for about 150 years. Wanton destruction of valuable resources (even if they belong to someone else) does not result in more resources for society than there would have been otherwise (now or in the future) and jobs are means, not ends.

  31. The above comments align with the idea that you could put all the world’s economists end to end but they would still not reach agreement.

  32. Kenneth Fritsch said

    “Since this thread is bashing Roosevelt and his handling of the economy, I thought I’d post this quote by Douglas MacArthur:”

    I was bashing Keynesian economics. Most of our Presidents from Hoover on have followed Keynesian recommendations and none of them have been intellectuals – they simply followed their lead.

  33. igsy said

    The current difficulties are mainly a result of past governmental interventions (direct and indirect) in capital markets. The Chinese kept their currency down by buying treasuries, which in turn kept US interest rates lower than they should have been. The Fed kept ratcheting US interest rates lower each time the stockmarket swooned (the “Greenspan Put”) for reasons best not dwelled upon. The hedonic pricing adjustments that were mendaciously implemented in the Clinton era (note – I’m not blaming C himself) for the purpose of lowering cpi-linked social security payments meant that reported headline inflation was lower than its true value, which in turn meant… interest rates were lower than they should have been. Look at the euro fiasco, which is all a consequence of Greece, Portugal etc being able to borrow large sums for the past ten years at interest rates far lower than their market rates as independent credits (the euro, of course, representing the epitome of government by edict).

    In short, the US and other countries’ interventionist actions not only created conditions for, but practically guaranteed, a credit boom, because virtually everything they did resulted in interest rates being kept below levels that would have prevailed under supply and demand. The “bankers” get the blame for all this, and, as we all know, they’re no angels, but for every unit of blame a banker receives, the government should get ten, at least (IMHO).

    So the simple question is this: why trust the idiots who got us into the mess to get us out of it? Since the answer is obvious, I concur completely with the main thrust of Dr Weinstein’s views, and appreciate them being given an airing here.

    From the other side of the pond, there are some who actually see a relatively bright future for the US, which would almost certainly be brighter without the appetite for centrally planned expenditure exhibited by the incumbent administration. Topically, for a climate-oriented blog, this perspective relies in part on energy considerations, and in particular the astonishing revolution in shale gas exploitation and the fracking technique. I recommend the following article as a good read:

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8844646/World-power-swings-back-to-America.html

  34. GregO said

    I’m with Igsy – please consider giving this book a read:

    On another thought though, it depends not just on whether government spends money, but on what the money is spent on – consider that mankind would not have gone to the moon without public monies and countless other worthwhile projects with far-reaching “unintended” but positive consequences all funded by the public purse. Lesson here is don’t discount public funding just because it is public.

    Now consider Dr. Weinstein’s closing statement “we (Americans I presume) have to realize that the gravy days of old are gone.”

  35. amabo said

    Tom Woods lecture that deals with the end of the second world war:

  36. Scott B said

    Jeff’s right, too bad the conservative answer is to let businesses make the most money possible, screw the little guy, and let globalization run it’s course until the quality of living is roughly the same worldwide. Basically damning the next 2-3 generations. I personally think we should start an all out trade war. Place high tariffs on anything we could potentially make ourselves at a level where it would someone would be justified manufacturing in the US. Although our window is decreasing, we are still the world’s largest consumers. Doing this would be painful because we’ve become dependent on cheap goods from overseas, but we still have the leverage to make it difficult on foreign countries that are living off of us, much like parasites. We have the capability to be mostly self dependent. Something most other countries can’t do.

  37. page488 said

    Fascinating discussion!

    I have to point out that the poster meant “college,” not “collage.” I’m assuming this error was just a typo.

  38. Mark T said

    Kenneth Fritsch said:

    Unfortunately the majority of the current intelligentsia holds more the view of a Keynesian, like Paul Krugman, and, in fact, so do much of Wall Street and those who run large businesses.

    Is it that Wall Street and those who run large businesses hold a Keynesian view, or is it that they understand how the current system works (whether right or wrong) and thus make their best attempts to work within the system they have been given? In other words, regardless of the system, it seems reasonable that a smart businessman will attempt to work with it (or game it) to maximize his benefit. Since the system is, and has been for quite some time, Keynesian, which implies a fairly heavy hand from the government, this necessarily means making the most of any influence said smart businessman can steer towards his bottom line. Take away the Keynesian mindset (from the government) and there’s nothing to game (and likewise, nothing to gain), so the same smart businessman proceeds based purely on his profit motive.

    Realistically, I think this means that smart business leaders don’t necessarily need to hold any particular view of what should be in place, they simply need to be smart about what is in place. I’m sure there are plenty that do hold such a Keynesian view (Buffet comes to mind), and likely there are just as many that hold a pure free market view (Jack Welch, perhaps), but they all must work with the Keynesian model, thus it appears as if they all agree with it.

    Mark

  39. Mark T said

    Leonard Weinstein said:

    I clearly stated it was post war activity that ended the depression, but the war was the underlying cause.

    Activity that would have ultimately occurred even sooner were it not for the heavy hand of FDR and the war itself. Crediting the war with getting us out of the depression is, as I noted previously, Keynesian myth. Orson Olsen’s brief quote has it right.

    As for the three points in the initial argument:

    1. Broken window fallacy. We had to destroy massive infrastructure and take an equally massive funds out of the economy to repair it. Such funds could have been (and likely would have been) spent on expansion, rather than repair. There was no net gain.
    2. This pent up need was a result of the war itself. The same demand existed without the war, it would have simply been spread out over the years. We (the US) redirected all of our production capability towards the war effort then took 10 million people out of the local (national) economy. This is sort of the reverse of the silly cash for clunkers program: people merely shifted their buying habits earlier rather than later (and did so at taxpayer expense no less). This is nothing more than a variation on the broken window fallacy.
    3. Again, we had to take a huge amount out of the economy to fund the GI bill. There’s no net gain. Broken window fallacy redux.

    All three of these likely resulted in a net negative. Ultimately, they rely on requiring the the war’s destruction in order to credit it for the eventual rebuilding (coupled with a government redirection of taxpayer monies).

    Indeed, TGSG, I did read, and I did understand.

    Mark

    PS: note, one should not infer from my comments any position on whether or not I think our entry into WW2 was right or wrong. I just don’t think the massive destruction that resulted from the war can be also given credit for saving us from the depression.

  40. DeWitt Payne said

    Re: igsy (Oct 23 16:55),

    The Chinese kept their currency down by buying treasuries, which in turn kept US interest rates lower than they should have been.

    The Chinese tied their currency to the dollar, which is not the same thing as keeping their currency down at all. Do US states that have trade imbalances with the rest of the US “keep their currency down” too? As far as buying US Treasury securities, when you have a trade surplus, you have to put the money somewhere. Currency manipulation doesn’t fix trade imbalances, unless by fixing trade imbalances you mean beggaring both countries.

  41. Gary said

    Jeff, one other thing you don’t mention is that after WWII the trade barriers (a tariff war) that was the trigger for the Great Depression were reduced and the world got back to profiting from a freer exchange of goods. Additionally, I suppose, the dollar becoming the de facto global currency made doing international business a bit cheaper.

  42. Kenneth Fritsch said

    “Is it that Wall Street and those who run large businesses hold a Keynesian view, or is it that they understand how the current system works (whether right or wrong) and thus make their best attempts to work within the system they have been given?”

    MarkT, I think what you have said in this post merely reinforces my point that business people and politicians (and most of the voting public) merely follow the ideas of the existing intelligentsia. They do not necessarily judge the economic system and alternatives as an intellectual would but rather use it for their own purposes. That is not to say that some of these people have countervailing views and philosophies. I do think, however, that if you took a survey you would find most business leaders of large companies in favor government spending in bad economic times and QE2s and even QE3s. Wall Street businesses are probably more orientated towards favoring government involvement in the economy than other US businesses are. Bankers depend on the Federal Reserve which can change their fate overnight. The establishment of the Federal Reserve has made banks very much more an extension of the government than it was before the Federal Reserve existed even though there was great dependence and interdependence before that time with banks buying government bonds and governments allowing occasional suspension of specie payment by banks. The Occupy Wall Street people, I strongly suspect, have little intellectual bearing and do not see the connection of Wall Street and the banks to government.

    As a libertarian, I have no use for government spending and expansion, but on the other hand I will game the system (legally, of course) probably to a much greater degree than most would – and have no moral qualms about it.

    I have noticed that you have made a disclaimer on the right or wrong of the US entering WWII and from the discussion on this thread I think that was probably not necessary, but does bring to the fore the issue of historians, in my view, giving Lincoln and Roosevelt a pass they would not give other Presidents because of the “good” wars that they directed. I think we lose a lot of perspective on big government spending and military actions because of this inhibition. I suspect some historians appear biased in favor of Lincoln and Roosevelt because they favor bigger government and some are hesitant to criticize because they feel their criticism may be mistaken for criticisms of the causes involved.

