White on the Crisis

by Don Boudreaux on October 26, 2008

in Financial Markets, Government Intervention, Monetary Policy, Myths and Fallacies

Here’s Larry White’s copius wisdom on the financial crisis – including his correction of a fundamental error committed by Paul Krugman.

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{ 31 comments }

T L Holaday October 26, 2008 at 2:34 pm

Bravo! A straightforward, unvarnished Let Them Fail:

What we now know—and
already knew—is that financial firms, especially if they
believe they can count on a government bailout, can
get into trouble by holding highly leveraged portfolios
of risky assets. The way to alleviate the problem is to
cure them of that belief by letting them and their counterparties
take their lumps.
(Emphasis added.)

It would have been gracious of him to give a nod to the heroic lumptakers at Lehman Brothers.

Jeremy October 26, 2008 at 6:08 pm

After they let Lehman go down, I was feeling OK about things; my thought was finally, they were going to reintroduce moral hazard to these guys. About $1 trillion later I realize: man, was I ever wrong!

Bravo to Professor White, written with style and a hint of flair. Anytime you can work a reference to MacGyver into a piece that criticizes Krugman, well, I'm all for it!

Xmas October 26, 2008 at 8:10 pm

WOAH!!!

Fuld "depleted Lehman's capital reserves by over $10 billion through year-end bonuses, stock buybacks, and dividend payments," Waxman said.

Did Fuld see the end coming for Lehman and try to distribute as much to the stock-holders and management team as possible?

Per Kurowski October 27, 2008 at 11:34 am

Add to this the fact that the current crisis is a direct result from our regulators, in their pursuit of a single objective, ironically that of avoiding crisis, imposed minimum capital requirements for the banks based on default risks, which stimulated the growth of a shadow banking sector; and empowered the credit rating agencies as supreme risk overseers, which caused the markets to follow some human fallible opinions, like lemmings, in the search of the promised land of high risk-weighted returns, only to drown in a subprime ocean.

Russ Roberts October 27, 2008 at 12:48 pm

I have removed a set of comments from this post that were inappropriate along with the responses to those comments.

Despicable comments (as opposed to those that are merely intellectually offensive) will receive similar treatment in the future and posters who repeat such comments will be banned.

Charlie October 27, 2008 at 3:19 pm

"The way to alleviate the problem is to cure them of that belief by letting them and their counterparties take their lumps."

This is a good example of someone who doesn't grasp time inconsistency. Bailouts will always be beneficial ex post, and there is no way for governments to commit to a no bailout option, since banks or financial institutions move first.

"Despicable comments (as opposed to those that are merely intellectually offensive) will receive similar treatment in the future and posters who repeat such comments will be banned."

Is a central planner stepping in to fix a market failure?

Charlie

Kevin October 27, 2008 at 3:44 pm

"Bailouts will always be beneficial ex post"

Charlie what are you talking about? I assume you mean that they will be spun to have been beneficial ex post, with visible winners highlighted and incontrovertible statements made about how bad things would have been without the bailout in question. You don't actually mean that bailouts will always be beneficial ex post, do you?

Also, your quip about central planning is funny and clever, but the Cafe is a private enterprise that is apparently trying not to compete with other blogs as a forum for despicable personal insults and flame wars… that market is thriving and highly competitive.

Hammer October 27, 2008 at 4:57 pm

I want to say I am personally pleased to see Russ removing some of the more horrific posts (and one might hope, posters) from the blog. While I am fine with statements like "If you support X, I think that makes you a bad person morally" many f of the statements simply are silly flaming. One doesn't have to agree to at least be reasonably civil.

Charlie October 27, 2008 at 5:32 pm

-Kevin

""Bailouts will always be beneficial ex post"

Charlie what are you talking about? I assume you mean that they will be spun to have been beneficial ex post, with visible winners highlighted and incontrovertible statements made about how bad things would have been without the bailout in question."

Fair enough, I didn't mean to imply that any and all conceivable bailouts were beneficial. That was a poor use of language.

Here is an amended statement, "If a bailout is beneficial ex post, there is no way for governments to commit to a no bailout option, since banks or financial institutions move first."

