Thursday, February 12, 2009

1920-21 Was Worse; Obama Ignores History

The left is talking directly past the free-market economists because the left isn't willing to admit those economists have anything to offer.
President Obama's epistemology is the reverse of the average American.

In simple terms, this means he thinks backward from the way most Americans think. Most Americans right now are thinking something like, "We can't depend on business alone to get us out of this mess; the mess is too big. We need some government help. How much help, and where to put it, is the trillion dollar question."

Mr. Obama, on the other hand, does not think that the government is the economic savior of last resort. He thinks it is the first resort.

"It is absolutely true that we can't depend on government alone to create jobs or economic growth," he said Monday in his first press briefing. In other words, he thinks of private enterprise as the back-up to what ever the government thinks it can or ought to do, because "we can't count on government alone." But he would like to; it is the only way to redistribute wealth according to a process that is not free enterprise, which does not "redistribute." It pays wages, instead.

While most people who don't have a full grasp of the power of free enterprise to pull us out of this mess are of the opinion that it takes at least some government help, Obama is saying it is going to take at least some help from private enterprise!

"...the federal government is the only entity left with the resources to jolt our economy back into life," said the President. "It is only government that can break the vicious cycle where lost jobs lead to people spending less money which leads to even more layoffs." [emphasis added]


"Despite its brevity, this depression [of 1920-21] was extraordinarily sharp: the U.S. price level declined by over 40% in a single year (Friedman-Schwartz, 1963), and output and employment likewise fell considerably.

"In one crucial respect, [it] was actually more severe than the Great Depression itself: there was a rapid decline in the price level of between forty and fifty percent within the course of a single year. As Friedman and Schwartz (1963) explain, “From their peak in May [1920], wholesale prices declined moderately for a couple of months, and then collapsed. By June 1921, they had fallen to 56 per cent of their level in May 1920. More than three-quarters of the decline took place in the six months from August 1920 to February 1921. This is, by all odds, the sharpest price decline covered by our money series, either before or since that date and perhaps also in the whole history of the United States.” (1963, pp.232-233.) The wholesale price index during the Great Depression took about three years to fall by the same amount." [emphasis added] The Depression of 1920-21

And from another source:

"Prices began to rise [in 1920], and rumors of a buyers' strike spread. After commodity prices peaked in May, they declined rapidly, precipitating an unprecedented cancelation of orders. Money was extremely tight, although the stringency did not become acute until autumn. A noticeable flight of gold from the country caused a marked advance in money rates, and the end of the year saw a 30 percent decline in industrial stocks. Depression—characterized by inactive industries, business failures, and a severe decline in foreign trade—continued throughout 1921. Answers.Com

If this brief depression was perhaps the worst "in the whole history of the United States", how did we get out of it before the end of 1921?

By doing nothing, as far as government intervention was concerned. There were no tax breaks, no stimulus, no lending of money. The government was strictly laissez-fairre about it. Free enterprise and the will of the people to return to work was the saving grace.

President Obama is ignoring not only history, but also ignoring naturalist economics that protect the rights of people to operate in a free market place.

"The second unusual feature of the depression of 1920-21 was the rapid recovery in employment and output, in sync with a swift adjustment of the real wage to its new equilibrium position. Although this is a short time span, there were simply extraordinary movements in macroeconomic variables during this period..."

Using what is called the Bernanke-Carey Model--(yes, Ben Bernanke, who along with Professor Kevin Carey of American University devised a model used by most economists--Google it)--it has been discovered that one of the most striking differences between that brief yet severe depression, the Great Depression, and the economic difficulties of today, is the swift response by needy employees to lower their wage expectations dramatically.
The United Auto Workers had to be put in the position of making concessions which for the UAW were awkward and that could hardly be called "dramatic," before any bail-out money was given to General Motors and to Chrysler.

But something Bernanke wrote in 2000 in a book called Essays on the Great Depression stands out strikingly as a comparison to the crisis of today:

"For many years, economic research on the origins and persistence of the Great Depression bore a striking resemblance to historical research on the causes of the American Civil War. Both sides to the respective debates talked past one another, and little, if any, intellectual progress was made."

Today, the 200+ economists who took out a full page ad in several newpapers a week ago are not being heard by the left who, led by Obama (or perhaps who is leading Obama, who is not an economist but a Constitutional professor and attorney) are going out full force for the idea that "only government" can bring the country out of recession.

The left is talking directly past the free-market economists because the left isn't willing to admit those economists have anything to offer. Instead, they are hell-bent on painting those with philosophical differences as:

  • people who wish to do "little or nothing at all" and as people who "still [don't] believe this constitutes a full-blown crisis". It implies the left is the only hope for salvation by saying "we have come together around a plan" when in fact the free-market economists do not "come together" on it and would have proposed vastly different plans; and because "as long as I hold this office," said the President, "I will do whatever it takes to put this economy back on track," except by listening to those voices who say that the billions of dollars in what are traditionally labeled "appropriations" belong in appropriation bills, not in a stimulus package.
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