Originally Posted by independent

Even the 1980s can't be fairly compared to the 1910s or 1840s - its so extreme in relation to its historical/cyclical counterparts.

The tax system is most obvious: capital gains at 15% max and payroll tax starts at ~14% as the absolute minimum. Add actual income taxes on top of that and it isn't hard to see who is paying the larger part of their income into the system.

This is a really important point. There are actually two distinct categories of wealthy people in our society. You have the financial sector and government contractor types whose wealth is staggering and lightly taxed and the entrepreneurs and high-skill professionals whose wealth is very comfortable but heavily taxed. Both the left and right have conflated these two groups with the left unjustly scorning legitimate wealth and the right unjustly praising parasites.

Originally Posted by Brian Rush

Well, what I meant was actually very close to that. I think that we are at or near the bottom and that the economy will begin growing again, sluggishly, within the next year or two. Since the next presidential election is three years away, it will be taking place in a time of recovery. Sort of.

I'm not sure the timing will be quite so optimal for the incumbent President. If 2012=1933, he's pretty much screwed. If 2012=1935, he'll do quite well. We'll have to wait and see, but we should be able to tell by 2Q 2010.

Originally Posted by Brian Rush

I would say that while Social Security, unemployment insurance, etc. were of some importance, much more important were progressive taxation (which discouraged very high incomes and forced wealth back into the productive economy), and support for labor unions (which pushed up wages), together with trade and immigration policies that also encouraged high wages.

This is probably true. My main criticism of these policies is that they constitute compensation for the damage wrought by centralization rather than an actual end to the problem. Which is why it was all too easy to gut this system with a series of exceptions and undermine any positive effects.

Originally Posted by Brian Rush

The Reagan administration did not attempt to reverse all of the New Deal, but rather reversed parts of it that were outside the public eye at the administrative level, while flattening the tax system and encouraging an end run by removing the barriers to outsourcing of labor. Also, the current wink-and-nod immigration policy, which encourages illegal immigration and so provides an exploitable labor force, was implemented.

This is why "laissez faire" is an inaccurate description of the Unraveling. The rules and systems in place remained but the enforcement became selective. It wasn't "let alone" but "look away." Open immigration would be excellent if it were truly legal and didn't place laborers in limbo. Similarly, deregulation works great when you actually make people responsible and streamline the rules for everyone. Get rid of rules for the big boys only and you get a system that is the worst of all worlds.

Originally Posted by Brian Rush

. . . the main change may be that we can no longer . . . pretend that we are a nation in which a person can become ridiculously wealthy and at the same time one in which the wealth is broadly distributed. Those two goals are incompatible and we will have to recognize and accept that fact.

It used to be that I would have a knee-jerk negative response to income re-distribution. But recently I've come to the conclusion that a freed market (note the future tense) could not possibly produce the kind of wealth disparities we often see in "market" economies. Differences in intelligence or talent simply do not account for the difference. As a result, any major concentration of wealth is evidence of someone rigging the game and if you can't figure out how they're doing it, the best stop gap measure is some level of re-distribution. The main quibble I have with mainstream liberals is their tendency to see the welfare state as an end-game rather than a defensive measure. Just turning back the clock to the '50s is neither sufficient, nor particularly desirable or even possible.

Originally Posted by playwrite

My sense is we are currently in the calm eye of the hurricane . . . It may be the Alt-A mortgages coming due in 2012 or it might be some black swan that tips us over the cliff. . . In the panic, people will swing to Krugman's view and question why more wasn't done to a much greater degree than last October

I'm not so sure, I think this scenario will be very damaging to public support for stimulus (monetary or fiscal).

Originally Posted by playwrite

The knee-jerk Austrian answer is of course, "deficits, deficits, deficits" (and in turn, debasing the currency, hyper inflation, government black helicopters, yaddi-yaddi) If those deficits, however, neither raise inflation nor interest rates to unsustainable levels, where is the harm?

The Austrian stance is that substantial deficit spending must have monetary effects given the way our government manages its debt. So, fiscal stimulus is bad in the sense that it engenders additional monetary stimulus (or tax increases). If however, such monetary impacts didn't materialize, then one would have to reconsider that view. However substantial stimulus without monetary impacts seems like a have-your-cake-and-eat-it-too scenario.

Originally Posted by playwrite

If, and when, we get S&H’s 1T, Kondratieff’s Reflation ‘Spring,’ Schumpeter's exponential tech innovation/adoption/dispersion growth, and the Dow marching to 50-100K in constant dollars, won't that make a lot of people seem pretty silly? It happen before - check the 1950s.

Fallact: Post hoc, ergo propter hoc. Re-establishment of international trade and an end to wartime command economies could have been more than sufficient to create the postwar boom. IOW, it would be the end of the WWII "stimulus" that allowed the boom to occur.

To independent, you said:

Originally Posted by playwrite

Also, I think I should point out it is simply disingenuous to the discussion to suggest that there is no benefits to the stimulus (e.g. roads, sewage treatment, drinking water plants are being build and employing people).

The proper question is, at what cost? We've already discussed the possible macro/monetary drawbacks, but there are also plenty of things unseen. We have no way of knowing how the resources used for those stimulus items would have been expended otherwise and its arrogant to assume that they are necessarily more efficient than what markets would produce. In order to justify fiscal stimulus, you have to make a series of assumptions:

1) That the monetary effects of the stimulus are less significant than their total cost.
2) That the projects chosen are more beneficial than what would otherwise have been produced and
3) That the projects do not subsidize pathological aspects of our economy (centralization, oligarchy, mass consumption) that contribute to future crises.

It's hard to put a number on all of these things, but it's very easy to suspect that benefits of fiscal stimulus are relatively tiny, and potentially quite negative.

To be clear, I'm far more concerned about Obama continuing the Bush record on civil liberties and war than his stimulus spending. My response to the former is anger, to the latter just a cynical eye-roll.

Originally Posted by independent

Here are several opportunity costs:

• Inability to deal with future waves of the crisis (ARMageddon, derivative clearings)
• Inability to afford transition costs for infrastructure and medical improvement
• Inability to create new permanent employment
• Loss of Confidence in Foreign Investors
• The opportunity cost of "wasting" a crisis and failing to address root causes

Taxes can be a net economic benefit if they're going to manage sectors with high external costs and benefits: education, medicine, transportation - these are essential components of a well functioning society. Of course, there has to be a stable financial system as well, but we're investing "whole-hog" in one that's responsible for a global economic disruption.

There's also political capital. When Obama rushed in to put the final props under the banking class, he spent a lot of the peoples' support for deficit spending. While medical reform and educational reform are more important for defining the character of our 1T, they will face more resistance and diminished resources if we even get around to really addressing them.

Based on who the interested parties are and how Congress tends to vote when forced to choose sides, I don't see anything changing yet or in the foreseeable future.

Of course - I could be proven wrong if unemployment stops rising and prices at the grocery store come back down. I figure we'll lose another 25-35% on the dollar and 5-10% of jobs before the 2011-panic clears up. I don't know if there's anything we could do to stop that in the short run, but I'm pretty confident that we could be making better choices for the longer term.

I think what you are hinting at is the "political will" to tackle several socioeconomic needs, and that "poliical will" is being drained by concern for the deficits caused by the stimulus.

Let's put aside the fact, as illistrated by the chart I posted above, that the deficit creation since the Clinton surpluses has been much more to do with the business cycle recessions (2002 and now) coupled with the policies of Bush. Let's go ahead and not only wrap all past 'sins' together but lets add in the likely new ones of further stimulus, health care revamp as well as some Medicare rescue and letting the SS 'crisis' just play itself out. Let's deem this the big Deficit Bête Noire (or, BDBN)

The question is does the BDBN in and of itself create the opportunity costs you listed or is it the fear of the BDBN that creates the costs, i.e., is it a self-fulling prophacy built on fear? If it is the latter, then perhaps we can all get a little backbone and quit listening to and certainly stop propogating the fear, no?

