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Archive for the ‘Great Depression’ Category

In an interview with an economic organization from India last month, I discussed many of the economic issues associated with coronavirus (fiscal fallout, excess regulation, subsidized unemployment, etc).

But I want to highlight this short clip since I had an opportunity to explain how the “New Deal” made the Great Depression deeper and longer.

For newcomers to this issue, “New Deal” is the term used to describe the various policies to expand the size and scope of the federal government adopted by President Franklin Delano Roosevelt (a.k.a., FDR) during the 1930s.

And I’ve previously cited many experts to show that his policies undermined prosperity. Indeed, one of my main complaints is that he doubled down on many of the bad policies adopted by his predecessor, Herbert Hoover.

Let’s revisit the issue today by seeing what some other scholars have written about the New Deal. Let’s start with some analysis from Robert Higgs, a highly regarded economic historian.

…as many observers claimed at the time, the New Deal did prolong the depression. …FDR and Congress, especially during the congressional sessions of 1933 and 1935, embraced interventionist policies on a wide front. With its bewildering, incoherent mass of new expenditures, taxes, subsidies, regulations, and direct government participation in productive activities, the New Deal created so much confusion, fear, uncertainty, and hostility among businessmen and investors that private investment, and hence overall private economic activity, never recovered enough to restore the high levels of production and employment enjoyed in the 1920s. …the American economy between 1930 and 1940 failed to add anything to its capital stock: net private investment for that eleven-year period totaled minus $3.1 billion. Without capital accumulation, no economy can grow. …If demagoguery were a powerful means of creating prosperity, then FDR might have lifted the country out of the depression in short order. But in 1939, ten years after its onset and six years after the commencement of the New Deal, 9.5 million persons, or 17.2 percent of the labor force, remained officially unemployed.

Writing for the American Institute for Economic Research, Professor Vincent Geloso also finds that FDR’s New Deal hurt rather than helped.

…let us state clearly what is at stake: did the New Deal halt the slump or did it prolong the Great Depression? …The issue that macroeconomists tend to consider is whether the rebound was fast enough to return to the trendline. …The…figure below shows the observed GDP per capita between 1929 and 1939 expressed as the ratio of what GDP per capita would have been like had it continued at the trend of growth between 1865 and 1929. On that graph, a ratio of 1 implies that actual GDP is equal to what the trend line predicts. …As can be seen, by 1939, the United States was nowhere near the trendline. …Most of the economic historians who have written on the topic agree that the recovery was weak by all standards and paled in comparison with what was observed elsewhere. …there is also a wide level of agreement that other policies lengthened the depression. The one to receive the most flak from economic historians is the National Industrial Recovery Act (NIRA). …In essence, it constituted a piece of legislation that encouraged cartelization. By definition, this would reduce output and increase prices. As such, it is often accused of having delayed recovery. …other sets of policies (such as the Agricultural Adjustment Act, the National Labor Relations Act and the National Industrial Recovery Act)…were very probably counterproductive.

Here’s one of the charts from his article, which shows that the economy never recovered lost output during the 1930s.

In a column for CapX, Professor Philip Booth adds some interesting evidence on how the United Kingdom adopted a smarter approach in the 1930s.

…the UK had a relatively good Great Depression by international standards. There was an extremely conservative fiscal policy (much more so than during the so-called austerity after 2008) and yet the economy bounced back. In the period 1930-1933, the average public sector deficit was just 1.1% of GDP. And there were only two years of negative GDP growth (1930 and 1931). By 1938, GDP growth had been sufficiently rapid, that the country had returned to trend national income as if the Great Depression had never happened. …In the UK, we had a stable regulatory environment, a liberalised market for land for building purposes and fiscal austerity. …though Roosevelt is often regarded as the great saviour, he is nothing of the sort. …taking the period 1929-1939 as a whole, real GDP growth was only 1% per annum. There was no return to trend national income levels. …unemployment in the US was much higher than in the UK. For the economy to be operating at those levels of unemployment for so long requires some very bad policies. …Arbitrary regulation damaged business and created “policy uncertainty” and top marginal tax rates were raised.

For what it’s worth, I also think it’s worth comparing what happened in the 1930s with the genuine economic recovery from the deep recession in 1920-21.

Or, look at how the economy boomed after World War II even though the Keynesians predicted the economy would fall back into depression without a massive expansion of domestic spending.

Nonetheless, as illustrated by this cartoon, some people still want to blame capitalism for problems caused by government.

P.S. FDR not only wanted a 100-percent tax rate, he actually tried to impose it without legislative approval.

P.P.S. FDR also wanted an “Economic Bill of Rights” that would have created a far-reaching entitlements to other people’s money.

P.P.P.S. This video summarizes the awful policies of Hoover and FDR.

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Starting with a column about government-subsidized debt and ending yesterday with a column about why government shouldn’t own airlines, I’ve written about coronavirus-related issues for 14 straight days. And since that’s the topic now dominating the national discussion, I expect many more coronavirus-themed columns will be forthcoming.

But I’m going to make a detour to normalcy today and write about the person who is probably America’s second-worst president in terms of economic policy.

No, I’m not talking about Barack Obama or George W. Bush.  Or even Herbert Hoover.

That’s a list of bad presidents, to be sure, but none of them are in the same league as Franklin Delano Roosevelt.

As I’ve explained before, FDR deserves scorn for doubling down on Hoover’s awful policies of higher taxes, increased spending, and more intervention – thus keeping the economy mired in misery all through the 1930s.

Amazingly, some people applaud his performance. Including some self-described conservatives.

Conrad Black, in an article for American Greatness, actually wants readers to think of FDR as a conservative.

My motive is…to correct the widespread misperception of Roosevelt as a socialist and somehow the person responsible for the present leviathan-state. …Roosevelt wanted to make America safe for wealthy people like himself. …he wanted a contented working-class and agrarian class, as he thought equitable in a rich country, and the only assurance against social instability. …retroactive quarterbacks have never suggested any serious alternatives to what Roosevelt did and no significant part of his domestic legislation has been seriously altered… When it comes to long-term social and economic policy, Roosevelt gets a solid B-plus. …Roosevelt acknowledged that the New Deal would, and did, make many mistakes, but it saved the country.

Saved the country?!? According to academic experts, the New Deal lengthened and deepened the downturn.

Why? Because FDR adopted so many bad policies. For instance, increased the top tax rate to 79 percent (and fortunately failed in his effort to impose a 100 percent tax rate). He cartelized the economy based on fascist economic principles. And he doubled the burden of federal spending in just eight years.

I’ll discuss more about FDR’s policy mistakes at the end of this column, but I also want to address his upside-down view of freedom.

He wanted to replace the Founding Fathers’ vision of “negative liberty” (the right to be left alone) with the redistributionst concept of “positive liberty” (the right to get handouts).

Here’s one of his speeches, which I first shared back in 2011.

I’m not the only one to find this point of view to be repugnant.

Here’s some of what James Bovard wrote last year, in a column for the Foundation for Economic Education.

Franklin Roosevelt did more than any other modern president to corrupt Americans’ understanding of freedom. …his 1941 “Four Freedoms” speech…declared: “The third [freedom] is freedom from want . . . everywhere in the world. The fourth is freedom from fear . . . anywhere in the world.” Proclaiming a goal of freedom from fear meant that government should fill the role in daily life previously filled by God and religion. Politicians are the biggest fearmongers, and “freedom from fear” would justify seizing new power in response to every bogus federal alarm. …Three years later, …Roosevelt called for a “Second Bill of Rights” and asserted that “True individual freedom can’t exist without economic security.” And security, according to FDR, included “the right to a useful and remunerative job,” a “decent home,” “good health,” and “good education.” Thus, if…someone was in bad health, then that person would be considered as having been deprived of his freedom, and somehow it would be the government’s fault. Freedom thus required boundless control over health care.

Amen.

There is no “right” to other people’s earnings.

Let’s now return to FDR’s specific policies.

My contribution to this discussion is a back-of-the-envelope assessment of the policies adopted while he was in office. As you can see, there were many anti-growth policies (and the policies that did the most damage get the biggest bars).

Trade was the only area where he consistently pushed policy in the right direction.

P.S. According to presidential scholars such as Al Felzenberg, President Roosevelt didn’t have firm views on economics and his administration was characterized by haphazard shifts in policy depending on which group of advisors (the reflationists, corporatists, Keynesians, anti-trust zealots, etc) were most influential.

P.P.S. FDR’s Treasury Secretary admitted the failure of the New Deal in 1939, telling a congressional committee that “We are spending more than we have ever spent before and it does not work… I say after eight years of this administration we have just as much unemployment as when we started…and an enormous debt, to boot.”

P.P.P.S. I wrote above that FDR is “probably America’s second-worst president.” I’m hesitant to give a definitive answer, in part because Nixon was so terrible. More important, the wretched track record of Woodrow Wilson (creator of the income tax and Federal Reserve, as well as an odious racist) suggests he may deserve the prize for being the worst of the worst.

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I have a very low opinion of leftist politicians, in large part because I suspect most of them privately understand their policies don’t work, but they don’t care because their main goal is the accumulation of political power (Crazy Bernie is an exception since he seems to genuinely believe in socialism).

But I don’t dislike ordinary people with statist views. They have good intentions.

All that’s wrong is that they think government intervention and redistribution can improve the lives of the less fortunate. Presumably because they incorrectly assume the economy is a fixed pie and that some people must be poor if some people are rich.