    A number of libertarian writers have more recently been coming out and writing what they see is truer history of the Civil War and WWII periods and the Lincoln and Roosevelt administrations. Perhaps they feel safer doing this because by their embracing a libertarian philosophy it would be difficult for those criticizing their writings to misconstrue their criticisms with their views of slavery and Nazi atrocities which, of course, libertarians would relate to horrific actions of governments that do not recognize individual rights or inconsistently recognize them.

  43. Kenneth Fritsch said

    “On another thought though, it depends not just on whether government spends money, but on what the money is spent on – consider that mankind would not have gone to the moon without public monies and countless other worthwhile projects with far-reaching “unintended” but positive consequences all funded by the public purse. Lesson here is don’t discount public funding just because it is public.”

    Perfect example of the broken window fallacy: Point to the worthwhile projects and never even think about alternative projects and their worth. I can realize unintended consequences from any investment – the key is that they are unintended. Public money that sent us to the moon was a result of, not a business decision, but rather a political move by our government to answer the USSR’s propaganda related to their space flights. Interesting too that an answer to a controlled economy like the USSR was to use government money to show that our system was better.

  44. Jeff Id said

    Gary and Scott,

    Just to be clear, this is Leonard’s post. http://noconsensus.wordpress.com/

  45. Jeff Id said

    #39, I agree with what you wrote for the most part, however you have identified what in my opinion is a specific reason that large corporations support some of the more liberal monetary policy whereas businesses in the 100Million range generally don’t. There are huge advantages with our current system for getting the right amount of attention from politicians by the giants which absolutely keep the mid sized from competing effectively. It is a mechanism for corruption of the GE, Seimens types leaving smaller guys off to the side.

  46. igsy said

    #41DeWitt, if you tie a helium balloon to a post, I would regard “tying it to a post” as opposed to “keeping it down” a distinction without a difference. The fact that they chose to peg to the dollar is the very intervention or free market distortion I was referring to. Of course I accept that once this decision is made they have to recycle the surplus – large persistent surpluses (and deficits of course) are a feature of fixed/pegged exchange rates, and if they are not recycled then the peg has to be abandoned. There can be no doubt that the Chinese decision to peg to the dollar ultimately resulted in lower US interest rates than would otherwise have been the case, all other things being equal. Dare I say “the economics is settled”?!

  47. Kenneth Fritsch said

    Governments of nations (mostly those who are attempting to maintain a trade surplus) definitely attempt to artificially intervene in monetary markets to effect the value of their currencies with respect to their major trading partner nations. They usually attempt to devalue their own currency which supports exports. They do this to support, I think, the same flawed, in my view, argument that those on the other side of the trade issue (like the US) support, i.e. that somehow running a trade surplus is by itself good for the trading nation.

    If it requires the surplus nation holding, for example, dollars in huge amounts as cash reserves and collecting no interest or in buying “safe” and liquid US assets with low yields like Treasures it is difficult to see the net good effects of that position. On the other hand, the deficit nation gets to borrow more cheaply than they otherwise would. This last advantage is ephemeral in that a nation like the US squanders away the advantage by borrowing and spending too much. All this is the result of a fiat monetary system. The US gets some advantages by being considered a safe haven and at the same time apparently printing money and inflating the money supply without retribution.

    Under an international gold reserve system these shenanigans would be difficult to impossible.

    I used to work for a US manufacturing company that competed with Japanese companies and attempted many times without success to get the US government to declare a dumping violation and impose a tariff on the offending nations products. The Japanese did probably sell products to the US for less than they did to their own citizens (in general, the definition of dumping), but that was a major advantage for the US consumer. The competition effects of the Japanese products was so gradual (and the economy so good) that most people in the manufacturing field were able to readily find other jobs or jobs with Japanese companies that relocated manufacturing facilities to the US. We have the ever loyal Japanese consumer to thank for that.

  48. DeWitt Payne said

    Re: igsy (Oct 24 15:48),

    The country most guilty of manipulating its currency isn’t China, it’s the US. The Chinese thus did the logical thing and pegged their currency to the dollar. The idea that trade surpluses/deficits are solely a function of currency value imbalances and would somehow disappear if currencies were allowed to float freely is simply wrong.

  49. GS said

    I thought the enaction of the Glass-Steagall act had something to do with ending the Great Depression and Clinton’s repealing of it something to do with the current Depression?

  50. Leonard Weinstein said

    GS
    The Glass-Steagall act was passed 1933, and the decade following that was the deepest part of the Great Depression. It may have helped in the long term, but clearly was not the direct cause of ending.

  51. Leonard Weinstein said

    The broken window argument does not apply here. The US economy was not broken, but in fact was expanded during the war, even though most was redirected to war supply production. It is destruction of other country economic capability that gave the post war advantage to the intact US production capability. Also, the markets are not purely driven by logic. The dropping or recovery has a large psychological component. If the economy is either dropping or rising, the attitudes of people push the rise or drop further, rather than logically considering the facts. This is the same behavior that leads to bank runs or stock surges or major drops.

  52. Leonard Weinstein said

    DeWitt,
    The problem is not that cheap imported goods are a direct disadvantage to US citizens, or the economy, but that long enough dependence on the importation leads to permanent loss of industries and eventually job losses.

  53. DeWitt Payne said

    Re: Leonard Weinstein (Oct 25 09:33),

    So basically you’re a mercantilist? Then let’s pass a new version of Smoot-Hawley. Oh, wait. The US Senate is already working on that and trying to start a trade war with China.

  54. Kenneth Fritsch said

    “The broken window argument does not apply here. The US economy was not broken, but in fact was expanded during the war, even though most was redirected to war supply production. It is destruction of other country economic capability that gave the post war advantage to the intact US production capability.”

    The broken window argument/fallacy has to do with people failing to recognize the benefits of potentional alternative spending and usually associated with command like government spending. What the money is spent on does not have to broken. That is called the fallacy of the broken window fallacy.

  55. Kenneth Fritsch said

    “The problem is not that cheap imported goods are a direct disadvantage to US citizens, or the economy, but that long enough dependence on the importation leads to permanent loss of industries and eventually job losses.”

    Of course, less expensive imported goods are a major advantage to US consumers. Permanent loses of industries and businesses is what capitalism is all about whether the competition that causes that creative destruction is domestic or foreign. I have noticed of late that people in the US are lamenting the current unemployment rate and attributing it to loss of jobs through international trade – even in face of the historically low unemployment rates we had just prior to the recent economic downturn. People lament the loss of manufacturing jobs when a look around the world shows that those jobs are being reduced worldwide and because of automation and productivity increases – developments that lead to higher standards of living.

    DeWitt is correct, in my view, that the US attempts to manipulate the dollar and does so from an advantaged position that might not last much longer. QE2 was a gamble by the Federal Reserve that increasing the money supply would not generate, at least immediately or mid-term, increases in the interest rate for government debt. If the US were no longer considered a safe haven (or better a safer haven than other nations of the world) interest rates would increase dramatically and with everything else being equal our debt problems could skyrocket.

  56. Leonard Weinstein said

    DeWitt,
    I am not a mercantilist, I am just stating one reason US jobs are being lost at present. In fact this result was inevitable given rise of third world technology, and level of US consumerism. The solution is to develop new industries or improve cost within the US. Don’t confuse a reason comment with my suggestions.

    Kennith.
    I am not supporting the broken window approach, the wars like WW2 were not done to improve economies like the US but a grab for land (Japan and Germany) and revenge for results of WW1 (Germany). Given the fact wars happen, the result following WW2 was as I stated. Those conditions no longer are present, and thus spending at the present would not do the same. That is my only point.

  57. Leonard Weinstein said

    DeWitt,
    The availability of better computers, mass production, and robotic capabilities are just beginning to be felt. It is even possible that doctors, and even engineers, among others will be phased out to some degree. Movies are going more to simulation and anime. Music and art are even going synthetic. There should be an opportunity for continual improvement of the human condition with greater productivity all the way around, and there is in some cases, but not most others. There is a clear need to shift the human work paradigm, and I do not know exactly where to. Do you have any suggestions on this?

  58. Mark F said

    The discussion is getting closer to my view. “WE” have to generate wealth. Yeah, I know, that’s a nasty word. But if we don’t, we end up cleaning each others’ toilets for a living, with our payment for same being taxed to pay for health, education and welfare costs. Let’s call them entitlements. On a micro scale, a community can export manufactured product, such as those developed by Microsoft – their centers of employment are “wealthy” as money comes in from elsewhere – more than goes out, usually. On a macro scale, each country has to export more than it imports, in dollar terms, or it goes bust eventually. Exports can be manufactured goods, knowledge-based products, agricultural or logging output, natural resources from mines or oil or gas wells, etc. Linked to this is “employment”, which has moved from an agricultural base, to a manufacturing base, to a knowledge base, and while the value of goods grown, made or “invented” continues to grow, the jobs have vanished via technological changes or economic ones – migration to less expensive countries.

