Tuesday, 7 December 2010

A Hick-up on economic history

The ignorance of so-called financial commentators is legion.

Take this just yesterday from alleged financial commentator Bernard Hickey, showing he’s as poor a historian as he is an economist.

_Quote_Idiot Obama is just like Hoover - US economist Thomas Palley
hits the nail when he compares Obama to President Hoover,
the President before Roosevelt who fiddled* while the economy
slumped into recession…

This is just flat-out ignorant nonsense. Dangerous nonsense, since it is intended to reinforces a myth that encourages more meddling, of which Mr Hickey now approves. I replied at his site roughly as follows:

_QuoteBernard, you said, "Obama is just like Hoover - US economist Thomas Palley hits the nail when he compares Obama to President Hoover, the President before Roosevelt who fiddled* while the economy slumped into recession..."
    There is no polite way to say this: This is just flat out wrong.
    If Palley has hit anything it is only his thumb--and yours. If you are going to talk as some kind of authority, then please learn what you're talking about before you open your mouth.
    The only thing Palley got right is that Obama (and Hoover, and Roosevelt, and Bush) should not have listened to mainstream economists.  But to listen to Palley peddling lies about Hoover’s record (and you spreading them further) makes my stomach turn.
    Because, far from keeping his hands off while the economy tanked, Hoover was precisely as active as you and your new interventionist mates would have liked him to be **
    He intervened to keep prices up.
    He intervened to keep wages up.
    He borrowed to put deficits up.
    He supported and signed the Smoot-Hawley Tariff Act.
    He endorsed the Federal Farm Board, which placed the government into the farm business.
    He introduced the Reconstruction Finance Corporation (RFC), which spent billions on loans (or gifts) to prop up failing banks and industries.
    In short, he did almost exactly what Bush did, and what today’s mainstream economists encourage, with results that were just as dismal. 
    And instead of fixing the crash, he turned it into a full-blown depression.
    He introduced what Benjamin Anderson calls “Hoover’s New Deal,” and with it he delivered what deserves to be called “Hoover's Depression.”
    Virtually everything in Roosevelt’s New Deal was in Hoover’s. Just like Obama did with Bush, And after campaigning against Hoover's "big-spending" and “fiscal irresponsibility,” when elected FDR went right on ahead and did just what Hoover did, only moreso.  Just like Obama did with Bush. 
    And instead of fixing the depression, he made it last for years.
    Between them, Hoover and FDR were a disaster—and their “underconsumptionist” thesis firmly exploded. 
    So if there's any historical comparisons to be made here (and there are) the only one that makes any sense is to say that Obama is playing FDR to Bush's Hoover. 
    And they're both a goddamned disaster.

HOWEVER, if you really do want to learn about an Administration that sat back while the economy slumped into recession, you really should learn more about the “Great Depression of 1920-21”--where the initial slump was even bigger than it was nine years later. 
    But do you want to know why you don't hear more about The Great Depression of 1920-21? It's simple. While the slump was much bigger, because the government sat back, got out of the way, and allowed the economy to recover, in less than two years the US economy had restructured, recovered, and was back on its way to growth again.
    In short, the authorities then did what Hoover (and Bush, and FDR, and Obama, and Greenspan, and Bernanke) should have done.
    Which was to get the hell out of the way.
    And that's why it's been called "The Depression You've Never Heard Of."  Because their fiddling* in 1920-21 while the economy slumped into recession was what allowed the economy to restructure, to recover, to “rebalance,” and to get back on the road again.
    It’s just impossible for an economy to do that when government is doing all it can to meddle.

* * * *

* Just to be clear, so there's no misunderstanding, by fiddling we all mean what Nero did -- which was "fiddling while Rome burned" -- not what Obama/Bush FDR/Hoover did, which was intervene, intervene, intervene.

** "Franklin D. Roosevelt, in large part, merely elaborated the policies laid down by his predecessor. To scoff at Hoover's tragic failure to cure the depression as a typical example of laissez-faire is drastically to misread the historical record. The Hoover rout must be set down as a failure of government planning and not of the free market. To portray the interventionist efforts of the Hoover administration to cure the depression, we may quote Hoover's own summary of his program, during his presidential campaign in the fall of 1932:

        “We might have done nothing. That would have been utter ruin. Instead we met
    the situation with proposals to private business and to Congress of the most gigantic
    program of economic defense and counterattack ever evolved in the history of the
[Quoted in From Murray Rothbard's book America's Great Depression]

*** In the 1932 election Roosevelt attacked Hoover’s meddling, and “promised a free-market approach to economic growth: cut federal spending, reduce taxes, and lower the Smoot-Hawley tariff.  He hit these three points frequently [“… also promising to cut government in size by 25 percent and to balance the budget in each year of his presidency”] , and no doubt won many votes because of that…” [Quoted in Burton Folsom’s New Deal or Raw Deal]

At the time of writing, Hickey hasn’t bothered to respond.