One of my main goals is to help them understand why this is wrong.

A rising tide can lift all boats, which is why I write so often about growth in general and comparative growth between nations in particular.

And it also helps to share evidence about historical growth within a nation.

Amity Shlaes addresses this issue in a must-read article about U.S. growth in the City Journal. She starts with a pessimistic observation about malpractice by historians.

Free marketeers…are not winning U.S. history. …No longer is American history a story of opportunity, or of military or domestic triumph. Ours has become, rather, a story of wrongs, racial and social. …an axiom is taking hold: equal incomes lead to general prosperity and point toward utopia. Teachers, book review editors, and especially professors withhold any evidence to the contrary. …Decades in which policy endeavored or managed to even out and equalize earnings—the 1930s under Franklin Roosevelt, the 1960s under Lyndon Johnson—score high. Decades where policymakers focused on growth before equality, such as the 1920s, fare poorly.

This is upside down, Amity explains.

…progressives have their metrics wrong and their story backward. The geeky Gini metric fails to capture the American economic dynamic: in our country, innovative bursts lead to great wealth, which then moves to the rest of the population. Equality campaigns don’t lead automatically to prosperity; instead, prosperity leads to a higher standard of living and, eventually, in democracies, to greater equality. …growth cannot be assumed. Prioritizing equality over markets and growth hurts markets and growth and, most important, the low earners for whom social-justice advocates claim to fight. …a review trip through the decades is useful because the evidence for growth is right there, in our own American past.

The article looks at several periods, but I want to focus on what she wrote about the 1920s and 1930s.

We’ll start with the 1920s, which began with a deep downturn.

…the early 1920s experienced a significant recession. …the top rate was still high, at 73 percent. …In response, Wall Street and private companies mounted a “capital strike,” dumping cash not into the most promising inventions but into humdrum municipal bonds. …The high tax rates, designed to corral the resources of the rich, failed to achieve their purpose. In 1916, 206 families or individuals filed returns reporting income of $1 million or more… By 1921, just 21 families reported to the Treasury that they had earned more than a million. ….Against this tide, Harding and Coolidge made their choice: markets first. …Harding and Mellon got the top rate down to 58 percent. …In a second round, stewarded by Coolidge, …Mellon and conservatives would get a (somewhat) lower tax rate of 46 percent…in 1924, Coolidge joined Mellon, and Congress, in yet another tax fight, eventually prevailing and cutting the top rate to the target 25 percent. …the tax cuts worked—the government did draw more revenue than predicted, as business, relieved, revived. The rich earned more than the rest—the Gini coefficient rose—but when it came to tax payments, something interesting happened. …the rich now paid a greater share of all taxes. Tax cuts for the rich made the rich pay taxes. …the United States did average 4 percent real growth. …the 1920s economy gave workers something far more important than notional wage equality: a job. Unemployment averaged 5 percent or lower.

Excellent points about overall economic policy and lots of good information about fiscal policy.

The tax cuts were a big success, just like the Kennedy tax cuts in the 1960s and the Reagan tax cuts in the 1980s.

Moreover, the recovery from the 1920-21 recession deserves a lot of attention because it shows that spending reductions are good for prosperity.

Sadly, that lesson was almost immediately forgotten.

Here’s some of what Amity wrote about the many policy mistakes of the 1930s.

The 1930s tell the opposite story. …Hoover responded differently from the way predecessors had responded to previous crashes: he intervened. …Hoover changed policy to focus on social equality… Hoover hauled business leaders to Washington and bullied them…he cajoled Congress into passing laws…the Davis-Bacon Act of 1931…raising the top rate to 63 percent. …Hoover thoroughly intimidated business and markets… Franklin Roosevelt…sent an even clearer signal that in his presidency, equality would come first. …the New Deal’s equality measures prolonged and deepened the Depression. …For ten years, joblessness stuck stubbornly in the double digits. This mattered far more to families than any theoretical envy index. With the coming of World War II, Roosevelt pushed the top tax rate to 94 percent.

From the perspective of economic policy, the 1930s was a trainwreck. Hoover imposed terrible policy. Then FDR takes office and does more of the same.

Let’s now get to the main point of today’s column. Which decade was better for poor people:

Did poor people enjoy better results in the 1920s, when government did less and policy was more focused on growth and opportunity?

Did poor people enjoy better results in the 1930s, when government did more and policy was more focused on equality of outcomes?

The answer should be obvious.

It was better to be a poor person in the 1920s rather than the 1930s.

Just like poor people did better in the laissez-faire 1980s than they did in the statist 1970s. Just like poor people today do better in Chile than in Venezuela. Just like poor people did better in West Germany than East Germany. Just like poor people….well, you get the idea.

P.S. Today’s column is another reminder that Calvin Coolidge was one of America’s greatest presidents.

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There were many policy mistakes that contributed to the Great Depression.

Monetary Policy presumably deserves the lion’s share of the blame, but politicians also increased the fiscal burden of government and radically expanded the amount of regulatory intervention.

And a tit-for-tat trade war, mostly caused by the United States (Hoover’s Smoot-Hawley tariff), also contributed to the economic destruction of the 1930s.

Sadly, history may be repeating itself, at least with regard to trade. That was my message in this recent discussion with Charles Payne.

This is why Trump’s protectionism is so alarming.

Let’s explore this issue.

Peter Coy, in a column for Bloomberg, explains the dangers of Trump’s approach. Simply stated, it’s not a good idea to let the protectionist genie out of its bottle.

…the president has instigated a trade war…his actions are eroding trust among both allies and rivals. Once gone, trust is hard to reestablish… U.S. corporate leaders soft-pedaled their criticisms of his trade policies in the past because they hoped he’d come around to their point of view. …Now they worry that waiting for the squall to pass may be a mistake because real damage could be done in the meantime. …the threats and counter threats create uncertainty that may induce businesses to hold back investment in new plants and equipment, known as capital spending, or capex.

We’re already seeing some blowback against the United States. But as I stated in the interview, the big concern is what comes next. The economic damage can be significant.

And all bets are off if the trade war goes hot. Fink warned that stocks could fall 10 percent to 15 percent if the Trump administration approves tariffs on an additional $200 billion of Chinese imports. …In the longer term, trade barriers make the global economy permanently less efficient because sheltered economies produce things that could be made more cheaply elsewhere. …if countries restored their tariff rates to their 1990 levels, wiping out almost 30 years of reductions, world average living standards in 2060 would end up about 14 percent lower.

Sadly, Trump seems oblivious to these concerns. So, just like 80 years ago, we’re heading down the tit-for-tat path.

What’s instructive for today is how the U.S. extracted itself from the beggar-thy-neighbor spiral that started with the Smoot-Hawley Tariff Act of 1930 and helped deepen the Great Depression. President Franklin Roosevelt lobbied for and got the Reciprocal Trade Agreement Act of 1934, in which Congress ceded some authority over international commerce to the president… To Dartmouth College economist Douglas Irwin, a historian of free trade, one lesson of the 1930s is that “it’s not as easy to snap back as you think” from a trade war.

Irwin’s argument is similar to the point I made in the interview about needing an adult to take charge before things spiral out of control.

P.S. Since I’ve referenced the Great Depression, I can’t resist reminding people that FDR was so awful that he actually tried to impose a 100 percent tax rate by executive fiat.

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The Great Depression was an unimaginably miserable period in American history. Income fell, unemployment rose, and misery was pervasive.

But there was still room for political satire in the 1930s. Here’s a cartoon that I shared back in 2012. Based on the notations in the upper right, I gather it’s from the Chicago Tribune, though I don’t know if that’s actually true. And I also don’t know the year.

But I certainly sympathized with the message since Hoover and Roosevelt were big-spending interventionists.

Hoover saddled the economy with taxes (an increase in the top tax rate from 25 percent to 63 percent!), spending, protectionism, regulation, and intervention. Roosevelt then doubled down on almost all of those bad policies, with further tax rate increases (up to 79 percent, and he even pushed for a 100 percent tax rate in the early 1940s!!), more spending, and lots of additional regulation and intervention.

And here’s a cartoon I posted the previous year. Since I don’t know whether public opinion was on the right side, I don’t know if it accurately captures the mood of taxpayers.

But it’s 100-percent accurate about the instinctive response of politicians. For “public choice” reasons, the crowd in Washington has an incentive to buy votes with other people’s money. One might even say they spend like drunken sailors, but that’s actually an understatement.

But I’m beginning to digress, as is my wont. Let’s get back to satire and the Great Depression.

And I’m going to be creative. That’s because I saw a cartoon on Reddit‘s libertarian page that makes a very general point about government causing a mess and politicians then blaming the private sector. But because I’m a goofy libertarian policy wonk, I immediately thought that this is a perfect summary of what happened in the 1930s.  Hoover and Roosevelt hammered the economy with bad policy, the economy stayed in the dumps for an entire decade, yet the political class someone convinced a lot of people it was all the fault of capitalism.

While I will always view this cartoon as the spot-on depiction of what happened in the 1930s, it obviously applies much more broadly.

Consider the recent financial crisis, which was the result of bad monetary policy and corrupt Fannie Mae/Freddie Mac subsidies. Yet countless politicians blamed greedy capitalism.

Maybe what we have is the cartoon version of Mitchell’s Law. That’s because when politicians cause a problem and blame the free market, they inevitably then claim that the problem justifies giving them more power and control. Lather, rinse, repeat.