    What concerns me most is the fact that nothing seems to be in the wings to help us generate domestic wealth in a way that employs large numbers of people. Service industries merely are a form of redistribution of existing wealth, with the mandatory tax being siphoned off for entitlements. Sure, the churn of disposable (and previously saved) income will keep us alive for a while, but erosion of the total wealth in our country (countries, I’m in Canada) will follow the balance of trade deficit. Wall Streeters are easy to point at, and yeah, some of them make tons of money, but shutting down the world’s economic systems isn’t likely to help the tent-city crowd much, as they watch their trust funds, welfare cheques, grants and allowances dry up, as the sources go South.

    It isn’t just manufactured goods, either – India and China are proving their capabilities in software development; Brazil and other countries are picking up key chunks of biotech where our morals get in the way, and the same applies to most other sectors of what we “produce”.

    Closing borders raises costs – which are already making us uncompetitive, but that’s a different argument. Read up on trade wars. Yeah, there are many present imbalances that
    haven’t been met with retaliatory actions, but as others have pointed out, the costs to OUR consumers usually have to rise if “fairness” is demanded. Close Walmart? Gotta increase those welfare payments, ’cause the cost of kids’ clothes just went up 50%. It’s, um, part of our living standard, stupid…..

    We’re consuming wealth faster than we’re creating it. Full Stop. I don’t have any solutions to propose, but unless and until we open the natural resources taps, or start bombing the factories and universities and labs in the developing world, the erosion will continue.

    I’m gonna encourage my grandkids to take up accounting and law. Specifically, some kind of human rights law, maybe aboriginal rights law. God knows there will be lots of classes of “victims” whose plight can be blamed on the government or evil banks or manufacturers. Not gonna help the economy much, but it’ll help them afford food, clothing and shelter. And maybe even health care. Maybe.

  59. Sonicfrog said

    Jeff, Mr Weinstein… Very good post.

    A couple of things to add. Government stimulus CAN NOT grow an economy out of a recession. If so, many of the European economies that are in desperate trouble (the PIIGS as it were) would be booming about now. What stimulus can do, if done correctly and wisely, is to provide a buffer against even worse economic conditions. The spending and back-to-work programs enacted by FDR, and to much lesser extent President Obama, did stem the tide against an even worse economic scenario. What it didn’t do in either case is “fix” the underlying problems that caused the depressions in the first place, which can be argued to be the over use / reliance on credit by banks, , business, governments and consumers.

    The exact same thing happened in America and Europe in the 1920′s. Germany had to borrow money from the US to keep its economy afloat and pay reparations to England and France. The few payments that were made by the German government to Britain, were in return paid back to us, as Britain owed us money from WW 1. But eventually neither could cope with the compound interest, as none of the countries were able to grow an economy robust enough to pay for the US loans or the other tremendous debts incurred due to WW 1.

    Currently, Greece is the prime example to show the problem. The European community keeps lending Greece money to prop up the government and try and stall a total economic collapse. But Germany has only so much cash to be handed to The problem is, Greece, like Germany before it, does not have an economy capable of supporting the massive amounts of government spending per capita or the ability to pay back the loans, and sooner or later, most certainly sooner, Greece will fall and be officially bankrupt. (I find it ironic that in the 20′s it was Germany that was the crippled country everyone was trying to save… well… except for the French!). The cycle of borrowing, when the economic backbone becomes too dependent on borrowing, is simply not sustainable.

    During the same time periods, in the 1920′s and the 2000′s, the economy here in the US also became too reliant on credit. In the 20′s wealth and business were funded too often by cash derived from the over use of stock market margins to generate funds. In the last decade, too much of the fuel used to prop up the economy were siphoned from Wall Street gimmicks such as derivatives and mortgage backed securities, or, on the consumer side, easy access to credit cards and funds borrowed via home equity or home flipping and the housing bubble. And interest rate were kept way way too low, encouraging even more borrowing.

    Back to the Great Depression. As I said, the New Deal acted as a buffer against worse condition. The work programs at least got many people back to work and generating at least some sort of income to house and feed the families. The economy was growing and probably would have continued to grow if we hadn’t had WW2. But WW2 really helped us, because we limited and rationed various products on the consumer market, which created a pent up demand, and, because there was a decrease in the amount of products consumers were able to purchase, you saw a great increase in personal savings. When the war ended, the economy shifted back to a civilian based economy. Add to the mix all the infrastructure improvements and great expansion of the nations electrical grid that took place via the New Deal, you have a recipe for the great economic expansion that occurred at the end of the 40′s and exploded in the 50′s.

    The thing that discourages me at the moment is that many of the “solutions” offered up to fix the economy are still based on rejiggering the availability of credit to try and get more credit available to business (as if they want more debt) or to somehow restructure mortgages, which, given the lackluster jobs situation, will only prolong the housing mess. If people don’t have jobs, or have inadequate employment to cover their debts, including house payments, these solutions will do nothing but prolong the malaise.

    Wow… i didn’t mean to type this much!

    PS. For more info on the European financial situation in the 1920′s, I can’t recommend “The Lords Of Finance” enough!

  60. DeWitt Payne said

    As far as the Chinese yuan being undervalued compared to the dollar, let’s look at purchasing parity exchange rates as exemplified by the Big Mac Index. As of July 28,2011, a Big Mac cost $4.07 in the US. In China the cost was 14.7 Yuan implying an exchange rate of 3.60. The monetary exchange rate at the time was 6.3873 so the yuan was undervalued by 43.6%. But let’s look at the rest of the world. Other countries that are undervalued by 30% or more are: Egypt, Hong Kong, India, Indonesia, Malaysia, Mexico, Pakistan, The Philippines, Poland, Russia, Saudi Arabia, South Africa, Taiwan and Thailand. Meanwhile currencies that are overvalued by 30% or more include: Brazil, Denmark, the Euro area, Norway (100%), Sweden and Switzerland. So we should subsidize imports from Europe and put tariffs on imports from China and India? I don’t think so!

  61. Genghis said

    Finance is just like ecology, the climate perhaps.

    Businesses and economies have cycles, just like the trees in Yellowstone have definite cycles. And just like managing the forests in Yellowstone, the Fed and the Government have tried to preserve the economy so that no tree or animal is damaged or burned up.

    The result of ‘managing’ Yellowstone’s ecology and aggressively putting out forest fires was a dead and barren landscape devoid of anything except big trees with the inevitable result that a fire burned up everything at once, rather than a number of small fires every year which would have maintained a vibrant ecology.

    Our economy today is very similar to Yellowstone’s just prior to the big fire. We have been working very hard to see that there is no suffering and that no business, stockholder, bank or homeowner fails. I don’t know where the lightening is going to hit, but I know that our economy is going to go up in flames. It is inevitable that everything comes back down to earth.

    There is another possible outcome, the forest or our economy is diseased with a lingering death that lasts for a very long time, a.k. like North Korea.

  62. w.w.wygart said

    Slightly off topic but an appropriate tangent I hope. Henry C K Liu over at the Asia Times On Line has a fascinating 13 part series on the economic effects of low wages – ultimately leading to revolution. Well worth reading in light of current discussions.

    http://www.atimes.com/atimes/Global_Economy/MF10Dj01.html

    Myself, for almost ten years I have been advocating, imposing our federal minimum wage laws on our foreign trade partners to anyone who would listen [no one ever listens] seems like a pretty win win solution to me, level the global playing field a little, improve the lives of the exploited masses in far away parts of the world and do SOMETHING to end the madness of this cross-border low wage arbitrage situation we have going on between the developed and developing world.

    How would it work? don’t know, don’t have to know, not our responsibility. People are clever, when they start losing their export licenses for a couple of years at a pop, or start having container ships turned around at the Port of Los Angles when we catch them cheating they will quickly find a way – I’m sure it will be pretty expensive for them too. India audits China, China audits Brazil, Japan audits Russia… you get the picture. How can the low wage countries retaliate? force us to pay our workers $1.50 a day? There will be a down side of course, American consumers will have to get used to paying the REAL price of goods again, they’ll probably have to demand better wages to afford it all.

    OR

    sarc/ We could always try the FIFTH WAY OUT of national debt and like the NAZI’s use the body fat of forced laborers, and goods and services plundered from conquered foes to fuel the economy. Now that would be a thesis topic for the budding economist, body fat to GDP conversion ratio. /sarc

    W^3

  63. Kenneth Fritsch said

    “There should be an opportunity for continual improvement of the human condition with greater productivity all the way around, and there is in some cases, but not most others. There is a clear need to shift the human work paradigm, and I do not know exactly where to. Do you have any suggestions on this?”

