Great Expectations
I’ve been reading up on the Great Depression (never say those of us at TPC don’t know how to have fun) and am struck by one overriding thought: Even with the benefit of 80 years of hindsight, economists still can’t agree on either what went wrong or how the economy got back on track.
There is an important lesson here. Famously impatient, Americans not only expect government to fix today’s economic crisis, they demand it. Barack Obama, I suspect, will have about a year to turn things around before the public turns on him. Yet, if we still don’t know what happened in 1929, how can we expect policymakers to truly understand—and correctly address—events happening in real time today?
Here is the dirty little secret: Obama doesn’t know how to fix the recession. Nobody does. It is easy (though wrong) to say Herbert Hoover failed to grasp the enormity of the Depression. But in truth, FDR had little better idea of how to respond to the crumbling economy. In fact, Roosevelt was famous for trying one solution after another until something seemed to work.
There is broad agreement on what government should not do, such as run a tight monetary policy or restrict trade. But there is much less consensus on what it should do. How much will pulling fiscal levers boost demand? Is massive new government spending really such a good idea? Will tax cuts get people and businesses spending again?
When credit markets collapsed earlier this year, George Bush turned to his group of wise men for advice. They included Fed Chairman Ben Bernanke, a highly-regarded student of the Depression. President-elect Obama has now chosen his team, including Christy Romer, another expert on that era. They are very smart, and have access to far better data than their counterparts had in the 30s.
But today’s data are not that good. And there is no magic bullet. For instance, Treasury Secretary Hank Paulson has been roundly criticized for his on-again-off-again use of the TARP. First, he insisted on using the $700 billion to acquire bad assets, then he decided to pump liquidity into financial institutions, and now he is giving $13 billion to the auto companies. This seems incoherent because it is. But trial-and-error is as inevitable in economics as in medicine—another field based more on art than science.
Obama’s stimulus plan, which by some accounts will cost $850 billion or more, will include its share of bad ideas. Some initiatives may at first seem to make perfect sense but will inevitably have dreadful unintended consequences. And there will be good ideas that should be in the plan but fail to make the cut.
Those of us who kibbitz from the sidelines will identify mistakes and demand better alternatives. But we should have no illusions. Getting a huge, complex, and still poorly understood economy back on track is not going to be simple and it will take time. Obama, despite the stratospheric expectations he’s raised, is going to make errors. We will, and should, call him on those poor choices. But we’d be fools to expect perfect diagnosis and treatment from the incoming Administration.
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Geneticall Modified Foods Great post- keep it up…
Great post- keep it up…
It is not exactly true to say that the macroeconomists don't know how the system gets back on track nor how the slump came about in the first place. But this knowledge is not common amongst them! For reasons that are obscure the way macroeconomics is taught and treated is often without providing a proper explanation about the so called “business cycles”. One book I have on the subject give 7 different reasons and then after long descriptions claims that none of them are satisfactory!
There is one explanation missing which is generally ignored and it is to do with land values. Land values are determined by a monopolistic system of banks and landlords/speculators who purchase this natural resource as if it were an item of capital goods. (It is not, it is a gift of nature for whom we should all get equal opportunities to use, but unfortunately this is not how our society is run.) The land value always rises after a slump and it does so as cities become more productive in both size and technical efficiency. After about 18 years the price of land has become so high that nobody can aford to speculate in it and the land-bubble is ready to burst. This occurs when mortgage holders begin to default and houses to be foreclosed due to their high cost and the fact that what looked like a good investment is too costly to keep up, or which can already be seen to be falling in value.
Then the banks who joined in with this kind of speculation find that their reserves are insufficient to cover the demands from deposit account holders. Normally without there being a “run” on the banks they can borrow from each other but these are credit squeeze times and its hard to get a loan! As the banks start to become bankrupt less production is done and the whole system begins to falter as more and more debts fail to be paid and less and less loans are possible.
Thus after the land bubble burst comes the bank failures and then unemployment becomes rife as the producers find that the demand for their goods is slackenning.
So the basic cause is in the monopolistic nature of land ownership and speculation. No other item of goods, be they consumer goods or capital type goods, falls into the same category as land because these other goods can always be bye-passed with something similar. But as Mark Twain wrote, “they ain't making land anymore” so the cartel in it is perfect and the price will never stabilise as it must with all the other goods.
The cure is to change the laws regarding the way land is treated within our society so as to prevent its speculation. The best way is by the introduction of a land tax. (Please see my writings on this site regarding taxation for more details.)
I shouild add that I have built a model of the macroeconomy which is both simple to see and comprehensive to use in that it covers the whole system. So all is not lost all we need is to spread the good news.
Please look in Henry George on the google search engine also try http://www.progress.org to find out more about land value taxation or LVT.