One of my pet peeves involves bloggers who dig up old posts in an effort to show how prescient they were at a given point in time. So, please believe me when I say, that resurrecting a recent post on some ideas involving the Depression is not an attempt to prove anything, rather a means of reintroducing a theme or two that I will probably flog mercilessly over the next few months. The catalyst for the disinterment was a column of George Will’s today.
Will’s column neatly falls into three pieces. He first points out that the Depression was not ended by the New Deal, a fact that probably comes as no surprise to most of you readers, but rather by the spending engendered by World War 11. He then delves into the theories of Amity Shales and some like minded economists who contend that by encouraging strong unions and higher wages than were economically justified, the Depression was elongated (more about this in a moment). Finally he gets to the area which I wrote about several weeks ago and want to discuss a bit further.
more: Will’s column, my posts with links
Will quotes from Russell Roberts of George Mason University who holds that one of the great problems of the Depression was the uncertainty and chaos that was created by the solutions adopted to cure it. He notes the climate created by multiple and sometimes contradictory solutions destroy the rules of the game. In his words:
There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next.
That seems to pretty well sum up the current state of affairs and based on statements from the Obama team we can expect to see initiatives on steroids in the first days of the next administration. Is it unreasonable to expect that we might see the same sort of reaction from the private sector as occurred during the Depression if we do fall into the trap of serial solutions to the problem?
Also included in my post was an article by Andrew Wilson, a former Business Week writer, that highlighted popular myths about the Depression. All are entertaining but the last is important to note. Contrary to popular belief, the government did not solve or pull the economy out of the Depression. In fact, they may have had as much culpability for its long run as any other agent. Pump priming with one hand while taxing with the other left it in shambles.
Back to Ms. Shales for a moment. She and Paul Krugman are now in something of a blogosphere cat fight over the Obama plans for stimulus. Her views can hardly be said to be in vogue and, naturally, raise some hackles among an administration and its supporters known to be more than a little indebted to unions. As I wrote last night, I have a bit of ambiguity about how to fit the labor and income inequality issue into all of this. I am going to have to resolve that ambiguity quickly and will let you know when I do.
At any rate, the point I seem to be lurching towards is that government stimulus programs intended to right the current economic situation have the potential for much damage. To the extent they distort normal economic decision making and normal market pricing mechanisms the net effect is likely to be negative. Much is being written about the “multiplier effect” associated with fiscal stimulus via direct spending as opposed to tax cuts. Leaving aside the weaknesses in the concept, tax policy while never benign if done on a broad enough basis has the advantage of leaving decision making up to the market.
We know this much about Obama’s plans so far. They are infrastructure targeted, will emphasize green industries to some extent and are likely to involve support for state and local government spending. That is a policy that is as much social engineering as it is fiscal stimulus. The dislocations are likely to result in signigicant inefficiencies and are unlikely to do much in the way of solving the problems.
The best course would be to follow the Hippocratic Oath, “First, do no harm.”