It would seem that all your dire consequences would stem from the inability for further expenditure, either in the private or public sectors. Now the stimulus is exactly aimed at this concern for the private sector; it is a real concern. However, what you are trying to do is lay this concern or some future amplification of it onto the BDBN. There are really two elements of this BDBN concern. The first is that the BDBN of the government will "crowd out" the expenditures by the private sector. The second is that the BDBN will exceed a point where foreign bond holders will no longer support it.

Let's have a heavyweight weigh in. With its unspoken but fascinating linkages to the S&H Turnings, I would suggest a full reading of this article, but let me just excerpt a few things for your consideraton (note - written in 2007) -
http://www.newamerica.net/files/NAF_...vest_color.pdf

Critics assert that efforts to expand
the scope of the public sector will drive up interest
rates and crowd out private business investment.
The accusation is particularly likely to be heard
when a proposal explicitly foresees the use of the
credit market, deficits, and public debt to finance
the expansion.
Are these fears justified? There is a two-part
answer to this question, the first related to economic
theory, and the second to the specific conditions facing
the United States in the world credit markets.
The theory of “crowding out” is based on a
common misconception of the nature of savings in
our economy, namely the idea that savings are a
“pool,” fixed in size, from which the public and
private sectors alike draw to finance their desired
The Macroeconomic Considerations of a Public Investment Strategy
rates of spending. No such pool exists. Rather,
what we measure as savings is created after the fact,
by the spending decisions of governments and private
businesses. These decisions create income; the
difference between income and consumption (the
latter, strongly established by habit), is savings.
Historically, savings have tended to rise in good
economic times and fall in bad economic times
because the household sector had limited direct
access to the credit markets. Thus a public budget
deficit was practically required for an expansionary
policy, and this gave rise to the idea that the public
sector competes with the private sector for available
funds. In the 1990s, however, the combination of a
stock market bubble, a housing boom, and credit
market innovations lifted this constraint, especially
for upper-income households. The household sector
was able to draw, to an unprecedented extent,
on loans against home equity (or in some cases,
against capital gains in the stock market) to finance
current consumption spending. Personal savings
went negative as the economy boomed.
A fall in personal savings was thus the counterpart
of the consumption boom. The fall in savings
also sent the federal budget into surplus: as spending
rose, incomes rose, and tax revenues grew. This
was, in effect, a “Keynesian devolution”: the economy
moved toward full employment on the
strength of spending fostered by public policy and,
in some important respects, guaranteed by the
public sector, but not carried out directly by government.
Thus the private (household and corporate)
sector ran deficits that the government would,
under other conditions, have been obliged to run.
Were the interest rate determined mainly by the
pull of federal credit demands on a “pool of savings,”
interest rates should have fallen as the federal
budget went into surplus. That did not happen.
Long-term interest rates remained around 7
percent throughout the period, and only declined
toward present values after the Internet bubble
burst in 2000. They reflected, in other words, the
health of the economy as a whole, and the use of
resources in relation to full capacity. After the
NASDAQ collapse, and especially following 9/11,
long-term interest rates fell sharply, despite the
strong movement of the federal budget into deficit.
If a public investment program (in combination
with other policies) were so successful as to bring
the economy up to full employment in the near
term, it might have a modest effect on long-term
interest rates. However, during our last experience
with noninflationary full employment in the late
1990s, there were few complaints that long-term
interest rates, which were then 200 basis points
higher than they are now, were a constraint on private
business activity. There is no strong reason to
believe that in a new period of full employment
this situation would be different. Moreover, the
scenario of a return to full
employment is optimistic.
It is now clear that the
depressing effects of the
slowdown in housing and
the fallout from the subprime
mortgage crisis will
be felt in a slower growth
rate of real GDP—perhaps
even in a recession. In
these circumstances, a
major public investment
strategy is exactly what will
be needed to stimulate job creation and private
investment. However, there is no reason whatsoever
to fear that even a large public investment
program would raise interest rates significantly.
We can conclude, first, that there is no direct
connection between federal budget deficits or surpluses
and long-term interest rates. Bond-financed
public investment poses no significant threat to
financial stability on that account. We can also
conclude that long-term interest rates may be
influenced by a combination of capacity pressures
in the domestic economy and inflation expectations.
However, this effect would be limited by the
fact that the domestic economy is unlikely to be at
full capacity in any event, and by conditions in the
world economy, which determine total effective
supply as well as the price for commodities and the
value of the dollar.

and in regard to -

Financing Abroad and the Dollar. This decade has
seen the emergence of an unprecedented deficit in
the current account and the accumulation of vast
reserves of dollar-denominated bonds abroad, especially
in China and Japan. The deficit in the external
accounts is the accounting counterpart—the
exact equal—of the sum of public and private sector
deficits in the domestic economy. It is also the
accounting counterpart—the exact equal—of the
aggregate reserve buildup.
This phenomenon is often referred to as “borrowing
from foreigners to finance current consumption,”
but again the shorthand is misleading.
When an American purchases a Japanese car,
credit is created and extended by an American
bank. Dollars then change hands, and Honda, say,
ends up with an income in dollars, which it converts
into yen. The Japanese central bank then
uses the dollars (which earn no interest as cash) to
purchase U.S. Treasury bonds (or some other
yielding asset), on the open market. But America
has in no sense borrowed from Japan to finance
the purchase of a car. Rather, a bank loan made in
the United States has created a dollar asset, which
subsequently has been purchased by an institution
(the Bank of Japan) that has no immediate use for
it and merely chooses to store it in a liquid, interest-
bearing form.16
The equilibrium of this system is neither balance
in the U.S. current account, nor any particular
given level of deficits. The equilibrium is, rather,
whatever level of dollar reserves the rest of the
world economy chooses to hold. And that level has
proven to be highly elastic, owing to the growth of
economic activity overseas and the behavior of the
major foreign central banks.
Under this system, the Japanese and the
Chinese central banks are passive receptacles into
which U.S. Treasury bonds can be deposited,
ostensibly for future use, but in fact and for practical
purposes permanently. These dollar reserves
are presently so large that there is no economic
scenario under which they can be spent without
causing them to lose a large part of their value. As
such, neither Japan nor China has much choice
but to accept U.S. Treasury bonds, even at low
long-term interest rates, and this both have been
doing for some time.
Thus, a more-or-less stable condominium of
major countries conspires, in effect, to support the
U.S. current account deficit and low long-term
interest rates because, for the present, they see it as
the least bad alternative. This could change, and
someday perhaps it will—particularly if the United
States continues to lose its position as a trusted
force for stability on the world scene.
But for the time being, the situation imparts
considerable stability to long-term interest rates,
and gives U.S. policymakers a considerable margin
of maneuver. An expansion of the economy is, of
course, certain to increase the current account
deficit.17 But so long as the basic policy of China,
Japan, and similarly situated major players remains
unchanged, the result will be largely what it has
been so far: the continued accumulation of dollar
reserves on their part, and on our part an unfettered
capacity to make economic policy decisions.
A political crisis, such as over Taiwan, or a war
(such as with Iran), might force rapid change on
the system. But there is no compelling reason to
believe that purely economic considerations will do
so in the short run, insofar as the situation has
been developing for a decade, and they have not
had this effect up until now.
This international financial structure is practically
unprecedented—and precarious, in the sense
that something bad could happen. But the fact that
something bad could happen does not necessarily
mean that it will. So long as the structure lasts, the
most likely effect of a substantial public investment
program on long-term interest rates in the United
States is that they will not change very much.