Charlie

Kevin October 27, 2008 at 5:52 pm

Charlie, couldn't the government commit to a no bailout option if it couldn't be known whether the bailout was going to turn out ex post to have been beneficial? Or is your argument that if even the possibility exists of a beneficial outcome ex post that the government will always opt for the bailout?

Oil Shock October 27, 2008 at 6:00 pm

Until the crash of 1929, the general policy of the federal government to economic crisis was a relatively hands-off approach. But then Hoover was too much of an activist to sit on his hand. He wanted to bail out the failures…

" Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom…. We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction." –Herbert Hoover.

It worked out well for Hoover didn't it? Roosevelt took Hoover's insanity to an extreme. 10 years after the crash of 1929, Unemployment was still hovering around 20%.

Charlie October 28, 2008 at 12:33 am

Oil shock,

That's an interesting speach, you didn't quote much of it.

"Some of the reactionary economists urged that we should allow the liquidation to take its course until it had found its own bottom. Some people talked of vast issues of paper money…any one of which ideas would have produced panic in itself. Some assured me that no administration could propose increased taxes in the United States to balance the budget in the midst of a depression and survive an election.
However, we determined that we would not enter the morass of using the printing press for currency or bonds. All human experience has demonstrated that that path once taken cannot be stopped, and that the moral integrity of the Government would be sacrificed because ultimately both currency and bonds must become valueless.
We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.
We determined we would stand up like men and render the credit of the United States Government impregnable through the drastic reduction of Government expenditures and increased revenues until we balanced that budget…We decided, if necessary, upon changes in the Federal Reserve System which would make our gold active in commercial use, and that we would keep the American dollar ringing true in every city in America and every country in the world."

It seems like Hoover vetoed just about everything we are trying now,

"At a time when the most vital need was for the reduction of expenditures and the balancing of the budget to preserve the stability of the Federal Government as the keystone of all stability, they produced a program of pork-barrel legislation in the sum of $1,200 million for nonproductive and unnecessary works at the expense of the American taxpayer. They produced the cash bonus bill. They passed that through the House of Representatives by their leadership. I opposed it. It failed in the Senate. Under that bill it was proposed to expend $2,300 million. Worse still, the bill that they passed provided the bonus should be paid through the creation of sheer fiat money. They would have made our currency a football to every speculator and every vicious element in the financial world at the very time when we were fighting for the honesty of the American dollar…

And, further, the administration proposed economy measures to bring about reduction in specialized governmental expenditures by $250 to $300 million. When those recommendations had passed through the filter of the Democratic majority of the House, only $50 million of savings were left, and yet we hear a multitude of speeches from them on the subject of governmental economy.

They passed a bill to destroy the effectiveness of the Tariff Commission. I vetoed that bill. They passed a price-fixing bill creating what might be colloquially called the "rubber dollar." I opposed that also. They passed a provision for loans to corporations and everybody else, whether they were affected and guarded by public interest or not. It would have made the Government the most gigantic pawnbroker of history. I vetoed that. They passed other measures with this same reckless disregard for the safety of the Nation."

"What the farmer wants and needs is higher prices, and in the meantime to keep from being dispossessed from his farm, to have a fighting chance to save his home. The immediate and pressing question is how these two things are to be attained. Every decent citizen wants to see the farmer receive higher prices and wants to see him keep his home. Every citizen realizes that the general recovery of the country cannot be attained unless these things are secured to the farmer.

The Republican Party originated and proposes to maintain the protective tariff on agricultural products. We will even widen that tariff further if it is necessary to protect agriculture. Ninety percent of the farmer's market is at home, and we propose to reserve that market to him.

Now, has the Democratic Party ever proposed or supported a protective tariff on farm products ? Has it ever given one single evidence of protection of this home market to the American farmer from the products raised by peasant labor on cheap land abroad ?"

There is much more badness in the speech. But we don't need to listen to what Hoover says he did to evaluate it. I only post these passages because they are kind of interesting.