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I try to avoid certain issues because they’re simply not that interesting. And I figure if they bore me – even though I’m a policy wonk, then they probably would be even more painful for everyone else.

But every so often, I feel compelled to address a topic simply because the alternative is to let the other side propagate destructive economic myths.

That’s why I’ve written about arcane topics such as depreciation and carried interest.

In this spirit, it’s now time to write about “Glass-Steagall,” which is the shorthand way of referring to the provision of the Banking Act of 1933 that imposed a separation between commercial banking and investment banking.

This regulatory barrier has been relaxed over the years, in part by the Financial Services Modernization Act of 1999 (often known as Gramm-Leach-Bliley).

Our friends on the left are big fans of Glass-Steagall. They think the law fixed a problem that helped cause the Great Depression and they think its partial repeal is one of the reasons for the recent financial crisis.

Bernie Sanders, for instance, has made Glass-Steagall reinstatement one of his big issues, probably in part because Hillary Clinton’s husband signed the 1999 law that eased that regulatory burden.

That may or may not be smart politics for Senator Sanders, but it is based on economic illiteracy. Let’s look at what the experts say.

Peter Wallison of the American Enterprise Institute, for instance, offers some very important insights about Glass-Steagall and the financial crisis.

The so-called “repeal” of Glass-Steagall in 1999…had absolutely nothing to do with the financial crisis. The 1999 changes in one sector of Glass-Steagall Act made only one change in existing law: it permitted affiliations between commercial banks and investment banks. But by the time of the 2008 crisis, none of the large investment banks (like Goldman Sachs, Morgan Stanley or Lehman Brothers) had affiliated with any of the large commercial banks (like Citi, JP Morgan Chase or Bank of America). Commercial banks and investment banks had remained fierce competitors with one another right up to the time of Lehman Brothers’ bankruptcy. The simplest way to think about the financial crisis is that the largest investment banks and commercial banks got into financial trouble by acquiring and holding risky mortgages or mortgage backed securities based on these risky loans. This was permitted for both of them before Glass-Steagall was “repealed,” and it was permitted afterward. In other words, if Glass-Steagall had never been touched by Congress in any way, the financial crisis would have unfolded exactly as it did in 2008.

Bingo.

If the leftists are right and the partial repeal of Glass-Steagall was bad and destabilizing, shouldn’t they be able to point to some real-world evidence? To any real-world evidence? To a shred of real-world evidence?

Megan McArdle, writing for Bloomberg, also is baffled by the anti-empirical emotionalism of the Glass-Steagall crowd.

…those intrepid souls who continue to fiercely agitate for the return of the Glass-Steagall financial regulations…have become a powerful force in the Democratic Party. …there is a small problem It’s very hard to think of the mechanism by which the repeal of this rule made any significant contribution to the meltdown. …The problems appeared first at Bear Stearns, and then Lehman Brothers, straight investment banks and lenders like Countrywide.

By the way, there’s a bipartisan consensus on this matter.

Catherine Rampell of the Washington Post certainly couldn’t be called a libertarian or conservative, yet she also is flummoxed by the fixation on Glass-Steagall.

the Glass-Steagall Act…’s become the left’s litmus test for whether a politician is “tough” on Wall Street. …But Glass-Steagall had nothing to do with the 2008 financial crisis. …If the repealed provisions of Glass-Steagall had still been on the books, almost none of the institutions at the epicenter of the crisis would have been covered by it. Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley were basically stand-alone investment banks. AIG was an insurance company. Fannie Mae and Freddie Mac were government-sponsored entities that bought and securitized mortgages. Washington Mutual was a traditional savings-and-loan. And so on. Glass-Steagall, or the lack thereof, is a red herring.

Steven Pearlstein of the Washington Post – another columnist who has never been accused of being in love with free markets – is similarly baffled. And for the same reasons. The facts simply don’t match the left-wing narrative.

Bear Stearns, Lehman Brothers and Merrill Lynch — three institutions at the heart of the crisis — were pure investment banks that had never crossed the old line into commercial banking. The same goes for Goldman Sachs, another favorite villain of the left. The infamous AIG? An insurance firm. New Century Financial? A real estate investment trust. No Glass-Steagall there. Two of the biggest banks that went under, Wachovia and Washington Mutual, got into trouble the old-fashioned way – largely by making risky loans to homeowners. Bank of America nearly met the same fate, not because it had bought an investment bank but because it had bought Countrywide Financial, a vanilla-variety mortgage lender. Meanwhile, J.P. Morgan and Wells Fargo — two large banks with big investment banking arms — resisted taking government capital and arguably could have weathered the crisis without it.

The inescapable conclusion is that Glass-Steagall had nothing to do with the financial crisis.

Instead, the main causes of the 2008 meltdown were bad government policies, such as easy-money from the Fed and corrupt housing subsidies from Fannie Mae and Freddie Mac.

But even if you’re a leftist and want to say that the crisis was caused by “greed,” the various institutions that got burned by “greed” were not giant investment bank/commercial bank conglomerates.

Let’s cover two more issues. First, my colleague Mark Calabria points out that one of the core beliefs of the left simply isn’t true. Commercial banking isn’t always a safe and boring line of business (which therefore has to be protected from the vagaries of investment banking).

…the bizarre implicit assumption behind Glass-Steagall: that somehow commercial banking is risk free.  Anyone ever hear of the savings-and-loan crisis of the late 1980s and early 1990s?  No investment banking angle there.  How about the 400+ small and medium banks that failed in the recent crisis? According to the FDIC, not one of them was brought down by proprietary trading.

Second, let’s dispel the notion that the Great Depression was caused by – or exacerbated by – the pre-Glass-Steagall mixing of commercial banking and investment banking.

Stephen Miller of the Mercatus Center debunks this myth.

The narrative justifying the Banking Act of 1933 always derived from myths that large securities dealing banks caused the banking crisis during the Great Depression. The myths hold that: (1) securities dealing banks were more unstable and contributed to the Great Depression, and (2) securities dealing banks pushed people to purchase what turned out to be low-quality assets that performed poorly during the Great Depression. However, both myths have been disproven. For instance, on the first myth, a 1986 Rutgers University study found that banks involved in securities dealing were less likely to fail. …none of the 5,000 banks that failed during the 1920s had securities dealing affiliates. From 1930 to 1933, more than 25 percent of all national banks failed, but the number of failures among those with securities dealing affiliates was less than 10 percent. On the second myth, …a 1994 study in the American Economic Review found evidence to the contrary — that the public understood this conflict of interest, which resulted in commercial banks that dealt securities prior to the Great Depression tending to underwrite high quality assets. These banks tended to do better during the Great Depression.

Oh, and by the way, the Great Depression wasn’t caused by deregulated markets. The real blame belongs to all the policy mistakes made by Herbert Hoover and Franklin Roosevelt.

So here’s the bottom line.

Glass-Steagall is a meaningless distraction, but restoration of that law nonetheless attracts support from know-nothings who have a religious-type belief that financial markets are intrinsically evil.

P.S. Financial markets are imperfect, of course, but they’re only evil when investors and institutions want private profits and socialized losses.

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It’s difficult to promote good economic policy when some policy makers have a deeply flawed grasp of history.

This is why I’ve tried to educate people, for instance, that government intervention bears the blame for the 2008 financial crisis, not capitalism or deregulation.

Going back in time, I’ve also explained the truth about “sweatshops” and “robber barons.”

But one of the biggest challenges is correcting the mythology that capitalism caused the Great Depression and that government pulled the economy out of its tailspin.

To help correct the record, I’ve shared a superb video from the Center for Freedom and Prosperity that discusses the failed statist policies of both Hoover and Roosevelt.

Now, to augment that analysis, we have a video from Learn Liberty. Narrated by Professor Stephen Davies, it punctures several of the myths about government policy in the 1930s.

Professors Davies is right on the mark in every case.

And I’m happy to pile on with additional data and evidence.

Myth #1: Herbert Hoover was a laissez-faire President – Hoover was a protectionist. He was an interventionist. He raised tax rates dramatically. And, as I had to explain when correcting Andrew Sullivan, he was a big spender. Heck, FDR’s people privately admitted that their interventionist policies were simply more of the same since Hoover already got the ball rolling in the wrong direction. Indeed, here’s another video on the Great Depression and it specifically explains how Hoover was a big-government interventionist.

Myth #2: The New Deal ended the depression – This is a remarkable bit of mythology since the economy never recovered lost output during the 1930s and unemployment remained at double-digit levels. Simply stated, FDR kept hammering the economy with interventionist policies and more fiscal burdens, thwarting the natural efficiency of markets.

Myth #3: World War II ended the depression – I have a slightly different perspective than Professor Davies. He’s right that wars destroy wealth and that private output suffers as government vacuums up resources for the military. But most people define economic downturns by what happens to overall output and employment. By that standard, it’s reasonable to think that WWII ended the depression. That’s why I think the key lesson is that private growth rebounded after World War II ended and government shrank, when all the Keynesians were predicting doom.

By the way, Reagan understood this important bit of knowledge about post-WWII economic history. And if you want more evidence about how you can rejuvenate an economy by reducing the fiscal burden of government, check out what happened in the early 1920s.

P.S. If you want to see an economically illiterate President in action, watch this video and you’ll understand why I think Obama will never be as bad as FDR.