Feeling less fearful?

Originally Posted by Kurt Horner

I'm not so sure, I think this scenario will be very damaging to public support for stimulus (monetary or fiscal).

I think this might be a question of where one stands depending on where one sits (e.g., out of work, family on the street, no savings left) or where one feels they could be sitting (e.g., out of work, family on the street, no savings).

Originally Posted by Kurt Horner

The Austrian stance is that substantial deficit spending must have monetary effects given the way our government manages its debt. So, fiscal stimulus is bad in the sense that it engenders additional monetary stimulus (or tax increases). If however, such monetary impacts didn't materialize, then one would have to reconsider that view. However substantial stimulus without monetary impacts seems like a have-your-cake-and-eat-it-too scenario.

Perhaps the possiblity derives from cyclical rather than linear thinking?

Originally Posted by Kurt Horner

Fallact: Post hoc, ergo propter hoc. Re-establishment of international trade and an end to wartime command economies could have been more than sufficient to create the postwar boom. IOW, it would be the end of the WWII "stimulus" that allowed the boom to occur.

This seems akin to that amusing notion that it wasn't govt spending, it was WW2!!! I vote for letting this one remain in each individual's creed.

Originally Posted by Kurt Horner

The proper question is, at what cost?

That was my point - cost/benefit analysis. I may have been mistaken, but I read his as an assertion that there was no benefit whatsoever.

Originally Posted by Kurt Horner

We've already discussed the possible macro/monetary drawbacks, but there are also plenty of things unseen. We have no way of knowing how the resources used for those stimulus items would have been expended otherwise and its arrogant to assume that they are necessarily more efficient than what markets would produce. In order to justify fiscal stimulus, you have to make a series of assumptions:

1) That the monetary effects of the stimulus are less significant than their total cost.
2) That the projects chosen are more beneficial than what would otherwise have been produced and

From a macro-economic perspective, you can make some valid assertions. The stimulus is from deficit-spending, it would not be spent today by the private sector - they don't yet have it. There is no present value to an expenditure if it is not spent. Indy is correct that it is future opportunity costs that are ltraded off (putting aside the costs of anticipated inflation as he wished). My question is there a possibilty within his or your belief systems, or scenarios that you are willing to entertain, where those costs are de minimus?

Originally Posted by Kurt Horner

3) That the projects do not subsidize pathological aspects of our economy (centralization, oligarchy, mass consumption) that contribute to future crises.

And of course we'd have to weight that against the possiblity of a reoccurance of at least the evil we have seen in the private sector should all of that money have been left laying around again.

Originally Posted by Kurt Horner

It's hard to put a number on all of these things, but it's very easy to suspect that benefits of fiscal stimulus are relatively tiny, and potentially quite negative.

It is the ease of coming to that conclusion that I not only question but truly find so amazingly confusing.

Originally Posted by Kurt Horner

To be clear, I'm far more concerned about Obama continuing the Bush record on civil liberties and war than his stimulus spending. My response to the former is anger, to the latter just a cynical eye-roll.

Yep, its been over 100 days, what's up with this Mesiah? Should we nail him up now or should we wait until his first State of the Union to show history how really patience we were?

Originally Posted by Kurt Horner

Fallact: Post hoc, ergo propter hoc. Re-establishment of international trade and an end to wartime command economies could have been more than sufficient to create the postwar boom. IOW, it would be the end of the WWII "stimulus" that allowed the boom to occur.

Actually, that is a PH/PH argument. And it doesn't even hold up very well if we disregard the fallacious character of the reasoning, because the economy fully recovered during the war, not after it. After the war, it soared to new heights unprecedented, so the wartime stimulus can't account for that, true (there were other factors at work), but the recovery itself occurred while the war was being fought.

We can't account for postwar prosperity by "[r]e-establishment of international trade and an end to wartime command economies" either, unless we restrict ourselves to comparing the postwar economy with the anomalous Depression years. A better comparison is between the High/Awakening economy and that of the previous saeculum in its first 3 Turnings (disregarding the Crisis). There was plenty of international trade, and except for the few years of World War I no wartime command economy, from the 1870s to 1929. So that isn't a difference that can account for the difference.

What I see as accounting for the unprecedented prosperity of this saeculum prior to 1973 is the shift in the rules enacted in the 1930s, which pushed wages up across the board and lowered income gaps. The wartime spending produced the recovery, but not the sustained prosperity that followed.

I feel another thing needs to be pointed out w/r/t the thread topic (since obviously neither the pre-Depression nor the postwar economy represents libertarian free-market conceptions). In the pre-Depression economy, as has been (rather amazingly) agreed by many here including libertarians, government policy interfered in the economy to keep wages down and facilitate transfers of wealth from the working class to the rich. In the postwar economy, the government still engaged the economy (even more so actually), but with the opposite intent and result.

So here's the question I have. Is it possible for the government to actually keep its hands off an industrial economy? Would the economy function well without government regulation, infrastructure spending, etc.? If not, then is it not a question, not of how much the government messes with the economy, but rather how and on who's behalf?

Between those two historical periods that is certainly what made the difference. The question is whether that was required by the realities of industrialization.

Originally Posted by playwrite

My question is there a possibilty within his or your belief systems, or scenarios that you are willing to entertain, where those costs are de minimus?

Sure, but what I don't accept is the possibility of being able to accurately predict those situations beforehand. In fact, anyone who strongly benefits from certain stimulus projects has a huge incentive to downplay the costs.

Originally Posted by playwrite

It is the ease of coming to that conclusion that I not only question but truly find so amazingly confusing.

Well, it seems that in the absence of any specific evidence otherwise one would expect stimulus to break-even. It's a transfer of resources from one part of the economy to another. As a result, you can only expect a net gain by presuming that the new employment of resources is more optimal than the arrangement that would otherwise prevail. So, my question to you is: on what basis do you assume that it's more optimal? If stimulus tends to break even, there's not much point.

I come to the further conclusion that stimulus is probably a net negative by the same means that one critiques any hierarchical decision system -- the ability and desire of those at the top of a hierarchy to understand or accommodate the needs of those at the bottom is low. In fact, meeting distributed needs is precisely what hierarchies don't do. Expecting a process like the creation of fiscal stimulus to help out the little guy is fanciful. It's a square peg for a round hole.

Originally Posted by playwrite

Yep, its been over 100 days, what's up with this Mesiah? Should we nail him up now or should we wait until his first State of the Union to show history how really patience we were?

Patience is only appropriate on matters where the change takes time to implement. In the case of state secrets, unlawful detention, etc, the Obama DoJ simply needed to refrain from continuing to argue for such policies in the same manner as the Bush DoJ. On this point they have already failed.

Originally Posted by Kurt Horner

Sure, but what I don't accept is the possibility of being able to accurately predict those situations beforehand. In fact, anyone who strongly benefits from certain stimulus projects has a huge incentive to downplay the costs.

Actually, my use of de minimus is intended to take the need to measure the stimulus benefits out of consideration. Assume they are de minimus as well. Is there a level of stimulus costs that one could consider de minimus? Or, are there scenarios where you could accept that happening?

Originally Posted by Kurt Horner

Patience is only appropriate on matters where the change takes time to implement. In the case of state secrets, unlawful detention, etc, the Obama DoJ simply needed to refrain from continuing to argue for such policies in the same manner as the Bush DoJ. On this point they have already failed.

I understand, and share, your concern.

