… as if on cue,

the current chairwoman of the council of economic advisors, Christina Romer, reminded us today that 'the economy needs a further boost' (link to www.cnbc.com/id/37180969 unavailable per 16.6. 2010) from the government. Romer is another self-styled  'expert on the depression', and similar to all the other 'experts' is about as ignorant about it as you can get.




Christina Romer – she looks harmless enough, alas…

(Photo credit : Alex Wong / Getty Images)



"I worry that policymakers may take the return of growth as license to withdraw the support that has been essential to the recovery," she said. Romer urged Congress to a pass a series of measures Obama has proposed to jump-start growth, including the establishment of a lending fund to spur credit to small businesses and providing cash-strapped cities and states with aid to help them avoid layoffs of teachers and other local employees."


Now, there is indeed much to worry about, but an economy can not be 'jump-started' as if it were a stalled engine. Contrary to Romer's assertion, the government's massive spending has likely retarded recovery considerably (of course, that just means in her world that they 'haven't spent enough', wink, wink).

As mentioned in yesterday's article, if the government implements these proposals for additional spending, it will have to take the funds from somewhere else in the economy. There is no free lunch-packet lying around in the oval office from whence a well-meaning president can distribute goodies to all who might require them.

All he can do is shift wealth from A to B – imagine if you will, taking a leaky bucket, and using it to take water from one end of the bath-tub and pouring it back at the other end, and you have a near perfect analogy. The important thing here is that the bucket is indeed leaky. Nothing invites more corruption and waste than a government program purporting to 'help the economy'.

These programs usually are designed to reward political cronies (and I think we can be fairly certain that the 'urgent need to help teachers and local employees' Mrs. Romer worries about can be freely translated as 'the public sector unions that helped getting us elected want their pound of flesh'), with representatives in the legislature adding pork left and right to the spending bills.

As a reminder, here is a list of some of the 'stimulus spending programs' of  'Stimulus 1.0', as recounted in a blog Mish wrote back in December. It contained such undoubtedly highly important spending items as

  • 'Study of Wildflowers in a Ghost Town' ($448,995)
  • 'Water Pipeline to a Money-Losing Golf Course' ($2.2 million)
  • 'Research to Develop Supersonic Corporate Jets' ($4.7 million)
  • 'Study on "Hookup" Behavior of Female College Coeds' ($219,000)
  • 'Recovering Crab Pots Lost At Sea' ($700,000)
  • 'Study of the division of Labor in Ant Colonies' ($950,000)

and so forth – you get the drift.

One isn't quite sure whether to laugh or be outraged (yes, the numbers in brackets are the amounts that were spent on this nonsense in order to, ahem, 'jump-start' the economy). While I can't prove it, I feel fairly certain that if an investigative journalist were to actually 'follow the money' to its recipients, some interesting discoveries might be made as to how they became so favored. I merely mention these examples to underscore the aptness of the 'leaky bucket' metaphor.

Further down in the article, the following statements can be found (keep the Pepto-Bismol handy):


Romer, an expert on the Great Depression, used much of her speech to compare the current economic crisis to the long downturn of the 1930s. She said that Obama once called her his "Frances Perkins," a reference to President Franklin Delano Roosevelt's secretary of Labor and the first woman to serve in the Cabinet. Romer said there have been parallels between Obama's economic response to that of Roosevelt but said that was less the result of a deliberate effort but instead was because "we were facing similar problems and shared similar core values."




A plague of misguided experts

Let us first deal with the 'expert on the Great Depression' stuff. It is quite evident from what one reads that none of these recently proclaimed experts (Ben Bernanke is also widely perceived to be a depression expert)  seem to know anything about the many efforts to lift the veil from the fact that the  New Deal attempts to 'fix' the economy were an utter failure. I already cited the UCLA study 'New Deal prolonged the depression by seven years' yesterday.

You can find countless more examples of well-reasoned arguments, such as 'How FDR's New Deal Harmed Millions of Poor People' by Jim Powell, or Burton and Anita Folsom's brief article in the WSJ which rhetorically asks 'Did FDR end the depression?' and reminds us that economic recovery only came after the war, when Congress finally rejected nearly every New Deal policy FDR had introduced and decided to cut taxes instead (a number of veritable monsters from FDR's era however survived, as an example the GSE's Fannie and Freddie that not only were instrumental in helping to create the recently deceased housing bubble, but nowadays cost the US tax payer tens of billions of dollars every quarter).

Furthermore, it seems highly unlikely that any of these 'experts' ever read Murray Rothbards book about the depression, which deals with the Hoover years and completely demolishes the false notion that Hoover was a 'liquidationist' or in any way supportive of a 'laissez faire' approach to economic recession. Rothbard did us all a great service by refuting this historical lie, which is regularly dragged up by supporters of FDR's statism and interventionism as a justification for deficit spending. In addition, Rothbard clears up a widespread misconception about the causes of the depression.

It is widely held among today's 'experts' that the cause of the depression was:

  • government inaction (false) and
  • a failure of the Federal Reserve to print money (false as well).

In reality, the cause of the bust were the malinvestments of the preceding credit-induced boom. It is true that countless mistakes then deepened and prolonged the depression, but they are the opposite of what the interventionists claim. Consider for instance that the Fed increased excess free bank reserves by over 400% between 1929 and 1932.