P.P.S. Since we’re looking at the economic history of the 1930s, I strongly urge you to watch the Hayek v Keynes rap videos, both Part I and Part II. This satirical commercial for Keynesian Christmas carols also is very well done.

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When major changes occur, especially if they’re bad, people generally will try to understand what happened so they can avoid similar bad events in the future.

This is why, when we’re looking at major economic events, it’s critical to realize that narratives matter.

For instance, generation after generation of American students were taught that the Great Depression was the fault of capitalism run amok. But we now have lots of evidence that bad government policy caused the Great Depression and that the downturn was made more severe and longer lasting thanks to further policy mistakes by Hoover and Roosevelt.

The history textbooks are probably still wrong, but at least there’s a chance that interested students (and non-students) will come across more accurate explanations of what happened in the 1930s.

More recently, the same thing happened after the financial crisis. The statists immediately tried to convince people that the 2008 mess was a consequence of “Wall Street greed” and “deregulation.”

Fortunately, many experts were available to point out that the real problem was bad government policy, specifically easy money from the Fed and the corrupt system of subsidies from Fannie Mae and Freddie Mac.

So hopefully future history books won’t be as wrong about the financial crisis as they were about the Great Depression.

I raise these examples because I want to address another historical inaccuracy.

Let’s go back about 100 years ago to the s0-called “progressive era.” The conventional story is that this was a period when politicians reined in some of the excesses of big business. And if it wasn’t for that beneficial government intervention, we’d all still be oppressed peasants working in sweatshops.

There’s just one small problem with this narrative. It’s utter nonsense.

Let’s look specifically at the issue of sweatshops. Writing for the Independent Institute, Ben Powell looks at the history of sweatshops and whether workers were being mistreated.

He starts with a bit of history.

Sweatshops are an important stage in the process of economic development. As Jeffery Sachs puts it, “[S]weatshops are the first rung on the ladder out of  extreme poverty”. …Working conditions have been harsh and standards of living low throughout most of human history. …Prior to the Industrial Revolution,  textile production was decentralized to the homes of many rural families or artisans, and output was limited to what could be produced on the  spinning wheel and hand loom. …Yarn spinning was mechanized in 1767 with the invention of the spinning jenny, and water power was harnessed shortly  thereafter. With these inventions and steam power later, large-scale textile factories that are similar to today’s sweatshops emerged. The conditions in these  early sweatshops were worse than those in many Third World sweatshops today. In some factories, workers toiled for sixteen hours a day, six days per week.

Then he looks at what actually happened in Great Britain, which is where sweatshops began.

Yet workers flocked to the mills. …sweatshop workers…were attracted by the opportunity to earn higher wages than they could elsewhere. In fact, economist Ludwig von Mises defended the factory system of the Industrial Revolution,…writing, “The factory owners did not have the power to compel anybody to take a factory job. They could only hire people who were ready to work for the wages offered to them. Low as these wage rates were, they were nonetheless more than these paupers could earn in any other field open to them.” …Mises’s argument is supported by historical evidence. Economist Joel Mokyr reports that workers earned a wage premium of 15 to 30 percent by working in the factories compared with other alternatives. The transformation of Great Britain during this time was dramatic. As economist and historian Donald McCloskey describes it, “In the 80 years or so after 1780 the population of Britain nearly tripled, the towns of Liverpool and Manchester became gigantic cities, the average income of the population more than doubled… Peter Lindert and Jeffery  Williamson similarly find impressive gains in the standard of living between 1781 and 1851. Farm labor’s standard of living went up more than 60 percent,  blue-collar workers’ standard increased more than 86 percent, and overall workers’ standard increased more than 140 percent. Along with this increase in  the standard of living came a decrease in the share of women and children working beginning sometime between 1815 and 1820.

Ben then looks at the American experience. Once again, he finds that sweatshops allowed workers to earn more income than they could by staying on the farm.

And this was part of a process that enabled the United States to become much richer over time.

…workers flocked to the mills. At first, in the cities north of Boston it was mainly rural women and girls who left the farm to populate the early textile mills.  During the 1830s in Lowell, a woman could earn $12 to $14 a month (in 1830s dollars) and after paying $5 for room and board in a company boarding house  would have the rest left over for clothing, leisure, and savings. It wasn’t uncommon for women to return home to the farm after a year with $25 to $50 in a  bank account. This was far more money than they could have earned on the farm and often more disposable cash than their fathers had. …much like in Great Britain, living standards improved over time. In 1820, before the Industrial Revolution, annual per capita income in the United States stood at a little  more than $2,000. By 1850, it had grown by 50 percent to more than $3,000 and then doubled again by 1900 to more than $6,600. Along with the rise in  incomes came improvements in working conditions and greater consumption.

Eventually, of course, the sweatshops disappeared. But Ben explains that it was because of higher living standards rather than government intervention.

Sweatshops are eliminated mainly through the process of industrialization that raises a country’s income. The increased income comes from increased  worker productivity, which raises the upper bound of compensation. The increased productivity isn’t just in one firm, but in many firms and industries, and  thus workers’ next-best alternatives improve, raising the lower bound of compensation. As the economy grows, the competitive process pushes wages up.  Because health, safety, leisure, and so on are normal goods, workers demand more of their compensation on these margins as their total compensation increases. The result is the eventual disappearance of sweatshops.

Now let’s look at the broader issue of whether the “progressive era” was bad news for big business.

The answer is yes and no. Politicians imposed lots of legislation that was bad for the free market, but the crony capitalists of that era were big supporters of intervention.

Tim Carney elaborates in a column for the Washington Examiner.

Every American knows the fable of the Progressive Era and that “trust buster” Teddy Roosevelt wielding the big stick of federal power to battle the greedy corporations. We would be better off if more people knew the work of the man who dismantled this myth: historian Gabriel Kolko… His thesis: “The dominant fact of American political life” in the Progressive Period “was that big business led the struggle for the federal regulation of the economy.”

Here’s what really happened.

Many corporate titans in the early 20th Century, buying into the pervasive hubris of the day, believed that a state-managed economy was the inevitable end of a rational society—the conclusion of what Standard Oil’s top lobbyist Samuel Dodd called the “march of civilization.” Competition, in their eyes, was destructive redundancy. “Competition is industrial war,” James Logan of the U.S. Envelope Company wrote in 1901. “Ignorant, unrestricted competition carried to its logical conclusion means death to some of the combatants and injury for all.”  Steel baron Andrew Carnegie constantly strove to turn the steel industry into a cartel and keep prices high. Competition, however, always had a way pulling prices down. As Carnegie wrote in 1908, “It always comes back to me that Government control, and that alone, will properly solve the problem.” Kolko also showed how the socialists welcomed corporate-state collusion to advance monopoly as part of “progress.”

And, as Tim explains, it’s still happening today.

This has its echoes in contemporary progressive politics… When conservatives challenged Obamacare’s individual mandate, the White House had the backing of the insurance industry and the hospital lobby. After Obama won at the Supreme Court, liberal Bill Scher wrote in the New York Times that progressive victories historically flow from the Left’s alliances with Big Business. …Liberal scholar William Galston at the Brookings Institution explains the economics at play. “Corporations have sizeable cash flows and access to credit markets, which gives them a cushion against adversity and added costs,” he wrote in 2013, explaining why the big guys often welcome regulation.

In other words, big business often is the enemy of genuine capitalism and free markets.

Not only did the big companies, including insurance and pharmaceuticals, support Obamacare.

They’re now supporting the corrupt Import-Export Bank.

And they’re perfectly happy to support higher taxes, at least when the rest of us are being victimized.

They also supported the sleazy TARP bailout.

The moral of the story is not just the big business can be just as bad as big labor. The real moral of the story is captured by this poster.

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There have been many truly awful presidents elected in the United States, but if I had to pick my least favorite, I might choose Herbert Hoover.

I obviously have disdain for Hoover’s big-government policies, but I also am extremely irritated that – as Jonah Goldberg explained – he allowed the left to create an utterly bogus narrative that the Great Depression was caused by capitalism and free markets.

Indeed, the Center for Freedom and Prosperity produced a video demonstrating that the statist policies of both Hoover and Roosevelt helped trigger, deepen, and lengthen the economic slump.

Building on that theme, here’s a new video from Prager University that looks specifically at the misguided policies of Herbert Hoover.

Amen. Great job unmasking Hoover’s terrible record.

As I explained when correcting a glaring error by Andrew Sullivan, Hoover was a big-government interventionist. Heck, even FDR’s inner circle understood that the New Deal was simply an extension of Hoover’s statist policies.

In other words, FDR doubled down on Hoover’s awful record. And with awful results. We have a better understanding today of how the New Deal caused the downturn to be deeper and longer.

This Tom Sowell video is definitely worth watching if you want more information on that topic.

And here’s something else to share with your big-government friends. The Keynesian crowd was predicting another massive depression after World War II because of both a reduction in wartime outlays and the demobilization of millions of troops. Yet that didn’t happen, as Jeff Jacoby has succinctly explained. And if you want more details on how smaller government helped restore growth after WWII, check out what Jason Taylor and Rich Vedder wrote for Cato.

P.S. I’ve compared Bush and Obama to Hoover and Roosevelt because of some very obvious similarities. Bush was a big-government Republican who helped pave the way for a big-government Democrat, just as Hoover was a big-government Republican who also created the conditions for a big-government Democrat.