Originally Posted by Brian Rush

...I feel another thing needs to be pointed out w/r/t the thread topic (since obviously neither the pre-Depression nor the postwar economy represents libertarian free-market conceptions). In the pre-Depression economy, as has been (rather amazingly) agreed by many here including libertarians, government policy interfered in the economy to keep wages down and facilitate transfers of wealth from the working class to the rich. In the postwar economy, the government still engaged the economy (even more so actually), but with the opposite intent and result.

Your posts are thoughtful and I gravitate to your way of thinking.

I was just wondering about this conclusion that govt intervention pre-Depression was on par with post-Depression, just in an opposite manner. Do you believe it was as comprehensive in scope and planning, as systematic, as post-D? I see it more as occasional, sometimes traumatically brutal, but generally on a backdrop of laissez-faire. I don't believe I am as well verse as you in this time period so I 'mreally standing to be educated here. I am interested to hear Kurt's perspective on this particular element as well.

Originally Posted by Brian Rush

Actually, that is a PH/PH argument. And it doesn't even hold up very well if we disregard the fallacious character of the reasoning, because the economy fully recovered during the war, not after it. After the war, it soared to new heights unprecedented, so the wartime stimulus can't account for that, true (there were other factors at work), but the recovery itself occurred while the war was being fought.

The economy did not recover during the war. GDP "increased" and unemployment "decreased" but those numbers bear no relationship to the economy as it existed before or after the war. The wartime economy saw further depression of private investment in consumption goods, saw rationing and a general reduction in quality of life. Those were not "good times" by any reasonable conception of the term.

That the economy boomed post-war especially after all the Keynesians predicted a plunge back into Depression indicates that wartime "prosperity" was a fantasy. It's a dangerous fantasy, too, since it means there are a lot of people who think that military spending is a boon to the economy.

Originally Posted by Brian Rush

I feel another thing needs to be pointed out w/r/t the thread topic (since obviously neither the pre-Depression nor the postwar economy represents libertarian free-market conceptions). In the pre-Depression economy, as has been (rather amazingly) agreed by many here including libertarians, government policy interfered in the economy to keep wages down and facilitate transfers of wealth from the working class to the rich. In the postwar economy, the government still engaged the economy (even more so actually), but with the opposite intent and result.

I guess I can understand why you're amazed at that. There are an awful lot of right-leaning types who talk like the 1920s were good times (except for monetary policy). The more radical libertarians have never thought that, and younger libertarians generally don't labor under the delusion that bad old FDR ended a period of sweetness and light.

The quibble I have is the contention that the government "changed direction" in the New Deal. Rather, it added new policies to offset the general upward redistribution.

Originally Posted by Brian Rush

So here's the question I have. Is it possible for the government to actually keep its hands off an industrial economy? Would the economy function well without government regulation, infrastructure spending, etc.? If not, then is it not a question, not of how much the government messes with the economy, but rather how and on who's behalf?

Those are big questions. They strike me as akin to wondering what trans-Atlantic trade in the 18th century would be like without mercantilism. One's view of what you're missing is obscured by the massive entrenched system in the way.

What I'm arguing for, as a sort of liberal-libertarian fusionism, is that we leave in place or streamline the parts of the system that redistribute downward while actually attacking the centralizing and aggregating features. It requires that a) libertarians chill out about the welfare state and b) that liberals stop taking a centralized economy as a given.

Originally Posted by Brian Rush

Between those two historical periods that is certainly what made the difference. The question is whether that was required by the realities of industrialization.

My contention is that it was not required, but that court historians have certainly encouraged the view that a centralized, corporate economy was inevitable.

Originally Posted by playwrite

I was just wondering about this conclusion that govt intervention pre-Depression was on par with post-Depression, just in an opposite manner. Do you believe it was as comprehensive in scope and planning, as systematic, as post-D? I see it more as occasional, sometimes traumatically brutal, but generally on a backdrop of laissez-faire. I don't believe I am as well verse as you in this time period so I 'mreally standing to be educated here. I am interested to hear Kurt's perspective on this particular element as well.

My answer would be that it increased, but not nearly as much as is usually described. I also believe that it was just as systematic and that the presumed "backdrop of laissez-faire" is probably the greatest myth in American history.

There's a tendency to view government spending levels as a good proxy for government power. But that view is critically flawed. Often, government power (and that of the business interests attached to that power) stems from legal provisions that are extremely cheap to enforce. Take patent law, for example. The cost of running the patent office and trying patent cases is minuscule compared to the impact it has on the economy -- and patents have been around a very long time.

In the previous saeculum, large companies routinely traded patents in order to benefit each other and lock out smaller competitors. This still happens today, but the practice has deep roots, and given long patent terms such a system contributes to oligopoly conditions. This and many other policies, creates oligopsony conditions in the labor market which depresses wages and worsens working conditions by reducing the number of available employment options. There is also a tendency for all employers in a field to adopt identical cultures that make switching employers moot for improving one's conditions.

A similar story can be told throughout what was then typical federal government activity. The list of market interventions existing pre-Depression is quite long. Just to name a few: central banking, regulatory agencies*, farm subsidies, IP, corporate agency status and cheap limited liability, tariffs and other trade barriers, immigration controls, land grants, etc.

So, the non-beltway libertarian analysis is that big government is not a counterweight to big business, but rather the relationship is mutually reinforcing and only apparently antagonistic. Essentially, occasional minor policy disputes within the elite are mistaken for actual conflict and division. Real conflict within the elite is exceedingly rare and, incidentally, appears to only occur at social moments.


* Contrary to popular belief the primary push for regulation nearly always originates with the dominant firms in a particular industry attempting to impose costs on their competitors.

Originally Posted by Kurt Horner

The economy did not recover during the war. GDP "increased" and unemployment "decreased" but those numbers bear no relationship to the economy as it existed before or after the war. The wartime economy saw further depression of private investment in consumption goods, saw rationing and a general reduction in quality of life. Those were not "good times" by any reasonable conception of the term.

You're cherry-picking your facts here. It is a fact that the wartime economy produced full employment, and that the hunger and homelessness of the Depression years dropped almost to nothing. The wartime economy did not see "depression" of private investment in consumption goods, it saw production targeted on what was in demand: goods for the war.

What's more, I contend that the wartime spending is what allowed the economy to convert after the war to a more normal consumer economy, almost painlessly and certainly without slipping back into depression. Well, that plus the rule changes as I said. But the fact that almost everyone had been well paid for several years (while being unable to buy much because of rationing) meant that consumer demand was no longer depressed -- if anything, it was excessive. The incentive to invest in consumer goods production after the war was huge, consequently the demand for labor was also huge, and so the discharged military veterans and laid-off war-factory workers were quickly re-hired for civilian purposes. The war forced the type of Keynesian stimulus spending that Keynes had always advocated and Roosevelt always resisted.

That the economy boomed post-war especially after all the Keynesians predicted a plunge back into Depression indicates that wartime "prosperity" was a fantasy.

No, it just indicates that many of the Keynesians didn't understand the implications of their own economics. One must not get lost in the etherials of fiscal and monetary policy; one must always remember what it's all about, which is the real economy of producers and consumers. As long as there is demand, there will be investment and economic growth. The key is to ensure that prosperity is broadly distributed. Keynesian stimulus is only a means to that end, and not always one that's needed -- in fact, the better we arrange the distribution of wealth, the less often it will be needed, until ideally it is never needed at all.

I'm actually not a Keynesian. Come down to it, what I am is a socialist. But a believer in decentralized socialism, not the top-down command type.

It's a dangerous fantasy, too, since it means there are a lot of people who think that military spending is a boon to the economy.

No argument there. We would have been better off (in LOTS of ways, not just economically) if the same stimulus could have been spent on some sort of wealth production instead of on slaughtering people and destroying property.