I wouldn't exactly call that a 'failure to print'. True, the money supply declined in spite of these exertions, but this was largely due to so many banks going under on account of bad loans on their books. Their demise destroyed a large amount of deposits – a process over which the Fed had no control. Money that had been created from thin air during the boom simply went back to whence it had come from – thin air.

Mrs. Romer first came to my attention when she wrote about the 'depression-within-the-depression' of 1937-1938, in an article titled 'The lessons of 1937'. In this article she describes the renewed downturn as having been caused by 'a return to contractionary monetary and fiscal policy' as the Fed allegedly 'worried way too early about its exit strategy' (it is interesting that the Fed seemed to require an 'exit strategy'. Exit from what? Doesn't the 'expert version of history' allege that the Fed didn't print?).

Robert Murphy writes here about 'Christina Romer's faulty depression history', showing that the actual numbers from that time period can not possibly be used to support the Keynesian argument about deficit spending (I have noticed that a general problem all these 'experts' like Romer seem to have is a strong tendency to  gloss over  data that don't support their demand for more spending).

I would like to add my own two cents here – where Romer is factually correct is that the Fed pulled back from what had been an extremely inflationary policy by raising bank reserve requirements. This reduced the volume of bank lending (i.e. the creation of money from thin air) and consequently unmasked the inflationary boomlet for what it always was: a mirage.

This is the crucial point not understood by the mainstream – that a boom based on a vast expansion of money and credit is not sustainable. You could say that in this case an unsustainable boom was ended 'voluntarily' by the Fed in 1937. The alternative would have been to let it careen out of control and risk an even bigger bust later on – or in the worst case, a complete immolation of the currency system.


Furthermore the article states:


She credited Obama's policies, such as enacting the $787 billion economic stimulus program in 2009, with helping to prevent a second Great Depression.  Romer said that, like Roosevelt, Obama recognized the economic crisis called for an "all-out policy response" but she described the current president's policies as more "market-oriented" than those of Roosevelt."


Well, move over Ben Bernanke! And there we thought you were the guy who 'prevented another great depression'. Given that there are now a record 40 million Americans living on foodstamps, and given a U6 unemployment rate of close to 17%, I believe we should perhaps reserve judgment on that topic. Premature victory laps are par for the course for the political establishment and the bureaucracy, alas, the depression is still young (consider that the Great Depression contained the aforementioned inflationary mini-boom as well. No-one thinks the depression ended in 1934 however).



Three different measures of the unemployement rate – the government's U3 and U6 (explanations here), and the 'alternate' measure issued by www.shadowstats.com, which attempts to reduce the 'unfounded optimism bias to make politicians look better'  inherent in government statistics (readers are invited to make up their own minds about the methodologies employed, details can be found at the site. The SGS alternate adds back unemployed workers that were 'defined out of existence in 1994') – chart by shadowstats.com – click for higher resolution.




Franklin Delano Roosevelt – a brief glimpse

I guess we can consider ourselves lucky though that the president's policies are considered 'more market-oriented than those of Roosevelt'. Sure enough, no-one has as of yet ordered the destruction of crops in order to raise the prices of agricultural products – one of FDR's major boondoggles in what was a veritable treasure trove of insane policies. Now consider, the people currently in charge are evidently full of admiration for FDR's policies.

After all, we have it from the horse's mouth, so to speak. To give you a brief impression of FDR's efforts, let me briefly quote from 'The Truth about FDR' by Thomas Woods, regarding the topic of the New Deal agricultural policy:


FDR s agricultural policies were in a class of genius all their own. Convinced that falling prices were hindering economic recovery, FDR decided that prices were now to be raised by any means necessary. Agriculture Secretary Henry Wallace, as thoroughgoing a Soviet dupe as this country has ever seen, described the wholesale destruction of crops and livestock in which he and FDR engaged in order to boost farm prices as "a cleaning up of the wreckage from the old days of unbalanced production" (as Tindall and Shi quote him, approvingly). Wallace, you see, knew precisely what quantity of production would bring things into "balance." What a waste that Wallace should have devoted his omniscience to a matter so mundane when thousands of crimes were doubtless going unsolved at that very moment. Tindall and Shi assure us that "for a while these farm measures worked." Well, if by "worked" you mean they succeeded in their goal of raising the prices of food and clothing at a time when people were desperately poor, then I suppose they did "work." Slaughtering some six million pigs and engaging in the destruction of enormous supplies of wheat and cotton did tend to increase the prices of these items. Congratulations.

While this program was under way, the Department of Agriculture released a study regarding the American diet during these lean years. The Department constructed four sample diets: liberal, moderate, minimum, and emergency (below subsistence). Its figures were sobering: America was not producing enough food to sustain its population at the minimum (subsistence) diet.


I leave you with this little glimpse into the world the vaunted FDR created. I'm astonished why he is still approvingly mentioned as a role model by politicians and bureaucrats to this day. Or perhaps I shouldn't be astonished.



TIME magazine, whose economic editorials often strike me as slightly to the right of Marx, thinks there is something to be learned from FDR – indeed, there is, but not what TIME thinks. Note in this context, back in FDR's own time, TIME magazine had a quite different editorial policy on interventionist economics. Poor FDR's understanding of economics was regularly subjected to scathing reviews. The passage of time has evidently  helped to transfigure his times for TIME.




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