The analogy also is good because I suspect political and economic incompetence led both Hoover and Bush to expand the burden of government, whereas their successors were ideologically committed to bigger government. We know about Obama’s visceral statism, and you can watch a video of FDR advocating genuinely awful policy.

The good news is that Obama will never be as bad as FDR, no matter how hard he tries.

P.P.S. It’s also worth mentioning that a very serious downturn in 1921 was quickly ended in part thanks to big reductions in the burden of government spending. Your Keynesian friends will also have a hard time explaining how that happened.

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Last year, I explained with considerable relief that President Obama would never be as bad as Franklin Roosevelt.

Yes, Obama has imposed a class-warfare tax hike, pushed through Obamacare, and squandered $billions on a faux stimulus (perfectly captured by this cartoon). But that’s trivial compared to the damage caused by FDR (and Hoover).

“I’ve tried, but it’s time for me to admit I’m not as bad as FDR”

Obama’s policies, to be sure, have contributed to an extremely weak expansion.

That’s bad, but FDR’s statism helped extend the Great Depression – by an additional seven years according to scholarly research! That’s a much worse track record.

But that doesn’t mean Obama doesn’t want to be as bad as FDR. Indeed, one of his top advisers seems very happy that the President’s second inaugural address was reminiscent of Roosevelt’s so-called Second Bill of Rights.

Here’s some of what Cass Sunstein wrote for Bloomberg.

Obama is updating Franklin Delano Roosevelt’s Second Bill of Rights. …Roosevelt announced the Second Bill of Rights in his State of the Union address in 1944. With the Great Depression over, and the war almost won, FDR declared that we “have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence.” …Then he listed them:

  • The right to a useful and remunerative job in the industries or shops or farms or mines of the nation.
  • The right to earn enough to provide adequate food and clothing and recreation.
  • The right of every farmer to raise and sell his products at a return which will give him and his family a decent living.
  • The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad.
  • The right of every family to a decent home.
  • The right to adequate medical care and the opportunity to achieve and enjoy good health.
  • The right to adequate protection from the economic fears of old age, sickness, accident and unemployment.
  • The right to a good education.

…the Second Bill was meant to specify the goals of postwar America… Obama took more such steps. …Obama’s second inaugural did not refer explicitly to the Second Bill of Rights, but it had an unmistakably Rooseveltian flavor. …Obama emphasized “that a great nation must care for the vulnerable, and protect its people from life’s worst hazards and misfortune.” …Having helped America to survive its greatest economic challenge since the 1930s, the current occupant of that office is giving new meaning to those commitments, and making them his own.

I guess we have to give Sunstein credit for chutzpah. We’re suffering through the weakest expansion since the end of World War II, and he wants us to be grateful for Obama’s policies since they supposedly “helped America to survive.”

Wow, I’d hate to see his idea of failure.

But here’s the good news. America will have gridlock for the next two years, and probably the next four years.

The bad news is that we won’t take necessary steps to reform entitlements, but the good news is that we won’t make things worse with the kind of statist policies outlined in FDR’s fake Bill of Rights.

Yes, I expect Republicans to screw up on some of the small issues and give the White House a few minor victories, but I can’t imagine them approving any big Obama initiatives, even if their opposition is driven only by partisanship rather than principle.

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I’ve explained on many occasions that Franklin Roosevelt’s New Deal was bad news for the economy. And the same can be said of Herbert Hoover’s policies, since he also expanded the burden of federal spending, raised tax rates, and increased government intervention.

So when I was specifically asked to take part in a symposium on Barack Obama, Franklin Roosevelt, and the New Deal, I quickly said yes.

I was asked to respond to this question: “Was that an FDR-Sized Stimulus?” Here’s some of what I wrote.

President Obama probably wants to be another FDR, and his policies share an ideological kinship with those that were imposed during the New Deal. But there’s really no comparing the 1930s and today. And that’s a good thing. As explained by Walter Williams and Thomas Sowell, President Roosevelt’s policies are increasingly understood to have had a negative impact on the American economy. …what should have been a routine or even serious recession became the Great Depression.

In other words, my assessment is that Obama is a Mini-Me version of FDR, which is a lot better (or, to be more accurate, less worse) than the real thing.

To be sure, Obama wants higher tax rates, and he has expanded government control over the economy. And the main achievement of his first year was the so-called stimulus, which was based on the same Keynesian theory that a nation can become richer by switching money from one pocket to another. …Obama did get his health plan through Congress, but its costs, fortunately, pale in comparison to Social Security and its $30 trillion long-run deficit. And the Dodd-Frank bailout bill is peanuts compared to all the intervention of Roosevelt’s New Deal. In other words, Obama’s policies have nudged the nation in the wrong direction and slowed economic growth. FDR, by contrast, dramatically expanded the burden of government and managed to keep us in a depression for a decade. So thank goodness Barack Obama is no Franklin Roosevelt.

The last sentence of the excerpt is a perfect summary of my remarks. I think Obama’s policies have been bad for the economy, but he has done far less damage than FDR because his policy mistakes have been much smaller.

“Hey, don’t sell me short. Just wait to see how much havoc I can wreak if reelected!”

Moreover, Obama has never proposed anything as crazy as FDR’s “Economic Bill of Rights.” As I pointed out in my article, this “would have created a massive entitlement state—putting America on a path to becoming a failed European welfare state a couple of decades before European governments made the same mistake.”

On the other hand, subsequent presidents did create that massive entitlement state and Obama added another straw to the camel’s back with Obamacare.

And he is rigidly opposed to the entitlement reforms that would save America from becoming another Greece.

So maybe I didn’t give him enough credit for being as bad as FDR.

P.S. Here’s some 1930s economic humor, and it still applies today. And I also found this cartoon online.

And here’s a good Mini-Me image involving Jimmy Carter. I wasn’t able to find one of Obama and FDR.

If anybody has the skill to create such an image, please send it my way.

P.P.S. The symposium also features an excellent contribution from Professor Lee Ohanian of UCLA.

And from the left, it’s interesting to see that Dean Baker of the Center for Economic and Policy Research basically agrees with me.

But only in the sense that he also says Obama is a junior-sized version of FDR. Dean actually thinks Obama should have embraced his inner-FDR and wasted even more money on an even bigger so-called stimulus.

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I’ve linked before to Professor George Selgin’s masterful video on the Federal Reserve’s horrible track record, and I’ve done my own video on the origin of central banking.

These types of posts often generate questions about what reforms we should support, and a lot of people ask about the gold standard. I’m not a monetary economist, so I’m not in a position to give competent answers. Fortunately, Prof. Selgin has decided to provide a very useful analysis of the issue.

Writing for a British paper, he explains that a genuine gold standard worked very well before World War I, but it probably wouldn’t work today because governments are so untrustworthy.

Of all the reasons usually given for condemning the gold standard, perhaps the most common is the claim that it was to blame for the Great Depression. What responsible politician, gold’s critics ask rhetorically, wants to relive the 1930s? But the criticism misses its mark. Fans of the gold standard are no more anxious to repeat the 1930s than their critics are. Their nostalgia is instead for the interval of exceptional international monetary stability that prevailed from the mid-1870s until World War I. That was the era of the classical gold standard – a standard policed by the citizens of participating countries, all of whom were able to convert their nations’ paper money into gold. This classical gold standard can have played no part in the Great Depression for the simple reason that it vanished during World War I, when most participating central banks suspended gold payments. (The US, which entered the war late, settled for a temporary embargo on gold exports.) Having cut their gold anchors, the belligerent nations’ central banks proceeded to run away, so that by the war’s end money stocks and price levels had risen substantially, if not dramatically, throughout the old gold standard zone. …the gold standard that failed so catastrophically in the 1930s wasn’t the gold standard that some Republicans admire: it was the cut-rate gold standard that Great Britain managed to cobble together in the 20s – a gold standard designed not to follow the rules of the classical gold standard but to allow Great Britain to break the old rules and get away with it. …the collapse of the gold-exchange standard forever undermined the public’s confidence in governments’ monetary promises; and absent such confidence there can be no question of a credible, government-sponsored gold standard, classical or otherwise. Sometimes with monetary systems, as with life, you can’t go home again.

I’m also glad that he explains that the gold standard was not responsible for the Great Depression. If you want to know more about that issue, including the damaging impact of statist policies by Hoover and FDR, this video is an excellent introduction.

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I’ve commented many times about the misguided big-government policies of both Hoover and FDR, so I can say with considerable admiration that this new video from the Center for Freedom and Prosperity packs an amazing amount of solid info into about five minutes.

Perhaps the most surprising revelation in the video is that America suffered a harsh depression after World War I, with GDP falling by a staggering 24 percent.

But we don’t read much about that downturn in the history books, in large part because it ended so quickly.

The key question, though, is why did that depression end quickly while the Great Depression dragged on for a decade?

One big reason for the different results is that markets were largely left unmolested in the 1920s. This meant resources could be quickly redeployed, minimizing the downturn.

But this doesn’t mean the crowd in Washington was completely passive. They did do something to help the economy recover. As Ms. Fields explains in the video, President Harding, unlike Presidents Hoover and Roosevelt, slashed government spending.

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I’ve pointed out on several occasions that Herbert Hoover was a big-spending Keynesian. Heck, Hoover was pursuing failed Keynesian policies several years before Keynes produced his most well-known book, The General Theory.

Hoover’s big spending was so pronounced that it generated this cartoon in 1932.

Sadly, this cartoon applies just as well today.