The quibble I have is the contention that the government "changed direction" in the New Deal. Rather, it added new policies to offset the general upward redistribution.

Not entirely. In some ways it really did reverse course. Most obvious example: the government stopped discouraging organized labor and started encouraging it.

It's true that many of the same very basic laws and policies, most notably the treatment of corporations as persons, remained in force and still do. I'm not sure what it would take to change something that well entrenched, though.

What I'm arguing for, as a sort of liberal-libertarian fusionism, is that we leave in place or streamline the parts of the system that redistribute downward while actually attacking the centralizing and aggregating features. It requires that a) libertarians chill out about the welfare state and b) that liberals stop taking a centralized economy as a given.

I think we might have the makings of sincere agreement in that.

Originally Posted by Brian Rush

I think we might have the makings of sincere agreement in that.

I'm pretty good with that as a working position, too.

I've found, talking to rational socialists such as yourself, that our positions really don't clash so severely if we take the time to -- as Kurt put it -- chill out and reassess the details we are taking as givens.

Originally Posted by Brian Rush

I've commented before that your apparent belief in the need for an economic downturn to reach a certain level of wealth destruction before the economy can recover is pure mysticism. There is simply no rational reason to hold that belief.

Actually there is. The sort of ecoomic world that libertarians tend to support is one with price stability and a minimum degree of fiscal and monetary policy.

To get to such a world from where we are now does require massive wealth destruction. Libertarians are refreshingly honest about that.

Originally Posted by Kurt Horner

The wartime economy saw further depression of private investment in consumption goods, saw rationing and a general reduction in quality of life. Those were not "good times" by any reasonable conception of the term.

Actually that's not true. Unlike all the other belligerents during the war, the nonmilitary-related American economy grew during the war.

Everybody was gainfully employed during the war years. Persdonal income was much higher in the 1940's than in the 1930's. And Americans spent more absolutely on consumption.

They spend less relative to what they could afford, which is what rationing accomplished. Normally what happens during wartime is wages rise, but prices rise more and so real consumption falls, allowing for miltiary cossumption. During WW II prices were fixed and rationing held consumption to levels far below income, forcing a huge amount fo savings. Output soared so fast that all the war material could be produced and more domestic output as well.

When the war ended, instead of the usual postwar depression, we got a boom that lasted a generation. I believe this is what China is trying to accomplish today--except without a war. This explains why they are willing to lend us so much of their money, when they know thay will never be repaid.

Originally Posted by Mikebert

Actually there is. The sort of ecoomic world that libertarians tend to support is one with price stability and a minimum degree of fiscal and monetary policy.

To get to such a world from where we are now does require massive wealth destruction. Libertarians are refreshingly honest about that.

That's different from saying that wealth destruction is required before we can recover from a recession.

Originally Posted by Brian Rush

What's more, I contend that the wartime spending is what allowed the economy to convert after the war to a more normal consumer economy, almost painlessly and certainly without slipping back into depression. Well, that plus the rule changes as I said. But the fact that almost everyone had been well paid for several years (while being unable to buy much because of rationing) meant that consumer demand was no longer depressed -- if anything, it was excessive. The incentive to invest in consumer goods production after the war was huge, consequently the demand for labor was also huge, and so the discharged military veterans and laid-off war-factory workers were quickly re-hired for civilian purposes. The war forced the type of Keynesian stimulus spending that Keynes had always advocated and Roosevelt always resisted.

Lots of the discharged military veterans took advantage of the GI bill to attend college; my early Silent parents (1930 cohorts who started first grade at age 5 and were 17 when they started college) had lots of GIs in their classes in the fall of 1947 and in 1948. I wonder what that impact (investment in education) had on the sustained economic boom of the 1950s and 1960s.

Originally Posted by The Wonkette

Lots of the discharged military veterans took advantage of the GI bill to attend college; my early Silent parents (1930 cohorts who started first grade at age 5 and were 17 when they started college) had lots of GIs in their classes in the fall of 1947 and in 1948. I wonder what that impact (investment in education) had on the sustained economic boom of the 1950s and 1960s.

Those investments in education created good habits for at least thirty years after the WWII, with people believing in education as a solution for most problems from juvenile delinquency to technological inadequacy. Many on the GI Bill got educational opportunities that they otherwise would not have had, and they likely evened out the old WASP-non/WASP social distinction. Not until the late 1970s did Americans begin to give up on education as a solution (witness Proposition 13 in California).

Many of the GIs became engineers -- and investments in engineering resulted in greater efficiencies in manufacturing and improved infrastructure. Paradoxically the increased efficiencies in manufacturing made people more complacent about prosperity. Without the well-engineered Interstates, many people would not have made it to the "holy sites" of the Boom Awakening.

Originally Posted by Justin '77

I'm pretty good with that as a working position, too.

I've found, talking to rational socialists such as yourself, that our positions really don't clash so severely if we take the time to -- as Kurt put it -- chill out and reassess the details we are taking as givens.

IMO Liberalism and Libertarianism are different approaches to reaching the same goal. The problem is when either side declares themselves to be the "one true way".

Originally Posted by Odin

IMO Liberalism and Libertarianism are different approaches to reaching the same goal. The problem is when either side declares themselves to be the "one true way".

That's mis-stating it (particularly since libertarians -- being without a "way" -- don't deserve to be let off the hook so easily). The problem arises, as with all other ultimately internecine disputes, when one declares that the other side is simply inherently wrongheaded, or otherwise not worth talking to without giving them an honest hearing (excellent example here). Failure to communicate, one might call it. Disinterest in communication might be another way.

I've been able to find common ground with Brian mainly due to both of our willingness to -- when necessary -- track all the way back down to tedious word-by-word parsing of what we are trying to say. It turns out our views are not at cross-heads so much as are simply the words we are using to express them and the assumed contexts we bring to the table.

Originally Posted by Brian Rush

You're cherry-picking your facts here. It is a fact that the wartime economy produced full employment, and that the hunger and homelessness of the Depression years dropped almost to nothing. The wartime economy did not see "depression" of private investment in consumption goods, it saw production targeted on what was in demand: goods for the war.

Originally Posted by Mikebert

Actually that's not true. Unlike all the other belligerents during the war, the nonmilitary-related American economy grew during the war.

Everybody was gainfully employed during the war years. Personal income was much higher in the 1940's than in the 1930's. And Americans spent more absolutely on consumption.

Since you're both making similar objections, I'm going to go to the numbers:

Real Private Investment (Note that the war years are the only major drop not associated with an official recession.)

Real Personal Consumption slowed considerably and if you look at the components you find mild increases in service consumption, slowing non-durable consumption and a huge drop in durables (because many of them weren't even being produced).

Also, comparing government expenditures to GDP, we see that the private sector went from $900 billion (1941, using 2000 dollars) to $650 billion in 1942, $500 billion in 1943, $480 billion in 1944 and back up to $635 billion in 1945 and all the way to $1400 billion in 1946 post-war.

Brian, I'll concede that abject poverty was largely eliminated during the war but, Mike, your comment about the private sector growing during WWII doesn't hold up and consumption appears to have stagnated.

Originally Posted by Brian Rush

What's more, I contend that the wartime spending is what allowed the economy to convert after the war to a more normal consumer economy, almost painlessly and certainly without slipping back into depression. Well, that plus the rule changes as I said. But the fact that almost everyone had been well paid for several years (while being unable to buy much because of rationing) meant that consumer demand was no longer depressed -- if anything, it was excessive. The incentive to invest in consumer goods production after the war was huge, consequently the demand for labor was also huge, and so the discharged military veterans and laid-off war-factory workers were quickly re-hired for civilian purposes.

Originally Posted by Mikebert

During WW II prices were fixed and rationing held consumption to levels far below income, forcing a huge amount fo savings.