NB: There are two primary reasons an economy needs a hands-off approach in order to restructure.

First, the economy has got out of whack in the boom period, during which much money has been lost and many resources consumed in malinvestments

Pumping newly-printed money back in to make up the loss (which as Von Mises used to say is like backing over a man you’ve just run down in your car, in the hope that the new accident will remedy the last) only leaves everyone uncertain about where and when all that newly-printed money is going.  What businessmen need to be able to do is read the price signals, and fit their price “coats” according to the reduced amount of monetary “cloth” around. Once the new price levels have been found, the economy is ready to be productive once again—but that can’t happen when prices themselves are being meddled with. Businessmen can’t do that when the whole price structure is put out of whack by these gobs of counterfeit capital, .  

Second, because the economy has got out of whack, it does need to restructure. Resources are down, and the best use has to be made of what’s remaining. The best way to ensure that doesn’t happen is to bail out bad positions, making sure those resources can’t be put to better use elsewhere. The second-best way to ensure it doesn’t happen is to announce so many new laws, measures, rules, regulations and bail-outs that no businessman knows from one day to the next what he can plan for. This is what Robert Higgs calls the phenomenon of regime uncertainty, which is arguably more responsible  than anything else for so many businessmen hunkering down and refusing to invest.

Here’s the sort of thing I mean: legislation introduced yesterday to break up what was once NZ's largest company.

Recession means recovery—or should doiff governments get out of the way so businessman can recover.

Explains Murray Rothbard in America's Great Depression (which you can, and should, read online here in PDF),

_Quote The "boom" ... is actually a period of wasteful misinvestment. It is the time when errors are made, due to bank credit's tampering with the free market. The "crisis" arrives when the consumers come to reestablish their desired proportions. The "depression" is actually the process by which the economy adjusts to the wastes and errors of the boom, and reestablishes efficient service of consumer desires.

The "depression" is a necessary thing.

_QuoteThe adjustment process consists in rapid liquidation of the wasteful investments. Some of these will be abandoned altogether (like the Western ghost towns constructed in the boom of 1816–1818 and deserted during the Panic of 1819); others will be shifted to other uses.
    Always the principle will be not to mourn past errors, but to make most efficient use of the existing stock of capital. In sum, the free market tends to satisfy voluntarily-expressed consumer desires with maximum efficiency, and this includes the public's relative desires for present and future consumption. The inflationary boom hobbles this efficiency, and distorts the structure of production, which no longer serves consumers properly.
    The crisis signals the end of this inflationary distortion, and the depression is the process by which the economy returns to the efficient service of consumers.
    In short, and this is a highly important point to grasp, the depression is the "recovery" process, and the end of the depression heralds the return to normal, and to optimum efficiency. The depression, then, far from being an evil scourge, is the necessary and beneficial return of the economy to normal after the distortions imposed by the boom. The boom, then, requires a "bust."

Time to stop worrying then, and learn to love the recovery.

And to stop treating the likes of Hickey as an economic authority.


  1. Kim Jong Hickey's contradictions are enough to warn anyone off (other than politicians, of course; they love him because he thinks the State is the answer for every ill in one way or another.) Appalling really.

    But of more importance, someone is going to have to tackle last nights Bernanke 60 Minutes interview:


    Especially his statement that QE II is not inflationary because it does not increase the money supply: it is simply an action being taken by the Fed to keep a cap on interest rates.

    I'd love to see that pulled apart, as it flies in the face of how I understand the process, including that of Treasury bonds, that is:

    a) Why does a government sell bonds if not to get money,

    b) The Fed is not using 'existing' money to buy these bonds, it has to be book entries,

    c) So this must be an increase in the money supply, thus inflationary? What after all, is this $600 billion injection that everyone is talking about otherwise.

    But if that is the case, as I understand, how could Bernanke be so wrong on such a public interview?

    Or is Bernanke saying that all this $600 billion is somehow already existing in reserves of some sort – but that still begs the question doesn’t it, now such reserves are being ‘activiated’?

    I've emailed Don Boudreaux at Cafe Hayek to see if he'll blog on it, plus William Andersons (Mises).

    Perhaps Bernard is advising Bernanke now?

  2. I don't why people are reading Hickey's commentaries on newsmedia (TV, print & on internet). The guy is trying to talk like an economic scholar but his ignorant of the subject is quite obvious to those who have studied economics to higher level than undergrad level.

    Hickey is suffering from wanting to say something just about everything economics or financial and since he needs to say something, then his ignorance showed up when he just made up stuff. It is unbelievable that politicians & the MSM treats his every word as something Godly or more like an Economics Nobel Prize winner. Unbelievable! The blind (Hickey) leading the blind (MSM, politicians & the general public).

  3. Great comment PC. It's good there's guys like you around who've got this history at their fingertips to counter this interventionist-lust. Good work.


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