Don’t Bring Back Glass-Steagall

My latest article for the American Institute for Economic Research is "Don't Bring Back Glass-Steagall."

Recent Scribblings

TGIF: "Economy or Catallaxy?
Op-ed: "The Ominous U.S. Presence in Northwest Africa"
Op-ed: "Mali: Here We Go Again"
TGIF: "Government Undermines Social Cooperation"
"World War II Spending Did Not End the Great Depression"
"No More Corporate Welfare"
"Against Government Debt"

Op-ed: War Doesn't Produce Prosperity

[H]ave a look at what the leading Progressive Keynesian, Paul Krugman, and leading conservative Keynesian, Martin Feldstein, agree on: a big war is apparently the only way left to get the U.S. economy out of its doldrums....

[T]hank goodness we don’t need a war to prosper. Shame on those who say we do.

Read the rest here.

Krugman Flunks Capital Theory

Paul Krugman is said to have beat up on George Will during this joint appearance on ABC's "This Week" back in November. But all Krugman really did was show that he, like Keynes, holds an unrealistic Play-Doh model of capital, as opposed to the heterogeneous, multistage, intertemporal structure-of-production model of the Austrian school. When Will notes that there was negative net investment during the 1930s, Krugman responds that, of course, there was negative net investment: "Because when . . . all the factories are standing idle, who wants to build a new one?"

Point for Krugman? Wrong.

If Krugman took the Mises-Hayek trade cycle theory seriously he'd realize that the idle factories in the 1930s represented malinvestment induced by Federal Reserve credit expansion in the 1920s. This policy, by lowering the interest rate and falsely signaling an increase in real saving (i.e., a preference for future over present goods), shifted resources from later stages of production (closer to the consumer) to earlier stages of production. Unfortunately, those who think of capital as a heap of homogeneous, monochrome Play-Doh aren't sensitive to this point. Capital is capital is capital. That's why Krugman can't understand why someone would want to invest when factories stand idle.

When the inflationary boom ended, as it had to because it was artificially induced and there weren't enough resources for both the early stages and the later stages (where consumers wanted them), the malinvestments had to be liquidated. But since capital consists not of Play-Doh but of discrete things -- buildings, machinery, tools materials -- with particular characteristics, those that were the products of malivestment were not necessarily suitable for other purposes. They couldn't simply, costlessly, and instantly be moved and employed in later stages of production. Hence, the idle factories. This was wasted capital brought about by the credit expansion. This was the depression.

If the economy was to recover, new investment consistent with consumers' actual preferences had to be undertaken. But that required time and saving, i.e., deferred consumption. It also required a stable political environment in which investors could be confident that their property was safe from the government. Unfortunately, thanks to tax increases, unending interventionist programs, and threatening antibusiness rhetoric, FDR's government failed to provide that environment.

Krugman's flip remark to Will is a perfect illustration of what is wrong with Keynesian economics.

Cross-posted at Anything Peaceful.

Shame on You, Paul Krugman

We are certainly used to the fallacious Keynesian "economics" that pours forth from most of Paul Krugman's New York Times columns. That's bad enough. But dishonesty too? What's the excuse for that? In a recent column called "Fifty Hebert Hoovers," Krugman expressed fear that the nation's governors would follow in the footsteps of Hoover, with devastating consequences for the economy. And what did Hoover do that has Krugman so concerned? He writes:

No modern American president would repeat the fiscal mistake of 1932, in which the federal government tried to balance its budget in the face of a severe recession....

But even as Washington tries to rescue the economy, the nation will be reeling from the actions of 50 Herbert Hoovers — state governors who are slashing spending in a time of recession.... [Emphasis added.]

Krugman here leads his readers to believe that Hoover tried to balance the budget by slashing spending. In fact, Hoover did not reduce spending. On the contrary, he increased it. If he aimed at balancing the budget, it was through tax increases not spending cuts. For example, the top marginal income-tax rate jumped from 24 to 63 percent. Anyway, he actually ran large budget deficits. In this, as in many other areas, Hoover anticipated Franklin Roosevelt. (See my article, "Bad Deal," in The American Conservative, Jan. 12.)

Does anyone believe that Krugman is unaware of that fact?

Cross-posted at Anything Peaceful.

Budget Deficits and Stimuli

It’s an article of faith that running budget deficits during the New Deal helped end the Great Depression. This myth has been demolished countless times, but it hasn’t penetrated to the pundits and pop economists who host cable news-talk shows. In fact, FDR did not run extraordinarily large budget deficits, and J.M. Keynes actually criticized FDR for this. For details see this New York Times article by Price V. Fishback of the University of Arizona and the National Bureau of Economic Research. Fishback writes, “Once we take into account the taxation during the 1930’s, we can see that the budget deficits of the 1930’s and one balanced budget were tiny relative to the size of the problem [reversing the fall in GNP since 1929]."

This point was also made by Jim Powell in FDR’s Folly: “Changes in federal budget deficits didn’t correspond with changes in gross domestic product, and in any case the federal budget deficit at its peak (1936) was only 4.4 percent of the gross domestic product, much too small for a likely cure.” (Emphasis added.)

Cross-posted at "Anything Peaceful."