These comments, I generally concur with. The government unintentionally refilled the pool of savings (in Austrian terminology), allowing for renewed growth. Also, I think the retooling that occurred for the war effort finally eliminated a lot of the lingering malinvestments from the 1920s boom period. Thus, when the wartime controls came off, the government had done most of the restructuring that would have occurred years earlier if various interventions (especially the RFC and NRA) had not been busy "saving" the economy.

So, in that sense, WWII did end the Depression -- or at least allowed the economy to finally hit bottom and start growing again. But the Depression didn't end in 1942, it ended in 1945.

Originally Posted by Brian Rush

The war forced the type of Keynesian stimulus spending that Keynes had always advocated and Roosevelt always resisted.

The war experience doesn't really prove Keynes right, since, per above, it was the rationing and retooling that was crucial, not the level of spending. In any normal fiscal stimulus, the expenditures would primarily draw upon (and entrench) existing capital goods and the wages generated would be consumed normally. So, the likelihood that a peacetime fiscal stimulus would actually improve the capital and savings structure of the economy is much lower.

Originally Posted by Brian Rush

Not entirely. In some ways it really did reverse course. Most obvious example: the government stopped discouraging organized labor and started encouraging it.

I would say "domesticating" rather than "encouraging" labor. Even the Wagner Act, which was very positive for unions, was only positive for a particular kind of shop and it effectively banned minority unions (i.e. where part of a trade or business joins a different, smaller union) by conferring legitimacy and protection only on the one that won the NLRB election. This meant that management would only be bargaining with one group, and that union would be unlikely to change. Taft-Hartley, of course, added a number of restrictions on coordinated strikes and boycotts.

Originally Posted by Brian Rush

It's true that many of the same very basic laws and policies, most notably the treatment of corporations as persons, remained in force and still do. I'm not sure what it would take to change something that well entrenched, though.

Changing a deeply entrenched policy starts by making people aware of it and not describing it as an inevitable aspect of society. Challenging absolute monarchy and slavery required the willingness to dream of an alternative future. Corporate personhood will likely require a similar effort to think outside the box.

Originally Posted by Brian Rush

I think we might have the makings of sincere agreement in that.

Good to hear. Honestly, sometimes I think that fusion is a tougher sell for the libertarians than the liberals.

Originally Posted by Kurt Horner

These comments, I generally concur with. The government unintentionally refilled the pool of savings (in Austrian terminology), allowing for renewed growth.

No, here I disagree. When one speaks of "savings," generally the reference is to the accumulation of capital for investment. It's true that savings rates during the war were high, but there was no shortage of capital for investment during the Depression itself; that was not the problem. The problem was maldistribution of wealth and consequent lack of demand. With high upper-end taxes and full employment, the war (unintentionally) reduced gaps in wealth and restored consumer demand. The high savings rates weren't a bad thing, but weren't the main economic benefit, especially since the saved money was rapidly spent after the war, when there finally was something to spend it on, and so represents pent-up consumer demand rather than genuine capital savings.

Also, I think the retooling that occurred for the war effort finally eliminated a lot of the lingering malinvestments from the 1920s boom period.

I don't see this, either, unless you're going to claim that the investments in real industry (as opposed to bubble-blowing) in the 1920s represented "malinvestment" on the reverse-reasoning basis that it produced goods that couldn't be sold. It didn't produce goods nobody wanted, only goods nobody that wanted them could buy.

Certainly there was malinvestment in the '20s, but it was not in anything that was eliminated by wartime retooling. In fact, it was eliminated by the Depression, years before.

Thus, when the wartime controls came off, the government had done most of the restructuring that would have occurred years earlier if various interventions (especially the RFC and NRA) had not been busy "saving" the economy.

There is no reason to believe this last. The RFC was not a bad idea at all as far as it went. The NRA was a bust, certainly, but the idea that it somehow lengthened the Depression is giving it more influence than it really had. All such arguments look to me like a search for something, anything, to justify a hands-off (or halfway hands-off) approach.

The NRA with its voluntary controls was mostly public-relations stuff, and in my perception had little effect on the economy one way or another. FDR was trying to create a sort of hybrid centralized-socialist/capitalist planned but privately owned economy, which would have given us the worse of all possible worlds if it had actually worked. (Since private ownership of capital property is the defining ill of capitalism, while centralized control is the defining ill of command socialism, and Roosevelt's vision would have combined the two.) But the way it was implemented there was little chance of this actually coming about, and it didn't. The NRA was a lot of sound and fury, signifying nothing, except it's author's economic confusion.

I don't look at the Great Depression as something radically anomalous. If anything, the fact that it provoked changes in economic policy is only reinforcement for the saeculum theory, since something very similar happened in 1893, during the High, without provoking such changes: http://en.wikipedia.org/wiki/Panic_of_1893. Here we had a collapse almost as bad as 1929, lasting almost as long, approached by precisely the "let it play out" method that the Austrian school would recommend. So where's the justification for that approach? Why does one see evidence that failure to follow it caused the Depression to last as long as it did, when applying that approach to the earlier panic produced a similar outcome?

The truth is, the Depression was merely the last and worst of the repeated economic collapses that characterized the economy of the Great Power Saeculum, which is to say, America's early capitalist economy, before it incorporated elements of socialism. It was only out of the ordinary in that it finally provoked serious reform.

The war experience doesn't really prove Keynes right, since, per above, it was the rationing and retooling that was crucial, not the level of spending.

I disagree completely, as explained above.

I would say "domesticating" rather than "encouraging" labor. Even the Wagner Act, which was very positive for unions, was only positive for a particular kind of shop and it effectively banned minority unions (i.e. where part of a trade or business joins a different, smaller union) by conferring legitimacy and protection only on the one that won the NLRB election. This meant that management would only be bargaining with one group, and that union would be unlikely to change.

Well, but that's a necessity. The whole point of a union is that while individual workers have little bargaining power, all workers together can bargain with capital on an equal basis, because they're entirely necessary to the enterprise, while a single worker is expendable. Fragmenting this into multiple unions for a single shop would defeat the purpose. Actually, I can see the point of the Wobblies' "one big union" idea, in which a single union represents all workers in all industries, although nobody's ever been able to bring that off.

There is one sense in which government support for unions "domesticated" the labor movement. By allowing it to succeed on a legitimate basis, while discouraging the more radical elements, it did "tame" the movement and sever it from its socialist, Marxist, and anarchist components.

Taft-Hartley, of course, added a number of restrictions on coordinated strikes and boycotts.

Yep. T-H was an attempt to roll back the most important (IMO) accomplishment of the New Deal, partly successful.

Changing a deeply entrenched policy starts by making people aware of it and not describing it as an inevitable aspect of society. Challenging absolute monarchy and slavery required the willingness to dream of an alternative future. Corporate personhood will likely require a similar effort to think outside the box.

Got that right.

Well, let's think about this somewhat further. There's a distinction to be drawn between the "corporation" that's a purely legal entity, such as a sole-proprietorship that's incorporated, and a big publicly-traded corporation. The little custom programming company that's one of my workers compensation clients is hardly Microsoft. (No, I don't have Microsoft as a client. Ha! I wish . . . )

The classic model of wealth production is someone applying his own labor to capital property to produce goods or services. A small business owner doesn't depart too radically far from that paradigm, because although he does use the labor of others sometimes, he still puts in an awful lot of his own (or goes out of business). But someone who merely plays with money, investing it in other people's businesses, skims the cream from the labor of thousands, sometimes millions, without doing any real productive work himself. The publicly-traded corporation is the mechanism by which this is done, without which it would be impossible.

Is there a positive function that this type of entity serves? And if so, what could replace that function?

