The market crash of 1929 was caused by a complex set of factors, but was certainly aggravated by Hoover's clumsy protectionist and high tax policies, contrasting with his predecessor's (Coolidge's) free market policies. Somehow FDR convinced people a few years later that he was going to turn the economy around with some new ideas since those damn Republicans got us in this mess.
It turns out that his plan was to expand on Hoover's method: restrict, and almost entirely strangle, international trade; and take money from private investers (at one point he raised taxes to 99% of income over $25,000) and spend it in presumably more efficient avenues. This included massive social welfare programs, and public works projects (WPA).
Ask an economist if this was a good idea. Historians praise him as the greatest president ever for doing it. I say he is nearly the worst. Taking money out of the hands of investors, slandering them as thieves and exploiters of the poor (in fact blaming the recession on them), how do you hope to help the economy recover? An investor (especially a self-interested one) spending his own money has a positive incentive structure in place to spend his own money in the most efficient way possible. FDR, driven by political motives, has an incentive structure not to spend efficiently, but according to special interests. This market distortion contributed to a prolonged depression.
Furthermore, restricting international trade (via tariffs and direct industry subsidies) stifled domestic economic growth. When I trade with my neighbor, there are "gains from trade" to both parties because the exchange is mutually beneficial (otherwise we wouldn't have traded, in a free market). By restricting this trade, the government destroys the mutual gains, and both parties are worse off than they would have been.
Whereas free markets operate in a positive sum game (where gains from trade result in a larger pie of wealth than initially), the government operates in a zero, or more often a negative sum game. The best outcome the government can hope for is to not destroy economic growth and break even. Spending money does not stimulate growth, it merely diverts spending from more productive areas, distorting optiomal economic behavior into something less than optimal.
Many people, including almost all politicians, do no seem to understand the concept of "opportunity costs." A friend pointed out to me that the Beartooth Pass highway in Wyoming was built by Roosevelt's WPA. I drove on this highway last summer, and I enjoyed it very much. I would be sorry if it was never built. However, I will never know what greater purpose an investor might have put his money towards, and what pain and suffering might have been avoided. Would you take money from Bill Gates as a young entrepreneur to build a vacation road? The opportunity cost is the eventual massive growth and job creation from Microsoft. Perhaps the next investor will create a cure for cancer. Or perhaps he will still build a vacation road that many people will value. How can we expect the government to know what the most valued use is when they steal our money and spend it unscrupulously? A free market must decide.
Today, Obama promises to treat a similar economic situation by throwing fuel on the flames, much like the late great FDR. According to a recent Fox News article, Obama's trade restrictions anger our trading parters. I would add that coercively holding up American industries makes us uncompetitive, and ultimately costs us jobs and [domestic] social welfare growth. It doesn't just hurt our neighbors. Domestic companies who receive no subsidy but who may produce more efficiently are priced out of the market by subsidized, less efficient companies. By manipulating trade, Obama destroys competition and the gains from comparative advantage. These are economic principles easily understood in Microecon 101.
Obama's plan to rescue Americans from the economic crisis is to take our money and spend it where a government bureacracy sees fit. Hayek says that the problem with central governments is they lack the knowledge of "particular circumstances of time and place." They are incapable of optimizing on our behalf--only we can do that. This fact has stood the test of time, proving and proving again that government intervention leads to a net social loss. (Do not be fooled by the positive "creations" of government--such as the Beartooth Pass highway. The government may produce something positive witht he money, but that's not the point. Consider the opportunity cost: what would have been built instead by a competitive market investing the money optimally.)
Spending money, quickly. Is that even a strategy? In personal finance, when you are buried in debt, and hard times hit, is it a good idea to spend as much money as you can, as fast as you can? No. You need to quickly and dramatically tighten your purse strings and get to work.
***
Speaking of work, check out this article:Study Finds Working at Work Improves Productivity
hey
ReplyDeletemy name is Krista Briscoe, Brooke mclendons friend. she knows that i really love economics and that i should come and read this artical! it is very good. what type of economics do you study kenisian or austrian? and what do you think causes inflation?
Hi Krista,
ReplyDeleteI have studied both Keynesian and Austrian economics superficially, but my masters in Applied Economics (usually micro econ, which is at the individual level whereas those two usually deal with macro issues, "the economy" as a whole).
Inflation is an increase in the supply of money, which most commonly happens when the Federal Reserve buys bonds, putting more dollars in circulation. But it can also happen when banks lend out more of their money, keeping less in reserve (conversely, banks hoarding more money, lending out less, deflates the dollar). Less commonly, but easier conceptualize, additional dollars are physically printed.
As our economy grows, we need more dollars in circulation, and therefore a small amount of inflation is reasonable and good. It is unexpected inflation that causes economic distortions.
I hope that helps!