Except Bush and Obama take the place of Hoover and Roosevelt – with the same dismal results.

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Here’s an absolutely horrifying video of President Franklin Roosevelt promoting a “Second Bill of Rights” based on coercive redistribution.

At first, I was going to post it and contrast it with this superb Reagan video and compare how one President’s policies kept America mired in a depression while the other implemented policies that triggered an American renaissance.

But there’s a much more important question, one that also applies to modern leftists. Do they actually believe this nonsense?

In other words, are people who push for bad policy misguided or malicious?

In the case of FDR, did he really think that the government could guarantee “rights” to jobs, recreation, housing, good health, and security?

If so, he was horribly misguided and blindly ignorant to the realities of economics.

But if he didn’t believe that government magically could provide all these things, then would it be fair to say he was maliciously lying in order to delude people and get their votes?

I don’t know Roosevelt’s motives, Like most politicians, he probably listened to both the angel (however misguided) on one shoulder and the devil on the other shoulder.

But if he was listening to the angel and trying to do what he thought was best, at least FDR had an excuse. Communism had not yet collapsed. Socialism had not yet collapsed. And Greek-style redistributionism had not yet collapsed.

So it was possible seventy years ago for a well-intentioned person to believe that government was some sort of perpetual motion machine of prosperity.

I’m not sure there is a similarly charitable interpretation for the motives of modern-day statists.

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Thomas Sowell just completed a three-part “Back to the Future” series, looking at a couple of fiscal policy issues. His unifying theme is how the political class fails (perhaps deliberately) to learn from mistakes.

In Part I, he decimates President Obama’s new stimulus scheme.

Once we get past the glowing rhetoric, what is the president proposing? More spending! Only the words have changed — from “stimulus” to “jobs” and from “shovel-ready projects” to “jobs for construction workers.” If government spending were the answer, we would by now have a booming economy with plenty of jobs, after all the record trillions of dollars that have been poured down a bottomless pit. Are we to keep on doing the same things, just because those things have been repackaged in different words? …When it comes to specific proposals, President Obama repeats the same kinds of things that have marked his past policies — more government spending for the benefit of his political allies, the construction unions and the teachers’ unions, and “thousands of transportation projects.” The fundamental fallacy in all of this is the notion that politicians can “grow the economy” by taking money out of the private sector and spending it wherever it is politically expedient to spend it — so long as they call spending “investment.”

In Part II, he exposes the historical illiteracy of folks who think government intervention ended the Great Depression.

The grand myth that has been taught to whole generations is that the government is “forced” to intervene in the economy when there is a downturn that leaves millions of people suffering. The classic example is the Great Depression of the 1930s. What most people are unaware of is that there was no Great Depression until AFTER politicians started intervening in the economy. There was a stock market crash in October 1929 and unemployment shot up to 9 percent — for one month. Then unemployment started drifting back down until it was 6.3 percent in June 1930, when the first major federal intervention took place. That was the Smoot-Hawley tariff bill, which more than a thousand economists across the country pleaded with Congress and President Hoover not to enact. But then, as now, politicians decided that they had to “do something.” Within 6 months, unemployment hit double digits. Then, as now, when “doing something” made things worse, many felt that the answer was to do something more. Both President Hoover and President Roosevelt did more — and more, and more. Unemployment remained in double digits for the entire remainder of the decade. Indeed, unemployment topped 20 percent and remained there for 35 months, stretching from the Hoover administration into the Roosevelt administration.

And in Part III, he explains how tax changes in the 1920s provide great evidence for the Laffer Curve.

Those who believe in high taxes on “the rich” got their way. The tax rate on people in the top income bracket was 73 percent in 1921. On the other hand, the rich also got their way: They didn’t actually pay those taxes. The number of people with taxable incomes of $300,000 a year and up — equivalent to far more than a million dollars in today’s money — declined from more than a thousand people in 1916 to less than three hundred in 1921. …More than four-fifths of the total taxable income earned by people making $300,000 a year and up vanished into thin air. So did the tax revenues that the government hoped to collect with high tax rates on the top incomes. …Mellon eventually got his way, getting Congress to bring the top tax rate down from 73 percent to 24 percent. Vast sums of money that had seemingly vanished into thin air suddenly reappeared in the economy, creating far more jobs and far more tax revenue for the government.

We could shorten all three of Sowell’s columns into one simple statement: Obama’s agenda of bigger government and class-warfare taxation will undermine America’s economy.

But that would be short-changing ourselves. Sowell’s writing is a model of clarity and logic – characteristics sorely lacking in Washington.

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I had some fun at Andrew Sullivan’s expense a couple of weeks ago, mocking him for asserting that spending cuts today would be repeating the mistakes of Herbert Hoover. That was a rather odd thing for him to write since Hoover boosted the burden of government spending by 47 percent in just four years.

Since it is notoriously difficult to educate Obamaphiles, I’m guessing that he (and others) need some supplementary material.

How about the words of a key aide to Franklin Delano Roosevelt? Would that be considered a legitimate source? One would think so, which means this excerpt from a 2007 book review (the same statement was also cited by PBS) is rather revealing.

FDR aide Rexford Tugwell would claim in a 1974 interview that “practically the whole New Deal was extrapolated from programs that Hoover started.”

The fact that Hoover and Roosevelt were two peas in a big-government pod may be of interest to economic historians, but the real lesson is that interventiondidn’t work for either one of them. That’s what Andrew Sullivan and others need to learn. But since people like that probably won’t listen to me, maybe they’ll be more willing to accept the confession of Roosevelt’s Treasury Secretary.

FDR’s Treasury Secretary, Henry Morgenthau, wrote in his diary: “We have tried spending money. We are spending more than we have ever spent before and it does not work. … We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started … and an enormous debt to boot!”

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Even though he’s become rather partisan in recent years, I still enjoy an occasional visit to Andrew Sullivan’s blog. But I was rather amused last night when I read one of his posts, in which he was discussing whether government spending helps or hurts economic performance. He took the view that a bigger public sector stimulated growth, and criticized those who wanted to reduce the burden of government spending, snarkily observing that, “The notion that Herbert Hoover was right has become quite a dogged meme on the reality-challenged right.”

Since I’m one of those “reality-challenged” people who prefer smaller government, I obviously disagreed with his analysis. But his reference to Hoover set off alarm bells. As I have noted before, Hoover increased the burden of government during his time in office.

But maybe my memory was wrong. So I went to the Historical Tables of the Budget and looked up the annual spending data. As you can see from the chart, it turns out that Hoover increased government spending by 47 percent in just four years (if you adjust for falling prices, as Russ Roberts did at Cafe Hayek, it turns out that Hoover increased government spending by more than 50 percent).

I suppose I could make my own snarky comment about being “reality-challenged,” but Sullivan’s mistake is understandable. The historical analysis and understanding of the Great Depression is woefully inadequate, and millions of people genuinely believe that Hoover was an early version of Ronald Reagan.

I will say, however, that I agree with Sullivan’s conclusion. He closed by saying it would be “bonkers” to replicate Hoover’s policies today. I might have picked a different word, but I fully subscribe to the notion that making government bigger was a mistake then, and it’s a mistake now.

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It doesn’t get much attention, but one of the most interesting economic experiments in American history occurred right after World War II. Despite warnings of Armageddon from Keynesian economists, government spending was slashed as the United States demobilized from the war.

This was the opposite of the failed Keynesian experiment of the 1930s, when massive increases in government spending failed to boost economic growth.

So how did this experiment is smaller government work? Well, here’s some of what Jeff Jacoby wrote on the subject.

Writing last year in the Cato Policy Report, economists Jason Taylor and Richard Vedder showed that the great post-World War II economic boom was ushered in by the swift rollback of what had been the largest economic “stimulus” in US history. At the time, leading Keynesians cautioned that the abrupt withdrawal of federal dollars would plunge the economy into a new depression. Their warnings were ignored. “Government canceled war contracts, and its spending fell from $84 billion in 1945 to under $30 billion in 1946,” Taylor and Vedder wrote. “By 1947, the government was . . . running a budget surplus of close to 6 percent of GDP. The military released around 10 million Americans back into civilian life. Most economic controls were lifted, and all were gone less than a year after V-J Day. In short, the economy underwent . . . the ‘shock of de-stimulus.'” Fearful predictions of massive unemployment — 14 percent, Business Week said — never materialized. Far from collapsing, “labor markets adjusted quickly and efficiently once they were finally unfettered.” Even with millions of demobilized soldiers re-entering the workforce, “unemployment rates . . . remained under 4.5 percent in the first three postwar years.” Workers who lost government-funded jobs quickly replaced them in the surging private sector. “In fact,” Taylor and Vedder add, “civilian employment grew, on net, by over 4 million between 1945 and 1947 when so many pundits were predicting economic Armageddon. Household consumption, business investment, and net exports all boomed as government spending receded.” America’s postwar experience indicates that vibrant growth is generated not by massive government interference in the economy, but by the reverse. The way to revive a gasping private sector is for government to get out of its way, not to choke it with trillions of dollars in new spending.

Not surprisingly, Reagan understood this issue, as he said in this video. Also, here’s one of my videos, which looks more broadly at the issue of whether government spending is a help or hindrance to economic growth.

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I’ve written several times about Hoover and Roosevelt causing/deepening/lengthening the Great Depression with their tax-and-spend, interventionist policies (see here, here, here, here, here, here, and here). But I’ve only once waded into the deeper economic issues. But a new column by Robert Higgs (h/t, Don Boudreaux) has motivated me to give some well-deserved attention to Austrian economic theory.