    The human condition has improved all around with greater productivity, not just in some cases. If there needs to be a shift in the human work paradigm, the free exchange of ideas and free markets are the best approaches. It will not come from some politicians attempting to protect their constituents from change nor will it come from some ivory tower types who think they have a grand idea that should be imposed on the public.

  64. Brian H said

    I think the “Broken Window Fallacy” is mis-named. It should be the “Break a Window Fallacy”. It refers to doing deliberate damage so that someone can be hired to fix it.

    E.g.: raise the minimum wage, put lots of low-income earners out of work, hire lotsa social workers to tend to them!

  65. w.w.wygart said

    Brian,

    You said, “E.g.: raise the minimum wage, put lots of low-income earners out of work, hire lotsa social workers to tend to them!”

    I used to say the same thing, but as I would like to point out, and Mr. Liu will confirm, low-wage earners can’t buy anything or pay taxes, and that income disparity inevitably leads to over capacity in the economy with all of its resultant problems.

    A real problem we face is how to raise wages generally and globally so that people at the lower end can contribute meaningfully to the economy, other than as a source of body fat to burn.

    W^3

  66. Jeff Id said

    I’m sorry that I can’t write any new posts right now. My workload keeps going up.

    I’m not sure minimum wage has a lot of effect on business now. There are some groups that it effects. Were it to be raised another $1 in Illinois to 9.25, it would cause problems for a lot of businesses though. People who want to make more, need to get some marketable skills.

  67. Mark T said

    low-wage earners can’t buy anything or pay taxes, and that income disparity inevitably leads to over capacity in the economy with all of its resultant problems.

    Most minimum wage earners don’t need to buy a whole lot. They’re still living with their parents, probably in high school or college just trying to get some extra cash to fund their social lives.

    A real problem we face is how to raise wages generally and globally so that people at the lower end can contribute meaningfully to the economy, other than as a source of body fat to burn.

    The only way this can happen is if they choose to learn a skill that can contribute meaningfully to the economy. Higher wages come with higher demand. A job that a monkey can do does not earn a high wage because there are a lot of monkeys, and far fewer jobs that require monkeys.

    It is interesting to see the socialist mindset at work. They complain that those of us that see things through “capitalist” eyes (really, just the free market) are greedy. However, on the same hand they discuss “income disparity” griping about how little the low-income has. They need more, nay, they deserve more, such people tell us. People like me only want the things we have earned. Indeed, one of these two positions is based on greed… I’ll leave it to readers to figure out which.

    Mark

  68. w.w.wygart said

    Mr Weinstein,

    I’ve enjoyed your post and the subsequent discussion.

    Thinking about the problem over-night I noticed a FOURTH MAJOR FACTOR that lead to the end of the Great Depression that I think has been overlooked in this discussion so far and maybe even generally, which is the MASSIVE TECHNOLOGY TRANSFER from the military-government complex to civilian industry immediately after the war, where people serving in our military or civilian labs took what they had learned and developed in many new technologies during the war and almost immediately started turning that knowledge to civilian commercial use by founding new businesses – no non-competition agreements apparently.

    Having spent time in the pro-audio world the example of Emmanuel [Bert] Berlant comes to mind, [who the cognoscenti will remember from his Concertone series of magnetic tape recorders]. Berlant worked in the U.S. Signal Corps Photo Center in Astoria, New York, during the war, but moved to Los Angeles in 1946 where he and several former associates of the Signal Corps Center founded Berlant Associates, Inc., which designed, manufactured, and distributed high-fidelity home music systems – a new industry.

    And, he was not alone.

    Yes, GE and RCA were deeply involved too, but it is my contention that there was an enormous burst of entrepreneurism immediately after the war – within months – that should not be underestimated. These were smart, capable people, who had been thinking about “What will I do after the war” the whole duration of the war, and the can do attitude of these people, when flushed with the victory over the Axis enemy. On the other hand most of the rest of the world was asking, “How can I SURVIVE to the end of the war”, a completely different mind-set.

    Yes, yes, yes there was Shockley leaving Bell Labs, which lead to Shockley Semiconductors, then Fairchild Semiconductors which spawned dozens of new enterprises eventually creating what we call silicone valley, but that wasn’t until the late ’50′s and 60′s. What I am talking happened within MONTHS of the end of the war. There was an enormous wave of people who either came home from war, or left government war work who immediately set up shop and went into business and nobody stopped them – possibly for the last time in US history.

    So, I will now introduce a new term to economic theory, PENT UP ENTREPENEURISM, to explain the dramatic way from which the civilain United States Economy leaped its way out of depression and war-time command economy in 1946. I am no economist, but I think my statement [if it is actually new] more accurately describes what actually happened to transform our economy over [365] night[s] than any other single factor.

    W^3

  69. bob said

    Good article. I agree with the author, and would only add (from what I understand) that the Federal Government reduced taxes after WWII. That came at a good time, and encouraged the recovery.Today’s recession is different, and as the author suggests, is the child of recurring business cycles. There is a way out, and that is to do things that help business conduct business.

    One of the few good things going on in the Presidential Primaries is the almost universal chorus for simplifying the US tax system. It’s about time, and this action will go a long way to put the US back into a competitive position in the world.

    We also need to remove the fetters from the energy industry, and stop deceiving ourselves that there is some sort of magic with clean energy. There is no realistic, competitive industry that can be fueled from alternative energy sources. We should view energy sources as being more or less efficient, and let the market decide.

  70. Kenneth Fritsch said

    “A real problem we face is how to raise wages generally and globally so that people at the lower end can contribute meaningfully to the economy, other than as a source of body fat to burn.”

    This whole argument about raising the minimum wage is rather ridiculous even though statist type economists appear to want to make a case for minimum wages. Raising minimum wages with all other effects equal will result in fewer jobs because employers are not going to hire people in order to lose money or make less money in order to pay these commanded wages. This aspect of the minimum wage is seen more easily if one considers the effects of raising that wage to $20 or $30 dollars per hour.

    I also see another aspect of some of these suggestions here talking about strategies to raise government revenue and changing the tax code. I say these arguments are misguided because the real issue is that government spends and taxes too much and that finding more “efficient” and “fairer” only encourages government spending and never addresses the real issue of overspending.

    A good example of this misguided thinking is that raising the moneys collected for Social Security and Medicare will somehow lessen future burdens on the systems when in actuality those funds will allow the government to spend more and do what they currently do in putting IOUs into a “trust” fund. The effect is more government spending and a bigger pile of IOUs that the government will eventually have to pay or decide to renege on.

  71. [...] The thinking behind this post began as a comment over at Jeff Id’s blog The Air Vent within a guest-post by Mr. Leonard Weinstein on the relevance of the factors that allowed the United States civilian [...]

  72. M. Simon said

    Scott B,

    Buy low. Sell high. Governments that interfere with that impede development.

    Because buy high sell higher under government protection is not a viable model for an economy. It may work well for the connected though. And the capitalists you rail about are all running under various government protections. And you in effect want to give them more. i.e. your proposed actions entrench the government more.

  73. M. Simon said

    What concerns me most is the fact that nothing seems to be in the wings to help us generate domestic wealth in a way that employs large numbers of people.

    Secular decline.

    What will reverse that is already in train. It is just not obvious to most of us.

  74. M. Simon said

    Thinking about the problem over-night I noticed a FOURTH MAJOR FACTOR that lead to the end of the Great Depression that I think has been overlooked in this discussion so far and maybe even generally, which is the MASSIVE TECHNOLOGY TRANSFER from the military-government complex to civilian industry immediately after the war.

    You could buy surplus 1625 transmitter tubes (12 V version of the 807) for 25 cents a pop (very cheap) as late as the early 60s.

    Of course as you point out the real wealth generator was the transfer of knowledge from military to civilian uses.

  75. M. Simon said

    eventually creating what we call silicone valley

    I believe that is actually a bit to the south and east of the place you were thinking of.

  76. RB said

    The Senate is the Republicans’ to lose. If there wasn’t also then a super-majority for Republicans, it would be a historic election. It will be interesting in that event to see how the blogoscenti react to continued government spending. I’d imagine that getting rid of defense cuts will make it palatable for the right, by and large.

  77. “A real problem we face is how to raise wages generally and globally so that people at the lower end can contribute meaningfully to the economy, other than as a source of body fat to burn.”

    I used to fight this idea, but I’ve come around. The trick is to reduce government induced cost to business. This includes corporate taxes, rescinding some of the more onerous regulation, and, here is the most controversial, get business out of the health care business period. For all it’s flaws, we will sooner or later, end up switching to a socialized style health care system. The question becomes, do we do in the near term, or do we wait until the entire system crashes before we address the problem. Again, I’m not FOR socialized medicine per-se, I just see, looking down the road as insurance and treatment becomes more and more out of reach, partially due to stagnant wages of the middle class, it is inevitable.

