Wednesday, September 17, 2008

Who's The Modern Herbert Hoover?

Paul Krugman notes the eerie similarities between the assurances of President Herbert Hoover in 1930 that "the fundamental business of the country" was sound, and similar assurances today by John McCain that the fundamentals of the economy is sound (whether that is true or not depends on what you mean by fundamentals, see my classic post "the two sides of the American economy" on the distinction between micro- and macro fundamentals).

Perhaps Krugman and other Obama supporters (Krugman was a Hillary supporter during the primaries and so a Obama critic at the time, but being a Democrat he is now a Obama supporter) should instead focus on the similarities of policies. As Murray Rothbard documented in his great book America's Great Depression (available online here, can be ordered in paper format here) Herbert Hoover's economic policies consisted of higher taxes, higher government spending, trade protectionism and government coercion to prevent wages from falling. Fast forward now from 1930-32 to 2008 and ask yourself which candidate propose consistently higher marginal tax rates, higher government spending on for example health care, who argues for protectionist trade policies and higher minimum wages and stronger unions (which will enable them to artificially prop up wages). Well, I think we all know which candidate best fit that description....

Of course, these Herbert Hoover policies weren't the main cause of the Depression (the main cause was monetary policy) but they did make the Depression even worse than it had to be, and so would implementation of similar policies make the current crisis even worse than it has to be.


Anonymous Anonymous said...

I love people who say what they truly think. I love your honesty.

2:26 AM  
Blogger Celal Birader said...

Hello Stefan,

I just clicked back and read your paper "two sides of the American economy".

How prophetic it is given it was written in January of 2006 --- way before there was even any hint of all this current financial macro mess.

In recent days, a number of politicians have started to take certain political stands. For instance, they are for the first time becoming more vocal in the media and even becoming outspoken in their criticism of the Treasury's AIG action.

Which way do you see things developing on the macro/political front in regard to the ongoing developments in the markets ?

But more importantly, which way should it develop ?

What distinctions do we need to make in this whole spectrum between nationalisation at one end and complete laissez faire liberalism at the other end ?

2:38 AM  
Anonymous Anonymous said...

It baffles me that no one in the American mainstream media is even mentioning monetary policy as a reason for this disaster. The media seems certain that this problem was caused by a lack of government regulation. Stefan, what do you think the effects of more financial regulation will be?

Also, between Obama and McCain, who do you think will be the better President regarding the economy?

8:38 AM  
Anonymous Anonymous said...

Exactly the same as Ludvig von Mises wrote in Human Action about monetary policy and other policies during the period 1920-1940

Also, the dollar was devalued by 40% in 1934

May you live in interesting times,

Göran, Sweden

8:42 AM  
Blogger stefankarlsson said...

Celal: I think it would be healthy if the financial institutions were allowed to fail. While that would make the short term downturn more painful, it would first of all force Americans to increase their savings and so reduce the imbalances in the economy and it would secondly deterr this kind of reckless behavior in the future and thus reduce the risk of future similar problems.

As the AIG case shows, it is doubtful that the politicians will choose to follow that path.

Anonymous2: I think there is no doubt at all that McCain-Palin is the lesser evil for the economy compared to Obama-Biden. Both because he is more market friendly and because it is generally more beneficial with divided government and given that the Democrats will control Congress, that requires McCain as president.

The only scenario where that would not hold would be if McCain started a war Obama wouldn't have started. But given how small the difference in foreign policy is and given that the Democratic Congress will keep McCain in check, I find that unlikely.

9:57 AM  
Blogger Allen said...

Was the main cause of the *depression* monetary policy or was that behind the big recession which the taxes made worse? Weren't FDR's policies the difference between a big recession, of which the economy works itself out of after a year or three and a depression which takes the economy nearly a decade to get out of?

3:26 PM  
Blogger Celal Birader said...

To Anon @ 8:38 AM

I think lack of regulation (or perhaps lack of proper regulation) has been characteristic of the Bush2 administration and has had a large part to play in the current set of events.

As Exhibit A i give you the repeal of the Uptick Rule.

Had this rule been in force there would have been no need to ban short selling of financial shares.

I could go on with the laxities seen with the body that oversees commodities trading (especially oil) but time does not permit.

8:04 PM  
Blogger Allen said...

Celal, you're going to have to explain what regulations could've prevented the crisis. From what I've seen, the govt via the Fannies, housing law and policies, cheap money from the feds and stuff created it.

As for short selling itself, I fail to see how banning it helps. It would seem to prolong the "crisis" and draw it out. Even if it doesn't, at best it seems like a lil' sponge-bob squarepants band aid that's going to be used to try to fix a severed leg. Even if you had a thousand of these band aids you still can't actually do anything significant to address the severed leg.

9:41 PM  

Post a Comment

<< Home