We already know he did the exact wrong things. He sought very hard to maintain the gold standard as any good Austrian would tell him to: "The third peril, which we escaped only by the most drastic action, was that of being forced off of the gold standard. I would like to make clear to you what that would have meant had we failed in that sector of the battle. Going off the gold standard in the United States would have been a most crushing blow to most of those with savings and those who owed money, and it was these we were fighting to protect." (from the same speech)

Of course, gold standards are counter cyclical. We had contractionary policy during a recession, cpi declined 8% per year 1930 – 1933. Aside from that, he balanced the budget, which was even more contractionary.

Everyone reading that speech will find something objectionable, but trying to compare Hoover's policy to ours now is beyond ridiculous.

Oil Shock October 28, 2008 at 1:36 am

From the same 1932 campaign speech by hoover

we might have done nothing. That would have beenutter ruin. Instead we met the situation with proposalsto private business and to Congress of the most igantic
program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action. . . . No government in Washington has hitherto considered that it held so broad a responsibility for leadership
in such times. . . . For the first time in the history of depression, dividends, profits, and the cost of living,
have been reduced before wages have suffered. . . . They were maintained until the cost of living had decreased
and the profits had practically vanished. They are now the highest real wages in the world.
Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for . . . “the common run of men and women.” Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom. . . . We determined that we would not follow the advice of the bitterend
liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings
of our people brought to destruction.2"

From Hoover Memoirs

We developed cooperation between the federal, state, and municipal governments to increase public works. We persuaded employers to “divide” time among their
employees so that as many as possible would have some incomes. We organized the industries to undertake renovation, repair, and, where possible, expand construction.

Oil Shock October 28, 2008 at 2:12 am

From America's Great Depression by Murray Rothbard ( Free PDF )

During the second half of 1930, production, prices, foreign trade, and employment continued to decline. On July 29, Hoover called for an investigation of bankruptcy laws in order to weaken them and prevent many bankruptcies—thus turning to the ancient device of attempting to revive confidence by injuring creditors and
propping up unsound positions. In August, it was revealed that merchant shipping construction had swelled from 170,000 tons in July, 1929, to 487,000 tons in July, 1930—due to Federal subsidies. On September 9, Hoover took an unusual step: to relieve the unemployment problem, and also to help keep wage rates up, the President effectively banned further immigration into the United States, and did so through a mere State Department press announcement. The decree barred all but the wealthiest immigrants as “public charges,” in a few months reducing immigration
from Europe by 90 percent.

Hoover Memoirs…

"I determined that it was my duty, even without precedent, to call upon the business of the country for coordinated and constructive action to resist the forces of disintegration. The business community, the bankers, labor, and the government have cooperated in wider
spread measures of mitigation than have ever been attempted before. Our bankers and the reserve system have carried the country through the credit . . . storm without impairment. Our leading business concerns have sustained wages, have distributed employment, have expedited heavy construction. The Government has expanded public works, assisted in credit to agriculture, and has restricted immigration. These measures have maintained a higher degree of consumption than would otherwise have been the case. They have thus
prevented a large measure of unemployment. . . . Our present experience in relief should form the basis of even more amplified plans in the future."

Rhetoric is one thing reality is another. Reality was a Keynesian's delight. Huge deficit spending by the government.

Federal expenditures rose from $4.2 billion in
1930 to $5.5 billion in 1931—excluding government enterprises, it
rose from $3.1 billion to $4.4 billion, an enormous 42 percent
increase. In short, in the midst of a great depression when people
needed desperately to be relieved of governmental burdens, the
dead weight of government rose from 16.4 percent to 21.5 percent
of the gross private product (from 18.2 percent to 24.3 percent of
the net private product). From a modest surplus in 1930, the Federal
government thus ran up a huge $2.2 billion deficit in 1931.And so President Hoover, often considered to be a staunch exponent of laissez-faire, had amassed by far the largest peacetime deficit yet known to American history. In one year, the fiscal burden of the Federal government had increased from 5.1 percent to 7.8 percent, or from 5.7 percent to 8.8 percent of the net private product.

Hoover goes on to say….