Originally Posted by Brian Rush

No, here I disagree. When one speaks of "savings," generally the reference is to the accumulation of capital for investment.

Yes, but you seem to be presupposing investment for large-scale capital-intensive projects. Small and mid-sized firms or firms with low capital needs increased in number considerably post-war.

Originally Posted by Brian Rush

It's true that savings rates during the war were high, but there was no shortage of capital for investment during the Depression itself; that was not the problem. The problem was maldistribution of wealth and consequent lack of demand.

There is a reason that investment funds were sitting idle. For the investor class, this period was terrifying. The government was constantly shifting the ground under them. The interventions were many and significant, and it was very unclear which changes would endure. In that environment why make long term investments?

In fairness, though, the pre-existing maldistribution of wealth meant that investment funds were concentrated among a small segment of the population who in general saw the Depression as an era of great risk, rather than opportunity for advancement. Lack of demand seems off-point, though. Since, had those funds been brought in off the sidelines, the resulting jobs would have provided demand for the goods. Unfortunately, the possible investments did not appear profitable enough to overcome the climate of fear.

Originally Posted by Brian Rush

With high upper-end taxes and full employment, the war (unintentionally) reduced gaps in wealth and restored consumer demand. The high savings rates weren't a bad thing, but weren't the main economic benefit, especially since the saved money was rapidly spent after the war, when there finally was something to spend it on, and so represents pent-up consumer demand rather than genuine capital savings.

There was a lot more than a consumption glut. Rather, a wave of business expansion and new business formation occurred. More new businesses were formed in America in 1946 than in any year until 1955 and the failure rate was only 5 per 10,000!

Originally Posted by Brian Rush

I don't see this, either, unless you're going to claim that the investments in real industry (as opposed to bubble-blowing) in the 1920s represented "malinvestment" on the reverse-reasoning basis that it produced goods that couldn't be sold. It didn't produce goods nobody wanted, only goods nobody that wanted them could buy.

I’m not seeing the division between desire to buy and ability to buy, or rather, I’m not sure that’s the best way to state it. Even at my own comfortable income, there are still a great many things that I want and cannot afford to buy. This condition is, in fact, the common state of affairs and would be especially prevalent in a society with a more even income distribution.

The reason why I prefer to look at the problem as one of systemic failure to accurately predict demand rather than a shortfall of demand is because the latter phrasing assumes something not in evidence – that the types of goods being produced in a boom are beneficial in the first place. The shortfall of demand viewpoint implicitly takes the viewpoint of the capitalist (i.e. “Why won’t people buy my stuff?”) when the better question comes from the consumer (i.e. “Why did you make all this extra stuff?”).

What’s interesting, though, is that while socialists and free market types can have a huge argument about which of these perspectives is correct, they really seem like the same phenomenon observed from two different angles. That phenomenon is too much centralization of decision making and it seems like socialists are a bit more astute about intra-firm pathologies from corporate hierarchy and the Austrians more astute about inter-firm pathologies arising from over-dependence on credit.

Originally Posted by Brian Rush

There is no reason to believe this last. The RFC was not a bad idea at all as far as it went.

The RFC was no different from the current bailout regimes (except in scale). Both systems are designed to maintain the current market leaders by providing them with credit at a time when they would go bankrupt, thus releasing funds and capital goods for new purposes.

Originally Posted by Brian Rush

The NRA was a bust, certainly, but the idea that it somehow lengthened the Depression is giving it more influence than it really had.

There’s considerable evidence that the NRA was detrimental to recovery.

Originally Posted by Brian Rush

FDR was trying to create a sort of hybrid centralized-socialist/capitalist planned but privately owned economy, which would have given us the worse of all possible worlds if it had actually worked. (Since private ownership of capital property is the defining ill of capitalism, while centralized control is the defining ill of command socialism, and Roosevelt's vision would have combined the two.)

Private ownership of capital goods is fairly unavoidable. For example, if I ran a business from home, my computer would suddenly become a capital good. The real issue seems to be the separation of capital ownership from those actually using the capital goods.

Originally Posted by Brian Rush

since something very similar happened in 1893, during the High, without provoking such changes: http://en.wikipedia.org/wiki/Panic_of_1893. Here we had a collapse almost as bad as 1929, lasting almost as long, approached by precisely the "let it play out" method that the Austrian school would recommend.

Well, first off, the Austrian school does recommend policy changes – those intended to prevent future unsustainable booms. Nonetheless, the Panic of 1893 definitely ended faster than the Depression.

Originally Posted by Brian Rush

Fragmenting this into multiple unions for a single shop would defeat the purpose.

This assumes that a union can’t be captured by management, which is why minority unions arose, and why it would be useful for management to effectively ban them.

Originally Posted by Brian Rush

There is one sense in which government support for unions "domesticated" the labor movement. By allowing it to succeed on a legitimate basis, while discouraging the more radical elements, it did "tame" the movement and sever it from its socialist, Marxist, and anarchist components.

This no doubt was a major motivating factor behind the Wagner Act. This is not dissimilar to how the government suddenly warmed up to Martin Luther King once groups like the Black Panthers began to gather steam.

Originally Posted by Brian Rush

Well, let's think about this somewhat further . . . The classic model of wealth production is someone applying his own labor to capital property to produce goods or services. A small business owner doesn't depart too radically far from that paradigm, because although he does use the labor of others sometimes, he still puts in an awful lot of his own (or goes out of business). But someone who merely plays with money, investing it in other people's businesses, skims the cream from the labor of thousands, sometimes millions, without doing any real productive work himself. The publicly-traded corporation is the mechanism by which this is done, without which it would be impossible. Is there a positive function that this type of entity serves? And if so, what could replace that function?

The positive function is that sometimes capital goods are going to be more expensive than the resources of the workers alone. The prevalence of this circumstance is greatly inflated by the legal protections afforded corporations as well as the artificial availability of loans (particularly for purchase of capital goods). Nonetheless, I can’t conceive of an economy where there weren’t at least some outside investors in larger projects.

The problem isn’t the public trading so much as the phenomenon that such corporations aren’t actually owned by their shareholders. There has been a steady advance towards greater management control of corporations, such that most shareholders are entirely passive. In addition, the tax system strongly encourages capital re-investment over payment of dividends (and given this, management likes to placate shareholders by inflating stock price instead). This, in turn, means that concentrations of capital tend to grow, rather than having the funds disperse among the outside investors who would then fund their own independent operations. So, the overall effect of the system we have is to pull more and more production decisions out of the price system and into management hierarchies.

Originally Posted by Kurt Horner

There is a reason that investment funds were sitting idle. For the investor class, this period was terrifying. The government was constantly shifting the ground under them.

No, that isn't the reason why the period was terrifying for investors, or anyway not the main reason. There's a more fundamental reason. I'll get to it in a moment.

In fairness, though, the pre-existing maldistribution of wealth meant that investment funds were concentrated among a small segment of the population who in general saw the Depression as an era of great risk, rather than opportunity for advancement.

Yes, but the concentration of capital was not the main problem, either. Although it did go too far, the problem was lack of spending money in most people's hands, not lack of capital. One might think of this as different words for the same thing, since all of it is money, but no: what the economy needed was for more people to spend, not for more people to invest. If people were spending, the investment would follow; if not, the only way to spur investment is to have the government do the investing. Which of course is what happened in the end.

Lack of demand seems off-point, though. Since, had those funds been brought in off the sidelines, the resulting jobs would have provided demand for the goods. Unfortunately, the possible investments did not appear profitable enough to overcome the climate of fear.