  78. w.w.wygart said

    M. Simon @ no.75

    Precisely my point, I used the example of Bert Berlant for that very reason, it was the knowledge transfer that was significant. Practical experience was another, as Steve Short @ no.4 pointed out so eloquently.

    [And yes that wild left middle finger does occasionally reach for the terminal 'e' without conscious intervention]

  79. RB said

    A lot of complex and even uncertain rules, high taxes, and the like are all negative factors to business growth.

    This guy has to be wrong but single-variable analysis apparently doesn’t hold up in practice .

  80. w.w.wygart said

    Kenneth Fritsch @ no.71. I was not making a minimum wage argument, at least in general terms.

    I did make that somewhat fanciful suggestion that we flow down our minimum wage laws [if we are going to have them at all] to our import trade partners as a way to level the playing field and reduce the cross-border wage arbitrage situation that is proving the situation for very, very, few people – at everyone else’s expense. Which I think may be an even more serious problem than the domestic low wage problem.

    As Mr. Liu says regarding low wages,

    “The most egregious deficiency of financial markets, and the most ignored, is its structural tendency to depress wages as the necessary condition for generating high return on capital. This tendency naturally prevents adequate consumer demand, which leads to excess productive capacity, which in turn causes nations to seek new markets through export. Lenin’s theory of imperialism being the final stage of capitalism is based on the failure of capitalistic markets to raise wages along with rising productive capacity.”

    I’m not sure what the solution is to the problem, and I don’t think minimum wages are a complete solution. Setting some kind of floor on how little you can pay someone seems like some kind minimum gesture, but that does obviously create problems of its own as well.

    W^3

  81. w.w.wygart said

    Mark T @ no.68

    You said,

    “Most minimum wage earners don’t need to buy a whole lot. They’re still living with their parents, probably in high school or college just trying to get some extra cash to fund their social lives.”

    You didn’t seem to understand what I was saying at all, maybe you could explain where what I said was wrong. The point I have been trying to make, and the reason why I included the link to Henry Liu’s essays, is that depressed wages have a large and detrimental impact on the economy as a whole for structural reasons. Maybe you should consider reading the articles to understand why. I found them to be very informative.

    http://www.atimes.com/atimes/Global_Economy/MF10Dj01.html

    However, as long as people like you can rationalize other people’s poverty, “because they don’t NEED to buy a whole lot,” we will ALL continue to suffer those negative impacts to our economy. Poverty is a drag on the capitalist economy, even as shortages are a drag on the economy.

    If you are poor you cannot afford to get the training for a skill that can contribute meaningfully to the economy, unless someone else pays for it. I have not proposed any big government-tax-and-spend solutions to the problem, all I have said is that it will benefit all if wages rise generally so that people can take care of themselves, get an education and make something of their lives, but if some people decide that the people they hire, “don’t need to buy a whole lot,” like an education, like healthcare, like nutritious food, the situation will never change.

    Running a successful business is really, really hard, most why try fail at it, and I applaud those who succeed, you are doing the work of making our economy an economy; however if as a business owner you are deciding that you are going to treat your employees like an expense to be minimized to the point where you are paying a wage that you know to be at the poverty level in order for you to take the cut you feel you deserve first, that’s not a business problem – that’s an ethical problem.

    What I was saying isn’t “the socialist mindset at work” unless you call caring about how to get your fellow citizens out poverty “socialist” – I don’t I call it human.

  82. w.w.wygart said

    Michael J. Alexander @ no.78

    I agree wholeheartedly with you about almost everything you suggest, I would even add that we should get business out of the retirement business as well [is that socialist??]. However, you do seem to be conceding my point to me when you suggest that socialized medicine is inevitable due to “stagnant wages of the middle class”. My main point is, and has been that people cannot afford to take care of themselves and the economy as a whole suffers when wages are depressed.

    I don’t know what the complete solution is, but I prefer one that does not involve guillotines or rough hewn wooden stakes. Poverty is a drag on the economy, shortages are a drag on the economy, revolutions are even worse – [I'm thinking back to reading, "We the Living" in HS]

    W^3

  83. Leonard

    You crudely pretended to miss that was my father not my grandfather. I am 63 i.e. not much younger than yourself. Who cares if you worked for the government for 40 year or 45 years? It still means you spent most of you working life (i.e. NASA from its golden days onwards) enjoying the career fruits of a big spending government.

    To my interpretation, that still makes what you write basically a treatise in hypocrisy.

    And Leonard, when you say:

    “Please tell me what you have done useful”; how about these?

    Many years ago I jointly invented an isotopic technique for ageing fish, via their otoliths, which is now used in every major fisheries laboratory in the world. Accurate measure of a fish’s age in relation to it’s anatomical level of sexual maturity is the critical key to sustainable managing the world’s major commercial fish stocks.

    Backed by a small venture capital company I have recently took out an international patent on a simple new hydrometallurgical process I have invented, enabling lignite fly ash to be used as an ultra cheap feedstock for the economic pyrometallurgical manufacture of magnesium. In a world where China makes 90% of the world’s magnesium (from high purity dolomite) and magnesium is thus a high ranking strategic metal, this enables the USA, Germany, Poland, Australia etc., etc., to break that stranglehold using little more than the many millions of tonnes of dumped lignite fly ash from well over 100 years of coal-based power production. Germany’s biggest engineering contractor RWE just purchased the Euro rights to exploit my process.

    Good enough? PS: These achievements were not funded by a lifetime of sucking at a government tit, either.

  84. Leonard Weinstein said

    Steve Short,
    Sorry for the mixup on my part confusing your father and grandfather. It was a simple mistake not deliberate. I still do not understand your anger. I did not make the world I was born in or lived in. I think NASA was a grand idea, although I disagreed with many of its directions. I developed most of the ideas leading to inventions on my own time, not NASA’s. I gave many (but not all) to NASA since I did not have funds to pursue them, and unfortunately, NASA made little effort to carry the ideas very far. Those who are “sucking at a government tit” include most university professors, and much of industry, even if they are indirect rather than direct employees. You appear to be against the government, which seems strange since you love Roosevelt and what he did.

  85. Leonard Weinstein said

    Steve Short ,
    Pray tell what is hypocritical about my post. I was just explaining why current stimulus spending would not do the same as spending before and during WW2, and those are the facts.

  86. RB said

    Since when did making up a “this time is different” story be called a fact?

  87. w.w.wygart said

    Mr. Short,

    I do not understand where this acrimony you are directing at Mr. Weinstein is coming from. Your misplaced motives on Mr. Weinstein speak very poorly of you despite your accomplishments.

    W^3

  88. Leonard

    My problem with your thesis is that it tends to re-write history in one important respect. It pretends that the massive tooling up and expenditure that occurred before and during in WWII in the USA occurred more or less reactively rather than proactively.

    It seems to me that your reading and word-of-mouth knowledge of what happened is very selective and casst unfair aspersions on the role of government(s) – in particular the US governments of the time.

    It is a big, highly complex subject but what actually happened, relevant to your thesis, in dot points is this:

    Hitler and the Nazis created a remarkable level of preparation and expenditure prior to, and following 1939 by basically trashing the conventional banking/finance structure of Germany (crippled as it was by the aftereffects of Weimar). That process also contained within sits self some the rationale for the Holocaust too. It was not Keynesianism but a uniquely German variant that, at least for a tragic windo in time time was very effective. But the point is, it was government driven.

    Both Britain and France were ill-prepared for the German onslaught simply because their economies had not have a significant level of government intervention in the means of productioon – they were older style laissez faire economies and they were in very bad shape too (i.e. still in Depression). Parts of my family lived in the East End of London (where we all came from) so we have a very accurate oral history of the period between WWI and WWII.

    The USA was very lucky in the sense that it came into WWI several years later. However what is being conveneient forgotten here that, after the commencement of the European/Mediterranean/North African theatres of the WWII, FDR and the Democrats were very proactive in cranking up the US ecoennomy,. Indeed Detroit itself was already increasing production at a fast rate – in part to supply the Nazis! There were massive (private enterprise) sales of US arms and materiel into Nazi Europe. However, lets not forget Lend Lease, FDR’s means of supporting Britain, FRance, the USSR and China. That was de facto in operation even well before it was signed into official status on March 14, 1941. Even Wikipedia knows that! So, long before Pearl Harbour, my Dad was brought back by the US Army from a very pleasant sojourn in New Zealand (where he later met his 2nd wife and fathered me and my sister post-WWII). He simply shuttled between LA and Detroit/Pittsburgh setting up chains of command/liason and physical materiel flow associated with the Lend Lease program (being a skilled ‘Limey-Yank’ if you will) but which later swung into even greater production for the Pacific War against the Japanese. This is why I have some unusual ‘special knowledge’ of those times.