As you can see in the excerpt below, Higgs succinctly explains that understanding the works of scholars such as Hayek and Mises is necessary if we want people to truly understand why Keynesianism doesn’t work. Higgs also cites two excellent articles (here and here) by my former grad school colleague, Steve Horwitz, for those who want a head start on grasping these issues.

Misunderstanding the Great Depression has caused much mischief in modern macroeconomics and, more important, in government fiscal and monetary policies based on or influenced by this faulty understanding. If we are ever to arrive at a sound understanding of the Depression, we will have to persuade the economics profession to take Austrian economics seriously, as most economists did before the publication of Keynes’s magnum opus in 1936. Keynesianism in particular has proven itself to be a fundamentally flawed mode of analysis, yet one that has survived, evolved, and—like the zombies in the film “Night of the Living Dead”—keeps coming back, no matter how many times anti-Keynesians credit themselves with having dealt it a fatal blow. Monetarist, New Classical, and other recent critiques have themselves been inadequate or indefensible in various ways, as well.

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There certainly are logical reasons to think that Obama’s policies are dampening economic growth. Investors and entrepreneurs have little reason to produce and take risks, after all, when they know the burden of government is going to climb. Especially when you add uncertainty to the mix.

Here’s a chart showing Federal Reserve data on the cash holdings of non-financial corporations. As you can see, there’s been a big jump in recent years. That’s certainly an indication that people are keeping money on the sidelines.

On the other hand, there’s been a long-term upward trend in the amount of cash companies are holding, so it’s a good idea to be cautious about drawing any sweeping conclusion from the recent jump. All we can say for sure is that bad policy reduces incentives for productive behavior. This is why bigger burdens of government are associated with slower growth.

And if there is a lot of very bad policy, a nation can suffer a lengthy period of stagnation or decline. Roosevelt and Hoover in the 1930s would be a good (or should we say bad?) example of this worst-case result.

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In a previous post, I commented on a Wall Street Journal column by former Senator Phil Gramm, calling attention to evidence that the economy is under-performing compared to what happened after previous recessions. This is an important issue, particularly when you compare the economy’s tepid performance today with the strong recovery following the implementation of Reaganomics. But there was another part of the column that also is worth highlighting. Much of what we are seeing from the Obama Administration is disturbingly reminiscent of the anti-growth policies of Hoover and Roosevelt, particularly the punitive class-warfare mentality. Here’s how Senator Gramm characterizes the similarities.

Today’s lagging growth and persistent high unemployment are reminiscent of the 1930s, perhaps because in no other period of American history has our government followed policies as similar to those of the Great Depression era. …The top individual income tax rate rose from 24% to 63% to 79% during the Hoover and Roosevelt administrations. Corporate rates were increased to 15% from 11%, and when private businesses did not invest, Congress imposed a 27% undistributed profits tax. In 1929, the U.S. government collected $1.1 billion in total income taxes; by 1935 collections had fallen to $527 million. …The Roosevelt administration also conducted a seven-year populist tirade against private business, which FDR denounced as the province of “economic royalists” and “malefactors of great wealth.” … Churchill, who was generally guarded when criticizing New Deal policies, could not hold back. “The disposition to hunt down rich men as if they were noxious beasts,” he noted in “Great Contemporaries” (1939), is “a very attractive sport.” But “confidence is shaken and enterprise chilled, and the unemployed queue up at the soup kitchens or march out to the public works with ever growing expense to the taxpayer and nothing more appetizing to take home to their families than the leg or wing of what was once a millionaire. . . It is indispensable to the wealth of nations and to the wage and life standards of labour, that capital and credit should be honoured and cherished partners in the economic system. . . .” The regulatory burden exploded during the Roosevelt administration, not just through the creation of new government agencies but through an extraordinary barrage of executive orders—more than all subsequent presidents through Bill Clinton combined. Then, as now, uncertainty reigned. …Henry Morgenthau summarized the policy failure to the House Ways and Means Committee in April 1939: “Now, gentleman, we have tried spending money. We are spending more than we have ever spent before and it does not work . . . I say after eight years of this administration we have just as much unemployment as when we started . . . and an enormous debt, to boot.”

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Jonah Goldberg writes in National Review that President Obama is beginning to look like the next Herbert Hoover. This is rather ironic since the left wanted him to become the next Franklin Delano Roosevelt, ushering in a new era of politically-popular statism.
…the Great Depression discredited laissez-faire economics for a generation or more. Hoover, who was hardly the “market fundamentalist” FDR made him out to be, suffered largely from the (bad) luck of the draw, giving Democrats a chance to argue for a new deal of the cards. For reasons fair and unfair, Obama, who inherited a bad recession and made it worse, every day looks more like a modern-day Hoover, whining about his problems, rather than an FDR cheerily getting things done. Inadequate to the task, Obama is discrediting the statism he was elected to restore. 
Jonah makes a compelling case, particularly from a political perspective. But if we look just at economic policy, the Obama-as-FDR analogy is more accurate. Hoover was a big-government interventionist with failed policies. That’s a pretty good description of Bush. FDR got elected in 1932 by promising to fix the mess, which is akin to Obama’s hope and change message in 2008. And, just like FDR, Obama then continued the big-government interventionist policies of his predecessor. The only difference is that Roosevelt somehow was able to remain popular even though his policies kept the nation mired in depression for another decade. Obama, by contrast, is veering dangerously close to becoming another Jimmy Carter. Tom Sowell has some key details about the timing and impact of the Hoover-Roosevelt policies.
The history of the United States is full of evidence on the negative effects of government intervention. For the first 150 years of this country’s existence, the federal government did not think it was its business to intervene when the economy turned down. All of those downturns ended faster than the first downturn where the federal government intervened big time– the Great Depression of the 1930s. …if you look at the facts, they go like this: Unemployment never hit double digits in any of the 12 months following the big stock market crash of 1929 that is often blamed for the massive unemployment of the 1930s. Unemployment peaked at 9 percent, two months after the October 1929 crash, and then began drifting downward. Unemployment was down to 6.3 percent by June 1930, when the first big federal intervention occurred. Within six months, the downward trend in unemployment reversed and hit double digits for the first time in December 1930. What were politicians to do? Say “We messed up”? Or keep trying one huge intervention after another? The record shows what they did: President Hoover’s interventions were followed by President Roosevelt’s bigger interventions– and unemployment remained in double digits in every month for the entire remainder of the decade. There is another set of facts: The record that was set in 1929 for the biggest stock market decline in one day was broken in 1987. But Ronald Reagan did nothing– and the media clobbered him for it. Then the economy rebounded and there were 20 years of sustained economic growth with low inflation and low unemployment. Can you imagine Barack Obama doing another Ronald Reagan?

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Walter Williams explains how Roosevelt’s policies extended the Great Depression. SInce Obama apparently would like to be the new FDR, this does not bode well for America’s future. The good news, so to speak, is that Obama’s policies are not nearly as bad as what Roosevelt (and Hoover) enacted, so America today is experiencing sub-par growth rather than economic cataclysm.
…let’s look at the failed stimulus program of Obama’s hero, Franklin Delano Roosevelt. FDR’s Treasury Secretary, Henry Morgenthau, wrote in his diary: “We have tried spending money. We are spending more than we have ever spent before and it does not work. … We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started … and an enormous debt to boot!” Morgenthau was being a bit gracious. The unemployment figures for FDR’s first eight years were: 18 percent in 1935; 14 percent in 1936; by 1938, unemployment was back to 20 percent. …During the Roosevelt administration, the top rate was raised at first to 79 percent and then later to 90 percent. Hillsdale College economic historian Professor Burton Folsom notes that in 1941, Roosevelt even proposed a whopping 99.5 percent marginal rate on all incomes over $100,000. …The Great Depression did not end until after WWII. Why it lasted so long went unanswered until Harold L. Cole, professor of economics at the University of Pennsylvania, and Lee E. Ohanian, professor of economics at UCLA, published their research project “How Government Prolonged the Depression” in the Journal of Political Economy (August 2004). Professor Cole explained, “The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes. Ironically, our work shows that the recovery would have been very rapid had the government not intervened.” Professors Cole and Ohanian argue that FDR’s economic policies added at least seven years to the depression.

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Much of the economic debate in Washington revolves around the silly Keynesian notion that politicians can stimulate an economy by borrowing money from the private sector and using the funds to make government bigger. That didn’t work for Hoover and Roosevelt during the 1930s, Japan during the 1990s, Bush in 2008, or Obama last year and this year, but the theory is convenient for politicians seeking ways to justify their natural tendencies. There are other factors that impact economic performance, however, and Amity Shlaes explains in the Washington Post that Obama is making the same mistakes as Roosevelt in some of these other areas. Here’s a blurb from her column, comparing Obama’s class-warfare tax agenda with FDR’s disastrous “soak the rich” law.
By fixating on the debt and stimulus plans, Obama and Congress are overlooking challenges to the economy from taxes, employment and the entrepreneurial environment. President Roosevelt’s great error was to ignore such factors — and the result was that sickening double dip. …Income taxes, the dividend tax and capital gains taxes are all set to rise as the Bush tax cuts expire. The Obama administration portrays these increases as necessary for budgetary and social reasons. …The administration and congressional Democrats are also striving to ensure that businesses pony up. …Roosevelt, too, pursued the dual purposes of revenue and social good. In 1935 he signed legislation known as the “soak the rich” law. FDR, more radical than Obama in his class hostility, spoke explicitly of the need for “very high taxes.” Roosevelt’s tax trap was the undistributed-profits tax, which hit businesses that chose not to disgorge their cash as dividends or wages. The idea was to goad companies into action. The outcome was not what the New Dealers envisioned. Horrified by what they perceived as an existential threat, businesses stopped buying equipment and postponed expansion. They hired lawyers to find ways around the undistributed-profits tax. In May 1938, after months of unemployment rates in the high teens, the Democratic Congress cut back the detested tax. That bill became law without the president’s signature.