You've missed something crucial here. It takes a very farsighted investor to see that having his own money, paid out in wages, come back to him in sales revenue, can actually be profitable. For most investors the logic goes: Oh my, people want [cars/radios/TVs/computers/sneakers/whatever] and there aren't enough of them being made! Look what those things are selling for! I think that looks like a good investment! And so more [whatever] are produced, demand is satisfied, price drops. When the price drops far enough, investor interest in the product declines and investment money goes somewhere else. Investors seldom see that they are creating demand; what they normally do is respond to demand that they can already perceive. Then other investors come behind them and respond to the demand that is created by investment.

During the Depression, with unemployment high and the price of everything dropping, there was very little incentive to invest. It had little to do with the changes in government policy, and a lot to do with the drop in consumer demand.

There was a lot more than a consumption glut. Rather, a wave of business expansion and new business formation occurred. More new businesses were formed in America in 1946 than in any year until 1955 and the failure rate was only 5 per 10,000!

But that's the predictable result of a consumption glut. Or rather, a consumer demand glut, which is kind of a weird phrase, since it actually describes a consumer-goods famine combined with lots of money to spend in lots of people's hands. Investment follows demand. Business formation is the result of investment. High success rate for new businesses is also a predictable outcome of high demand, since it's very easy to make sales and make profits when money is burning holes in people's pockets.

I’m not seeing the division between desire to buy and ability to buy, or rather, I’m not sure that’s the best way to state it. Even at my own comfortable income, there are still a great many things that I want and cannot afford to buy. This condition is, in fact, the common state of affairs and would be especially prevalent in a society with a more even income distribution.

That doesn't mean there's no difference. If your income were double what it is now, wouldn't the same words describe your condition -- that is, wouldn't there still be a great many things that you would want and could not afford to buy? But you would be buying more than you are now, nonetheless.

The reason why I prefer to look at the problem as one of systemic failure to accurately predict demand rather than a shortfall of demand is because the latter phrasing assumes something not in evidence – that the types of goods being produced in a boom are beneficial in the first place.
The shortfall of demand viewpoint implicitly takes the viewpoint of the capitalist (i.e. “Why won’t people buy my stuff?”) when the better question comes from the consumer (i.e. “Why did you make all this extra stuff?”).

Well, avoiding values statements for the moment, what we certainly have is an imbalance between production and demand. But let's think about outcomes for the moment. What happens if we decide (by whatever collective decision-making mechanism we employ -- set that aside for the moment, too) that we were producing too much and that's why the economy crashed. What will we do? Recover to a lesser level of economic activity, right? And that means we accept a permanently depressed state of the economy. On the other hand, if we decided that we were producing the right amount, but didn't share the wealth enough for people to buy the stuff produced, then what we will want to do is to recover to the same (or a higher) level of economic activity, but at higher wages and narrower income gaps. One way or the other, demand and production will come into balance with each other. But I know which way I like better.

There’s considerable evidence that the NRA was detrimental to recovery.

Your link seems to be broken.

Private ownership of capital goods is fairly unavoidable. For example, if I ran a business from home, my computer would suddenly become a capital good. The real issue seems to be the separation of capital ownership from those actually using the capital goods.

A fair point.

Nonetheless, the Panic of 1893 definitely ended faster than the Depression.

Yes, but it lasted longer than any postwar recession to date, all of which were responded to by government action. It was the second-longest economic downturn in the nation's industrial history. You're naturally going to get some variability in economic downturns just like in most other things, but the point is that there's no good evidence that leaving things alone produces a shorter recession.

This assumes that a union can’t be captured by management

No, it just assumes that that isn't inevitable, while recognizing that fragmented unions are less effective. Actually, fragmented unions are more likely to be captured by management, or at least diverted into conflicts with each other. Divide and rule -- it's a very old tactic.

This no doubt was a major motivating factor behind the Wagner Act. This is not dissimilar to how the government suddenly warmed up to Martin Luther King once groups like the Black Panthers began to gather steam.

I'm quite certain you're right about that. However, I'm also certain that most industrial workers really didn't support radical movements like the Communists or anarchists.

The positive function is that sometimes capital goods are going to be more expensive than the resources of the workers alone. . . . I can’t conceive of an economy where there weren’t at least some outside investors in larger projects.

OK. I agree with you here. (I know the above snippage changed the sense of what you were getting at somewhat. However, the part left contained what I was trying to reach for. We can come back to the sins of big corporations later; what I was trying for here was why the problem of them might not be simple to solve. If they were an unalloyed evil, then the solution would be to simply pass a law voiding their existence.)

The positive function is to provide investment capital. By selling shares, a big corporation is able to raise money without directly borrowing it at interest. Without this mechanism, there is a practical limit to how large a company can become.

So we have two follow-up questions, it seems to me.

1) What good is provided to the economy by big corporations? What can be done by a single huge economic entity that can't be as effectively done by many smaller ones?

2) Assuming the answer to #1 isn't "nothing," is there another, alternative way to achieve the same results?

PW

Sorry for the delay on the post, I've been too ill for a proper response. Too much travelling and foreign food and honestly, the American bars pour a much cheaper and much stronger whiskey drink I was unprepared for.

Originally Posted by playwrite

Let's put aside the fact, as illistrated by the chart I posted above, that the deficit creation since the Clinton surpluses has been much more to do with the business cycle recessions (2002 and now) coupled with the policies of Bush. Let's go ahead and not only wrap all past 'sins' together but lets add in the likely new ones of further stimulus, health care revamp as well as some Medicare rescue and letting the SS 'crisis' just play itself out. Let's deem this the big Deficit Bête Noire (or, BDBN)

The question is does the BDBN in and of itself create the opportunity costs you listed or is it the fear of the BDBN that creates the costs, i.e., is it a self-fulling prophacy built on fear? If it is the latter, then perhaps we can all get a little backbone and quit listening to and certainly stop propogating the fear, no?

Fear and confidence can help determine timing, but as much as we've tried to divorce our economics of concrete attachments, these choices have effects that are not solely determined by public sentiment.. I see the economic reliance on confidence as a distinctly unravelling-era feature. Real choices and wealth assignments are what naturally affect sentiment. Good choices build confidence, bad ones create fear. Our economists tend to sell fear and confidence thinking those alone can make up for bad decision making! Thats unravelling/early crisis for sure, not a regenerative thing.

It would seem that all your dire consequences would stem from the inability for further expenditure, either in the private or public sectors. Now the stimulus is exactly aimed at this concern for the private sector; it is a real concern. However, what you are trying to do is lay this concern or some future amplification of it onto the BDBN. There are really two elements of this BDBN concern. The first is that the BDBN of the government will "crowd out" the expenditures by the private sector. The second is that the BDBN will exceed a point where foreign bond holders will no longer support it.

Let's have a heavyweight weigh in. With its unspoken but fascinating linkages to the S&H Turnings, I would suggest a full reading of this article, but let me just excerpt a few things for your consideraton (note - written in 2007) -
http://www.newamerica.net/files/NAF_...vest_color.pdf



and in regard to -


Feeling less fearful?

Its not even about crowding out, its about choosing investments with the best return. There's some spending limit out there we aren't going to reach. The dollar isn't going to go to zero, but it might lose another 50-75% in the next 15 years (its lost that much in the last 25 already)

So I'm not complaining about $770B for schools, trains, and hospitals ... its the other $12 trillion committed and pumped into the financial system that is exacerbating our economy's systemic risk. Quantitative easing in an international fiat economy is one of those theoretical constructs that assumes you can control sentiment! It assumes everyone will act in concert! Even if those assumptions hold, the winners and losers will be based on the decisions they made with the money.

You don't actually believe that giving $5 Trillion to NASA will return an equal benefit as giving $5 Trillion to Goldman Sachs? Well, neither do I!