    I would suggest you conduct much more detailed research into what did actually happen economically and politically in the 30s to early 40s in Europe and the USA. You could (a) get some big surprises, and (b) might then acknowledge that you are, at least partly, rewriting the history and underlying theory of what actually happened.

    This is my point. I strongly apologise for any personal offence given.

  89. Start here:

    http://en.wikipedia.org/wiki/Cash_and_carry_%28World_War_II%29

    and here:

    http://en.wikipedia.org/wiki/Lend-Lease#Historical_background

  90. Kenneth Fritsch said

    “Since when did making up a “this time is different” story be called a fact?”

    I think after a more thorough discussion of the facts, we will probably find that it is not different with regards to the Keynesian economics that will fail us once again – but that the Keynesians will be able to re-interpret the facts to live another day. The latest mantra that appears to working well for them is that it would have been much worse without the Keynesians interventions.

    I suspect LW was merely interpreting the motivations and circumstances as being different, and, of course, it is rather obvious that there are differences. What is common to both in my view is the Keynesian approach and of which the war effort was very much a part.

  91. Mark T said

    You didn’t seem to understand what I was saying at all, maybe you could explain where what I said was wrong.

    I completely understood you. You don’t understand the problem with your own comments. I explained what was wrong with your comments in that very post. I’ll reiterate below.

    The point I have been trying to make, and the reason why I included the link to Henry Liu’s essays, is that depressed wages have a large and detrimental impact on the economy as a whole for structural reasons.

    Which is, as I noted, incorrect. There are no “depressed wages” in the first place. If anything, they are inflated due to government tinkering. Wages should be determined by demand. If any monkey can do the job, you can’t expect the job to pay well. Period. Attempts to bring such wages up cause more harm than good. The same old shtick from Keynesians and socialists – an inability to see beyond the meager good that may result from their policies (certainly those that got a raise see some small benefit), not unlike the broken window fallacy, to the heavy cost that comes with such policies.

    Kenneth did a pretty good job of pointing out many of these costs. His idea that raising the minimum wage to $20 or $30 an hour will make it obvious hits the nail on the head. The only way you can bring up lower wages is to depress higher wages. When everybody makes $20 an hour or more, everything will cost more, out currency will be worth less. It’s like a balloon – when you push on one side, it has to expand on the other.

    Maybe you should consider reading the articles to understand why. I found them to be very informative.

    Why? I’m glad you found those articles informative, but that has nothing to do with my assertion regarding your comments.

    While I certainly understand your pain regarding poverty, and I don’t disagree that it is unfortunate, the simple truth is that it is an unavoidable consequence of ALL economic systems. Capitalism simply results in the lowest level of poverty of all the possible systems, and, at the very least, it provies an opportunity for those below the level to rise above it. Other systems do not.

    Anything else requires altruism from everybody, which is not possible with free will. Indeed, it is due to this fact that government force, the threat of imprisonment or worse, is required to implement any other system. That fact alone should make any rational person wonder how great such systems really are.

    Mark

  92. Jeff Id said

    it provies an opportunity for those below the level to rise above it

    Exactly my thoughts. Even in Eurosocialism, the process of rising up is nearly impossible. Interestingly, once you are at the top of a pile i.e. buffet, the government/system can be manipulated to keep you there. Socialism seems better for that than true capitalism.

  93. DeWitt Payne said

    Re: Mark T (Oct 28 13:48),

    I think you can make a good case that before the labor reforms of the early twentieth century, wages were depressed. Henry Ford, for example, was a visionary in his wage policies. But no one can afford to pay people more than they produce. I read a story once many years ago where a local economy was destroyed by someone who spread a lot of money around without increasing production. What ensued was runaway inflation. See also the example of the Weimar Republic in post WWI Germany.

  94. Kenneth Fritsch said

    “Interestingly, once you are at the top of a pile i.e. buffet, the government/system can be manipulated to keep you there. Socialism seems better for that than true capitalism.”

    Jeff, that is a contradiction as the government/system that is least likely to, at least artificially, to keep someone at the top would be under true capitalism, since in true capitalism, the government would have little power and say in these matters. A socialist government can keep rulers and their toadies at the top for a long, long time, e.g. Stalin and Mao. A true capitalistic system would not be bailing out large corporations or providing subsidies to favored corporations and industries.

    I do not like Warren Buffett’s politics, but I do not begrudge him his wealth. He easily could have made a series of bad decisions along the way that would have allowed the creative destruction of capitalism to take its toll. I am not at all sure how Buffett has profited by “manipulating” the system other than having a wad of money at his disposal for making leveraged investments. He plans to give it all away when he dies.

  95. Kenneth Fritsch said

    I hope we understand that inflation (of the money supply and eventually the raising of the general price level) is not caused by high wages, but rather that inflation can cause higher wages that can have the same or lower purchasing power as before the inflation took effect. If wages were raised by fiat with everything else being equal I would judge that unemployment would increase and standards of living would decrease. Sticky wages can lead to recessions and depressions.

    Actually part of the Keynesian strategy of inflating the money supply and prices is that labor will not realize, or realize quickly enough, that the real buying power of their wages has decreased and they have in reality been given a decrease in wages. Keynesians thought this was an easier way around the sticky wage issue and the power of unions. Of course, people now are very much aware of cost of living contracts.

  96. DeWitt Payne said

    Re: Kenneth Fritsch (Oct 28 17:41),

    He plans to give it all away when he dies.

    But, of course, as little as possible to the government in the form of estate taxes. Which makes his support of the estate tax the height of hypocrisy.

  97. A bit OT I know, but many years ago I met an elderly German who had been a quartermaster of stores in the Africa Korps in Northern Africa. He asserted that almost all the vehicles, armaments and assorted materiel required to pursue Germany’s war against Montgomery’s Allied forces forces in North Africa were offloaded from ships ‘crossing the Atlantic from the west’ – all neatly crated and packed with the letters OK (Otto Krueger) stamped on the side.

    Noting the endless and largely silly debate in the US about Keynesianism (reflected in this blog) which has intensified as the US declines towards a possibly terminal future, I suggest it might be useful to study why and how the German and Japanese economies posed such an ‘instant’ threat to the democracies of Western Europe and the US just before and during WWII.

    Articles like:

    http://en.wikipedia.org/wiki/Economy_of_Nazi_Germany

    help (a bit).

    Notice that the reference to the German subsidiary Fordwerke has now been expunged from Wikipedia. Yes folks, revisionism is yet another ‘ism’ which is very alive and well in the modern America at the same time as we explore how many little anti- or pro-Keynesians can balance on the head of pin.

    My point?

    The Germans and Japanese clearly showed there are many ways in which a government can affect the means and volume of production and the power of an economy. The Keynesian approach is just one. This is why the debate about the US economy and national direction at this time is so narrow and one-eyed and how diversions like decrying the talent and effect or otherwise of the WWII Democratic government and of ‘that man’ are so pathetic.

    Hey, I have an ‘ism’! Why don’t we simply confiscate the wealth of the only approximately 2 million East Coast mega-rich who own 90% of America and then distribute it amongst the other 309 million according to some ‘democratic criterion’. After all, the 2 million already demonstrably have in place their own offshore tax havens and/or little pet state to escape- to.

  98. Kenneth Fritsch said

    Steve Short, thanks for giving us all here a take on how a truly pragmatic and statist approach should be applied to these problems: Whatever appears to work in the short run and damn any ethics and concerns with individual freedoms. I’d call it more a gang warfare than a class warfare approach. Interesting that you use the Nazi Germany and Japanese war efforts as “good” examples of what “works”.

    Then I see “2 million East Coast mega-rich who own 90% of America” and decide I wasted my time with a reply that might require a reasoanable person at the other end.

  99. Jeff Id said

    Kenneth,

    “Jeff, that is a contradiction as the government/system that is least likely to, at least artificially, to keep someone at the top would be under true capitalism, since in true capitalism, the government would have little power and say in these matters. ”

    There is no contradiction, in the capitalist case it is live and let die, in the socialist one, it is prop up the powerful. Unfortunately we currently have a mash of both where the politicians react at the beck and call of the wealthy.

  100. RB said

    Kenneth,
    LW’s description of the differences was lacking in the significant commonalities understood by someone like Jan Hatzius, though intelligentsia gets short shrift in the blogosphere despite a not very informed application of standard economic terms such as deficits. Pat made an important point in comment #7, though likely not in the resolution. To each his own ..

  101. RB said

    Jeff, if you wouldn’t mind – that was me up there ..