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Ambrose Evans-Pritchard of the UK-based Telegraph has a very dismal outlook for the US economy. I’m more optimistic. While I think Obama’s policies will prevent America from enjoying a Reagan-type boom, I don’t think the current Administration is repeating all the mistakes of Hoover and Roosevelt, so I think a depression or double-dip recession is unlikely.

Roughly a million Americans have dropped out of the jobs market altogether over the past two months. That is the only reason why the headline unemployment rate is not exploding to a post-war high. Let us be honest. The US is still trapped in depression a full 18 months into zero interest rates, quantitative easing (QE), and fiscal stimulus that has pushed the budget deficit above 10pc of GDP. The share of the US working-age population with jobs in June actually fell from 58.7pc to 58.5pc. This is the real stress indicator. The ratio was 63pc three years ago. Eight million jobs have been lost. The average time needed to find a job has risen to a record 35.2 weeks. Nothing like this has been seen before in the post-war era. Jeff Weninger, of Harris Private Bank, said this compares with a peak of 21.2 weeks in the Volcker recession of the early 1980s. “Legions of individuals have been left with stale skills, and little prospect of finding meaningful work, and benefits that are being exhausted. By our math the crop of people who are unemployed but not receiving a check amounts to 9.2m.” …in the first quarter…the economy eked out a growth rate of just 2.7pc. This compares with 5.1pc, 9.3pc, 8.1pc and 8.5pc in the four quarters coming off recession in the early 1980s.

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Citing a scholarly book by Richard Vedder and Lowell Gallaway, Tom Sowell concisely explains that government intervention caused the Great Depression.

Right here and right now there is a widespread belief that the unregulated market is what got us into our present economic predicament, and that the government must “do something” to get the economy moving again. FDR’s intervention in the 1930s has often been cited by those who think this way. …Although the big stock market crash occurred in October 1929, unemployment never reached double digits in any of the next 12 months after that crash. Unemployment peaked at 9 percent, two months after the stock market crashed– and then began drifting generally downward over the next six months, falling to 6.3 percent by June 1930. This was what happened in the market, before the federal government decided to “do something.” What the government decided to do in June 1930– against the advice of literally a thousand economists, who took out newspaper ads warning against it– was impose higher tariffs, in order to save American jobs by reducing imported goods. This was the first massive federal intervention to rescue the economy, under President Herbert Hoover, who took pride in being the first President of the United States to intervene to try to get the economy out of an economic downturn. Within six months after this government intervention, unemployment shot up into double digits– and stayed in double digits in every month throughout the entire remainder of the decade of the 1930s, as the Roosevelt administration expanded federal intervention far beyond what Hoover had started. If more government regulation of business is the magic answer that so many seem to think it is, the whole history of the 1930s would have been different.

I particularly like that Sowell compares the 1929 and 1987 stock market crashes. The market actually fell more in 1987, but Reagan wisely did nothing and the economy continued growing.

The very fact that we still remember the stock market crash of 1929 is remarkable, since there was a similar stock market crash in 1987 that most people have long since forgotten. What was the difference between these two stock market crashes? The 1929 stock market crash was followed by the most catastrophic depression in American history, with as many as one-fourth of all American workers being unemployed. The 1987 stock market crash was followed by two decades of economic growth with low unemployment. But that was only one difference. The other big difference was that the Reagan administration did not intervene in the economy after the 1987 stock market crash– despite many outcries in the media that the government should “do something.”

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The politicians in Washington and their enablers in the academy are wildly wrong about how to boost growth. They think more government spending is a key to prosperity, but this blog already has revealed that the Great Depression was made worse because of bigger government. Experts have pointed out that the best way to boost growth is to get government out of the way, as happened in the early 1920s when President Harding allowed the economy to adjust and thus deserves credit for quickly ending a serious downturn. Another great example of the benefits of a laissez-faire approach took place after World War II. The Keynesians all though the Great Depression would resume as government spending was reduced after the war. But as Jason Taylor and Richard Vedder explain for Cato Policy Report, less government spending was exactly the right approach:

….the “Depression of 1946″ may be one of the most widely predicted events that never happened in American history. As the war was winding down, leading Keynesian economists of the day argued, as Alvin Hansen did, that “the government cannot just disband the Army, close down munitions factories, stop building ships, and remove all economic controls.” After all, the belief was that the only thing that finally ended the Great Depression of the 1930s was the dramatic increase in government involvement in the economy. In fact, Hansen’s advice went unheeded. Government canceled war contracts, and its spending fell from $84 billion in 1945 to under $30 billion in 1946. By 1947, the government was paying back its massive wartime debts by running a budget surplus of close to 6 percent of GDP. The military released around 10 million Americans back into civilian life. Most economic controls were lifted, and all were gone less than a year after V-J Day. In short, the economy underwent what the historian Jack Stokes Ballard refers to as the “shock of peace.” From the economy’s perspective, it was the “shock of de-stimulus.” …What happened? Labor markets adjusted quickly and efficiently once they were finally unfettered — neither the Hoover nor the Roosevelt administration gave labor markets a chance to adjust to economic shocks during the 1930s when dramatic labor market interventions (e.g., the National Industrial Recovery Act, the National Labor Relations Act, the Fair Labor Standards Act, among others) were pursued. Most economists today acknowledge that these interventionist polices extended the length and depth of the Great Depression. After the Second World War, unemployment rates, artificially low because of wartime conscription, rose a bit, but remained under 4.5 percent in the first three postwar years — below the long-run average rate of unemployment during the 20th century. …many who lost government-supported jobs in the military or in munitions plants found employment as civilian industries expanded production — in fact civilian employment grew, on net, by over 4 million between 1945 and 1947 when so many pundits were predicting economic Armageddon. Household consumption, business investment, and net exports all boomed as government spending receded. The postwar era provides a classic illustration of how government spending “crowds out” private sector spending and how the economy can thrive when the government’s shadow is dramatically reduced.

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A great column in the Wall Street Journal explains how FDR’s policies hurt the economy. That is true, but the really interesting part of the column for me is that it explains how Roosevelt (and then Truman) were convinced the economy would return to depression after World War II unless there was another giant Keynesian plan. Fortunately, Congress said no. This meant there was no repeat of the Hoover-Roosevelt mistakes of the 1930s and the economy was able to recover and enjoy strong growth:

FDR did not get us out of the Great Depression—not during the 1930s, and only in a limited sense during World War II. Let’s start with the New Deal. Its various alphabet-soup agencies—the WPA, AAA, NRA and even the TVA (Tennessee Valley Authority)—failed to create sustainable jobs. In May 1939, U.S. unemployment still exceeded 20%. European countries, according to a League of Nations survey, averaged only about 12% in 1938. The New Deal, by forcing taxes up and discouraging entrepreneurs from investing, probably did more harm than good. …His key advisers were frantic at the possibility of the Great Depression’s return when the war ended and the soldiers came home. The president believed a New Deal revival was the answer—and on Oct. 28, 1944, about six months before his death, he spelled out his vision for a postwar America. It included government-subsidized housing, federal involvement in health care, more TVA projects, and the “right to a useful and remunerative job” provided by the federal government if necessary. Roosevelt died before the war ended and before he could implement his New Deal revival. His successor, Harry Truman, in a 16,000 word message on Sept. 6, 1945, urged Congress to enact FDR’s ideas as the best way to achieve full employment after the war. Congress—both chambers with Democratic majorities—responded by just saying “no.” No to the whole New Deal revival: no federal program for health care, no full-employment act, only limited federal housing, and no increase in minimum wage or Social Security benefits. Instead, Congress reduced taxes. Income tax rates were cut across the board. …Corporate tax rates were trimmed and FDR’s “excess profits” tax was repealed, which meant that top marginal corporate tax rates effectively went to 38% from 90% after 1945. Georgia Sen. Walter George, chairman of the Senate Finance Committee, defended the Revenue Act of 1945 with arguments that today we would call “supply-side economics.” If the tax bill “has the effect which it is hoped it will have,” George said, “it will so stimulate the expansion of business as to bring in a greater total revenue.” He was prophetic. By the late 1940s, a revived economy was generating more annual federal revenue than the U.S. had received during the war years, when tax rates were higher. Price controls from the war were also eliminated by the end of 1946. …Congress substituted the tonic of freedom for FDR’s New Deal revival and the American economy recovered well. Unemployment, which had been in double digits throughout the 1930s, was only 3.9% in 1946 and, except for a couple of short recessions, remained in that range for the next decade.

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Nobody would ever want me to sing, so I won’t be appearing in any videos like this very clever production about John Maynard Keynes and Friedrich Hayek.

The video is entertaining, for sure, but it also includes some very good economic analyis.

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