Aug 31, 2010

Rethinking The Depression

Three Stories. All Relevant. My 2 Cents sprinkled around.

The Parent Model
Excerpt: During the first half of this year, German and American political leaders engaged in an epic debate. American leaders argued that the economic crisis was so bad, governments should borrow billions to stimulate growth. German leaders argued that a little short-term stimulus was sensible, but anything more was near-sighted. What was needed was not more debt, but measures to balance budgets and restore confidence. The debate got pointed. American economists accused German policy makers of risking a long depression. The German finance minister, Wolfgang Schäuble, countered, “Governments should not become addicted to borrowing as a quick fix to stimulate demand.”

The two countries followed different policy paths. According to Gary Becker of the University of Chicago, the Americans borrowed an amount equal to 6 percent of G.D.P. in an attempt to stimulate growth. The Germans spent about 1.5 percent of G.D.P. on their stimulus. This divergence created a natural experiment. Who was right? The early returns suggest the Germans were. The American stimulus package was supposed to create a “summer of recovery,” according to Obama administration officials. Job growth was supposed to be surging at up to 500,000 a month. Instead, the U.S. economy is scuffling along. The German economy, on the other hand, is growing at a sizzling (and obviously unsustainable) 9 percent annual rate. Unemployment in Germany has come down to pre-crisis levels.

My 1/2 cent - ironic that in 70 odd years, it's the Germans trying to teach the Americans how to prevent a Depression.

Little-known fact: Obama's failed stimulus program cost more than the Iraq war
Excerpt: Expect to hear a lot about how much the Iraq war cost in the days ahead from Democrats worried about voter wrath against their unprecedented spending excesses.
The meme is simple: The economy is in a shambles because of Bush's economic policies and his war in Iraq. As American Thinker's Randall Hoven points out, that's the message being peddled by lefties as diverse as former Clinton political strategist James Carville, economist Joseph Stiglitz, and The Nation's Washington editor, Christopher Hayes.

The key point in the mantra is an alleged $3 trillion cost for the war. Well, it was expensive to be sure, in both blood and treasure, but, as Hoven notes, the CBO puts the total cost at $709 billion. To put that figure in the proper context of overall spending since the war began in 2003, Hoven provides this handy CBO chart showing the portion of the annual deficit attributable to the conflict:

My half cent - weren't we supposed to be selling that Iraqi oil to ourselves by now to pay for that situation?

FDR and the Lessons of the Depression
[LINK] Excerpt: In 1937, after several years of partial recovery from the Great Depression, the U.S. economy fell into a sharp recession. The episode has become a lightning rod in the ongoing debate about whether the economy needs further increases in government spending to keep employment from declining even more. Christina Romer, the outgoing chair of the President's Council of Economic Advisers, started this debate last year in The Economist by drawing a parallel to 1937 for anyone getting cold feet about increased government spending and soaring deficits. New York Times columnist Paul Krugman chimed in by claiming that the economy will repeat the experience of the 1930s if government spending is not increased.

The economy did not tank in 1937 because government spending declined. Increases in tax rates, particularly capital income tax rates, and the expansion of unions, were most likely responsible. Unfortunately, these same factors pose a similar threat today. Here are the facts: Real government spending, measured in 1937 dollars, declined by less than 0.7% of GDP between 1936 and 1937, and then rebounded in 1938. It is implausible that such a small and temporary decline reduced real GDP by nearly 3.5% in 1938 or reduced industrial production by about one-third. But in 1936, the Roosevelt administration pushed through a tax on corporate profits that were not distributed to shareholders. The sliding scale tax began at 7% if a company retained 1% of its net income, and went to 27% if a company retained 70% of net income. This tax significantly raised the cost of investment, as most investment is financed with a corporation's own retained earnings.

The tax rate on dividends also rose to 15.98% in 1932 from 10.14% in 1929, and then doubled again by 1936. Research conducted last year by Ellen McGratten of the Federal Reserve Bank of Minneapolis suggests that these increases in capital income taxation can account for much of the 26% decline in business fixed investment that occurred in 1937-1938.

My last cent - it wasn't spending, or not spending or even WWII that pulled the US from the Depression Era - it was that all the competition had been blown to hell, and the US was the only manufacturing base that was left standing. There was zero competition for 15 years. And when Japan and Germany were rebuilt with American Marshal Plan dollars - in part to stop the spread of Russian Brand Communism - those brand new factories were able to produce better products than the US. And, the US was also spending a majority of their GDP dollars in the defense of Western Europe and Japan (which we're STILL doing in 2010), which allowed for 'enlightened' social programs of Western Europe and also Japan, since an insignificant amount of their GDP were being spent on their own defense and military. I think my meter just ran out, so I better end with a quote...

Socialism is like a dream. Sooner or later you wake up to reality. ~ Winston Churchill

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