  102. Kenneth

    I think you misunderstand me. I am certainly not advocating the German and Japanese approach. I was merely making the point that, given the rapidly emerging threats and aggressions of pre-WWII Germany and Japan, the US under FDR had really no option but to adopt with all due urgency a highly stimulist approach which as Leonard pointed out worked well – although we differ on the timing and underlying theory at the time, and Leonard was generally unaware of the directions/timing of the ‘Cash and Carry’ and ‘Lend-Lease’ programs.

    I haven’t researched the Japanese system of the time but if you actually research how the Nazis ‘reformed’ their economy and got the major companies on their side in terms of rate of production you will find that they created new and quite innovative forms of finance and banking which, of themselves, were not actually particularly coercive. At least in the 1930 – 1940 part of the Third Reich, there was quite a strong consensus amongst the German technological elite that Hitler was ‘saving’ Germany from the nightmare that had been the Weimar Republic. The German general public also went along with that due to the massive job creation and monetary stabilization which resulted. Only towards the end (1940 – 1945) did the runaway German war engine require a massive level of slave labor and the Nazi’s ideological excesses enter the realms of madness.

    It is not commonly known that in the early 1930s Hitler was even negotiating with a prominent and well-known right wing Russian Zionist leader to ‘trade’ the complicity of some Jewish bankers and use of a Jewish brigade in exchange for a guarantee of a Jewish state in Palestine through seizure from the British.

    And as for the 2 million East Coast mega-rich I was being facetious and joking.

    However, I did that to make the point that the taxation of the rich and of major corporations declined drastically under Reagan, Clinton and the two Bushes – to the detriment of the USA as an effective and healthy democracy. I find it deeply ironic that the silver-tongued child Obama can see no irony in playing golf with the head of GE or appointing that person to a major economic task force when GE pays no US tax at all, conducts most its financial affairs out of the Cayman Islands and actually has the gall to claim tax credits inside the US!!! In my view it is the combination of:

    excessive military expenditure off shore (post Cold War);

    a massive reduction in the corporate and individual tax base (including rampant tax fraud and the rise off numerous off shore tax havens) while globalization of labor and the skill base was also strongly underway ;

    abandonment of the gold standard and repeal of Glass-Steagall; and

    generally incompetent social governance in the context of an ageing population,

    which has dragged America down to where it stands today.

    Basically I agree 100% with Jeff:

    “There is no contradiction, in the capitalist case it is live and let die, in the socialist one, it is prop up the powerful. Unfortunately we currently have a mash of both where the politicians react at the beck and call of the wealthy.”

  103. Kenneth Fritsch said

    “At least in the 1930 – 1940 part of the Third Reich, there was quite a strong consensus amongst the German technological elite that Hitler was ‘saving’ Germany from the nightmare that had been the Weimar Republic. The German general public also went along with that due to the massive job creation and monetary stabilization which resulted. Only towards the end (1940 – 1945) did the runaway German war engine require a massive level of slave labor and the Nazi’s ideological excesses enter the realms of madness.”

    That Germans and even intellectuals around the world could defend a statist approach like Germany’s is not in dispute. Even historians can find bits they like about most statist approaches. For a time many intellectuals in the US defended the Communist experiments in Russia and China. In fact a leading Keynesian economist, Paul Samuelson, predicted that the USSR would soon pass the US in GDP or some other economic measure – and not that long before its collapse. Keynes pushed his “new” economic system with fascists regimes, like in Germany, and said that Keynesianism would be easier applied under a command economy like fascism.

    FDR was a hero of the intellectual left and remains one with historians.

    It is interesting that these defenses of statist regimes always seem to have to be qualified as you did with the Nazi regime in what you euphemistically called ideological excesses. When intellectuals begin realizing that these bad endings for statist regimes were not due to some anomaly but originates within the system itself, we might progress past that philosophy.

  104. Hmmm…..’statist’ regimes eh?

    No doubt ethnically, sectarian and/or commercially dominated; pursuing exclusivist state policies which disadvantage internaL minorities or (ahem) ‘neighbors’ like say Singapore, Malaysia, Dubai, Syria…….Israel…….

    Yes, you are dead right, they certainly are prone to what we might euphemistically ideological excesses aren’t they?

    I guess it is quite clear that when ‘intellectuals begin realising that’ these too will fall away, no doubt?

  105. Kenneth Fritsch said

    “No doubt ethnically, sectarian and/or commercially dominated; pursuing exclusivist state policies which disadvantage internaL minorities or (ahem) ‘neighbors’ like say Singapore, Malaysia, Dubai, Syria…….Israel……. ”

    When we consider statist regimes we must go to the smallest minority which is the individual. Recognize individual rights and minority issues are taken care of. As a libertarian I can see denial of those individual rights at same level in all nations of the world including the US. My problem with many intellectuals is that they do not even see it at the level of a statist regime like represented by the USSR and China. They are too good at excusing the most extreme consequences of statist regimes with phrases like ideological excesses – although I must say that most would not use that phrase as you did to describe Nazi atrocities.

  106. It’s times like this I wish Hunter S. Thompson were back on the beat. He never wrote about money. But his political journalism was revolutionary and spot on. His book, Fear and Loathing on the Campaign Trail ’72 is legendary.

    He sniffed Richard Nixon out as a ‘greedy little hustler’ years before Nixon was forced to resign the presidency due to the Watergate scandal. He saw through the spin and got to the heart of politics – its corruption – better than anyone.

    We are still paying, via Nixon’s dumping of the gold standard for the fact he was just a ‘greedy little hustler’. Nearly every president since has been of the same ilk.

    What would Hunter say about the Eurozone’s current implosion at the hands of their politicians? At best he’d call them swine. Or devious little rats jumping on and off barely floating ships (of state).

    The latest news from Europe, which will change tomorrow so don’t get comfy with it, is the Greek referendum is now off. The market liked it.

    They also liked the fact that new European Central Bank (ECB) boss Mario Draghi cut interest rates by 25 basis points to 1.25 per cent. But they didn’t like that he was reticent about using the ECB’s printing press to buy up the debt of bankrupt sovereigns. For the record, the rate cut will be just about useless.

    Back to the referendum, or lack of it. Sorry Greek people. You were going to be consulted on your and your children’s economic fate but that consultation risks the fate of politicians. And guess what? Politicians are far more important than you.

    Sarkozy and Merkel were livid with Greek PM George Papandreou for having the hide to see whether his people wanted to stay in the Eurozone or not – and put up with a prolonged depression to do so. They immediately went on the offensive. Sarkozy threatened that Greece would not get ‘a single cent more’ should the people vote no. Talk about debt servitude.

    For Sarkozy it was about ‘obeying the rules’. Greece wasn’t playing nicely. No one seems to be pointing out that France ignored many of the rules of EU membership too, which is why its AAA sovereign credit rating hangs in the balance. But hypocrisy and politics go hand in hand.

    This is all about political survival and to hell with everyone else. If Greece exits the Eurozone on its own terms, it will very likely start a domino effect that will lead to the disintegration of the whole euro project.

    Why else is Greece getting so much attention? Ordinarily European politicians wouldn’t give two hoots about Greece. They would happily let it go to the dogs if its exit from their club didn’t threaten their own political ambitions.

    The tragedy in all this is the Greek people remain at the bottom rung of the ladder…as all the crap from the political animals scrambling for power above them falls on their heads.

    Amid the daily changing headlines, all you need to do is keep this in mind – sacrificing society to bailout bankers and hedge fund hustlers will not work in the long run.

    Anywhere!

    The Eurozone is a dysfunctional state. Many of its members are trapped in a gold standard regime, having ignored all the rules of a gold standard in the lead-up!

    These austerity experiments have never before been tried. The closest we came was in the Great Depression. Back then, ignoring the rules of the gold standard while the debt bubble grew ended in the gold standard’s eventual demise.

    The same will happen with the Eurozone. The people calling the shots are fools, hypocrites and, as Hunter S. Thompson would rightly say, swine. They’re trying desperately to keep a badly designed construct together for their own political purposes. Nature, eventually, will tear it down.

    What does this mean for you and me? More volatility.

    Today, the market is up nearly 100 points (at the time of writing). Who would have thought Greek politics could have such an influence on the market?

    But such volatility is not a sign of strength – it’s a sign of extreme fragility. For traders, this is a time for stomach ulcers and night sweats. If you’re lucky, you might make money.

    For investors, it’s a time to ignore all the noise and focus on the big picture. In a world of sound monetary policy – which we don’t have – prices give off reliable signals. In a world of crazy fiat money systems controlled by increasingly desperate central bankers, prices tell lies. Today’s big rally (assuming it holds) tells you no more than the sell-off earlier this week. It only communicates confusion.

    The big picture is this: The world’s monetary system is buckling under the pressure of excessive debt. Attempts to prop it up create even more debt, market distortions and disincentives to create wealth.

    The capitalist system is being twisted beyond all recognition. Consumption is preferred to saving, speculation preferred to investment. Under this scenario, wealth preservation takes precedence over wealth creation.

    In today’s sleazy world, run by those whose genes apparently designed-in a psycho- and sociopathic greed, even Karl Marx is seen as one of the few who were sane.

    Guard what you have! Look for safe havens – if not for yourself at least for your kids!

  107. YOUR CSR DEVELOPMENT PARTNER…

    [...]Why WWII Got Us Out Of The Great Depression, and Why Present Government Spending Would Not Do The Same « the Air Vent[...]…

  108. Two decades after the disintegration of the USSR, Russia is now starting to influence the course of European events in a way not seen since the days of the powerful Tsars centuries ago.

    And China is becoming the most powerful global force some three decades after the Cultural Revolution. Both Russia and China are filling the gap left by the declining American financial muscle, but are using economic power in the way leaders of former rising empires used military might.

    Europe is desperate for cash according to Stratfor and Russians are seeking to buy assets all across Europe, with emphasis on Central European countries like the Czech Republic, Poland, Italy and even Greece.

    The Russians want to snap up assets at low prices that will give them strategic power, so they are looking for energy groups, banks, credit unions, airports and ports. In Greece, they want to buy the state energy firms and perhaps Athens International Airport.

    Stratfor says Russia is very interested in buying stakes in strategic banks in Austria, Hungary, Poland, Turkey and the Netherlands. The banks in Central Europe are significant because bank lending in the region accounts for more than 90 per cent of credit.

    Since most Central Europeans already depend on banks for the bulk of their lending, Russia and Russian capital will be able to influence the distribution of this lending. After the fall of the Soviet Union, there were not really any healthy banks in the region, so the Western Europeans bought them up. Now those European banks are failing and Russia wants to take control.

    With the power of cash comes influence but expect more European community protests as people grasp the significance of the asset sales to Russia. Countries like Ukraine, which had hoped to become part of Western Europe, now do not want to annoy the might of the new Russian bear.

    Russian President Medvedev will visit four European capitals this month. Last week, after the G20, he talked with President Sarkozy in France. This week he will be in Germany to launch the Nord Stream natural gas pipeline that directly connects Germany and Russia. Later in the month he will visit Rome and Athens.

    The Chinese have been more tentative in buying European assets and have been looking at helping Europe by buying bonds. Unlike the Russians, the Chinese are tentative and it is as though the Chinese see Europe as the Russian sphere of influence. However, both Russia and China are looking for technology assets in Europe.

    How could it have happened that the Western capitalistic systems, which had looked to be superior when the communist systems failed, should be overtaken by the cash generated by the Russian and Chinese systems that evolved from those two communist empires?

    There are many reasons. Russia has been boosted by European markets for its gas and energy. The US allowed its manufacturing and, as a result, its technology might, to be shifted to China. But it is much more than that. For example, Western societies spent beyond their means and ran up huge deficits. The US fought two wars.

    However, in my view the biggest reason for Western decline is what happened in the banking systems. Both the US and Europe were driven by their strong banks which had enormous influence over governments. Those banks were, and are, operated by a tiny minority that doesn’t give a damn about the concept of Western democracy and lives only to benefit themselves and their own community.

    Few realised until it was too late that the US and European banking systems had been captured by boards and executives from that socially cohesive minority, who gambled by seeking high returns irrespective of risk, secure in the knowledge that they already controlled Wall Street, the Fed and Congress and hence could engineer their own bailouts and that they had in place their own tax havens and even a proxy state to flee to if the shit totally hit the fan (which for them it clearly hasn’t).

    They have brought Europe – and the the US – to its knees.

    Those banking executives and boards are still clinging to power, as are their puppets, the politicians. The West is now having great difficulty coping with a new world where Chinese and Russian cash will fill the vacuum created by their decline.

    Think about it.

  109. a.batty said

    America came out of depression due to its industry,where Britain for example was bust,all its money spent on arms etc.
    British industry was geared for armaments and took many years to recover ,never regaining past market share.
    America was poised for expansion,and leaped forward due to its intact infrastructure and was able to rebuild ,with its own goods,much of the broken worlds industry.
    Globalisation has relocated wealth in the East,only the investors have gained[in the short term]future stagnation in the west will bring them down too.

  110. Jeff Id said

    Steve Short

    “How could it have happened that the Western capitalistic systems, which had looked to be superior when the communist systems failed, should be overtaken by the cash generated by the Russian and Chinese systems that evolved from those two communist empires?”

    Both Russia and China operate freer markets than the US and Europe. You probably haven’t been there but capitalism has ruled China’s expansion – nothing else. They call themselves communist but personal ownership of large buildings, corporations, cars etc. has driven the healthy competition which feeds the masses. There are plenty of regulations for sure, but they are not enforced leaving low taxation and easy money for Chinese factories. Currently China is struggling because their top customers have loaded their own capitalist systems down so heavily with regulation and taxation that they cannot compete and therefore cannot consume.

    American business has the highest tax rate in the world.

    Think about that.

  111. Kenneth Fritsch said

    “Few realised until it was too late that the US and European banking systems had been captured by boards and executives from that socially cohesive minority, who gambled by seeking high returns irrespective of risk, secure in the knowledge that they already controlled Wall Street, the Fed and Congress and hence could engineer their own bailouts and that they had in place their own tax havens and even a proxy state to flee to if the shit totally hit the fan (which for them it clearly hasn’t).”

    As the Austrian school of economics have often shown there is and has been a strong link between governments and banking, going back into the early history of the US, that has grown stronger over the years. Banks are controlled by the government and the banks are beholden to Federal Reserve for future successes. Banks are highly regulated by government and government obviously has the controlling hand with regards to interest rates. In order to “fix” the problem the government would have to have much less control of the banking system and that would be the overwhelming recommendation of any Austrian economist.

    Unfortunately the answer with the ruling intelligentsia would be that we need more government control of the banking system because those bankers have too much power – of course, conveniently forgetting that the government is very much the source of that power.

  112. Kenneth Fritsch said

    “Both Russia and China operate freer markets than the US and Europe. You probably haven’t been there but capitalism has ruled China’s expansion – nothing else. They call themselves communist but personal ownership of large buildings, corporations, cars etc. has driven the healthy competition which feeds the masses. There are plenty of regulations for sure, but they are not enforced leaving low taxation and easy money for Chinese factories. Currently China is struggling because their top customers have loaded their own capitalist systems down so heavily with regulation and taxation that they cannot compete and therefore cannot consume.”

    In China a lot of the investment capital is provided by government banks that back enterprises that they favor. Poorly run and unprofitable enterprises can survive by continuous infusions of capital from the government friendly banks. Russia and China both look good in comparison to their former communist regimes, but who would not? I have never heard that Russia is becoming an economic power but rather that that nation remains in the doldrums of bad habits left over from the communist command economy and find it difficult to rid themselves of these habits.
    China is currently growing its economy rapidly, but will eventually have to pay the price of government interference and playing favorites in its economy. It amazes me that people do not see a bubble economy in China just like we had here – and for the same major reason: government involvement with artificial signals for prices, savings and investment. The US has to resort to the Federal Reserve to creating money out of thin air and keeping interest rates low to keep the economy hyped. In the process the real savings rate ignored. Eventually that real rate comes into play and we get a bursting bubble and/or a recession. If at this point the government remained on the sidelines the economy would quickly readjust to the real savings rate and investments.

    The Chinese have a command economy and they do not have to hype their economy with a central bank, although they can and do. They can provide money through the government banks directly. Even in command economies these artificial inducements have to eventually be dealt with. How soon we forgot what happened to the economy in Japan in the 1980s on their way of becoming the largest economy in the world. Paul Samuelson, a Nobel prize winning Keynesian economist had the USSR soon surpassing the US economy. Heck, I’ll bet some people have already forgot that we were all going to get rich in the US by purchasing real estate or just getting a home mortgage to leverage our investment.

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    [...]Why WWII Got Us Out Of The Great Depression, and Why Present Government Spending Would Not Do The Same « the Air Vent[...]…

  114. viana said

    americans have always been so shrewed !!! they pretend saving the humanity while they are thinking about their own benifits !!

  115. Heya i am for the primary time here. I found this board and I find It really helpful & it helped me out a lot. I’m hoping to offer something back and help others such as you aided me.

  116. [...] Perhaps the biggest evidence of this theory not working is with how FDR and the New Deal are perceived by the public today. His policies actually slowed economic progress and recovery, but you’d never know it talking to the average American.  All we hear about is how wonderful the New Deal was, and how FDR put the nation back to work. In actuality, Hitler and Hirohito did more to create American jobs than any liberal policy could have ever hoped to – starting WWII. [...]

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