"Your thesis is that the government expenses can be reduced by $2 billion—the amount of the tax decrease. This is . . . wholly impossible. It would mean we must give up the postal service, the Merchant Marine, protection of life and property and public health. We would have to turn 40,000 prisoners loose in this country; we would have to stop the maintenance of rivers and harbors; we would have to stop all construction work going on in aid of unemployment; it would mean abolishment [sic] of the Army and Navy. In other words it means complete chaos."

Here is another thing that FDR gets credit for Glass-Steagal

One thing Hoover was not reticent about: launching a huge inflationist program. First, the administration cleared the path for the program by passing the Glass–Steagall Act in February, which (a) greatly broadened the assets eligible for rediscounts with the Fed, and (b) permitted the Federal Reserve to use government bonds as collateral for its notes, in addition to commercial paper.

Does the following sound familiar?

During 1932, President Hoover greatly stepped up his oneman war on the stock market, particularly on shortsellers, whom he naïvely and absurdly persisted in blaming for the fall in stock prices. Hoover forgot that bulls and bears always exist, and that for every bear bet there must be an offsetting bull, and also forgot that speculation smooths fluctuations and facilitates movement toward equilibrium. On February 16, Hoover called in the leaders of the New York Stock Exchange and threatened governmental coercion unless it took firm action against the “bears,” the shortsellers. The Exchange tried to comply, but not aggressively enough for Hoover, who declared himself unsatisfied.

Having warned the Exchange of a Congressional investigation, Hoover induced the Senate to investigate the Stock Exchange, even though he admitted that the Federal Government had no constitutional jurisdiction over a purely New York institution. The President used continual pressure to launch the investigation of what he termed “sinister” “systematic bear raids,” “vicious pools . . . pounding down” security prices, “deliberately making a profit from the losses of other people.” Beside such demagogic rhetoric, constitutional limitations seemed pale indeed. Secretary of Commerce Lamont protested against the investigation, as did many New York bankers, but Hoover was not to be dissuaded. In answering the New York bankers, Hoover used some unknown crystal ball to assert that present prices of securities did not represent “true values.”

Federal Home Loan Bank, a hoover creation

President Hoover, we remember, had wanted to establish a grandiose mortgage discount bank system to include all financial institutions, but the rejection of the scheme by insurance companies forced him to limit compulsory coverage to the building-andloan associations. The Federal Home Loan Bank Act was passed in July, 1932, establishing 12 district banks ruled by a Federal Home Loan Bank Board in a manner similar to the Federal Reserve System.
$125 million capital was subscribed by the Treasury, and this was subsequently shifted to the RFC.

Some more….

Measures such as Federal and state and local public works, worksharing, maintaining wage rates (“a large majority have maintained wages at high levels” as before), curtailment of immigration, and the National Credit Corporation, Hoover declared, have served these purposes and fostered recovery. Now, Hoover urged more drastic action, and he presented the following program:
(1) Establish a Reconstruction Finance Corporation, which would use Treasury funds to lend to banks, industries, agricultural
credit agencies, and local governments;
(2) Broaden the eligibility requirement for discounting at the Fed;
(3) Create a Home Loan Bank discount system to revive construction and employment measures which had beenwarmly endorsed by a National Housing Conference recently convened by Hoover for that purpose;
(4) Expand government aid to Federal Land Banks;
(5) Set up a Public Works Administration to coordinate and expand Federal public works;
(6) Legalize Hoover’s order restricting immigration;
(7) Do something to weaken “destructive competition” (i.e., competition) in natural resource use;
(8) Grant direct loans of $300 million to States for relief;
(9) Reform the bankruptcy laws (i.e., weaken protection for the creditor).
Hoover also displayed anxiety to “protect railroads from unregulated competition,” and to bolster the bankrupt railroad lines. In addition, he called for sharing-the-work programs to save several millions from unemployment.

Did I mention Smoot-Hawley?

Oil Shock October 28, 2008 at 11:43 am

Anybody heard of Hoover Dam?

Charlie October 28, 2008 at 4:33 pm

Real Real
GDP GDP/pop
1929 $865.2 $7,099
1930 $790.7 $6,418
1931 $739.9 $5,960
1932 $643.7 $5,152
1933 $635.5 $5,056
1934 $704.2 $5,567
1935 $766.9 $6,021
1936 $866.6 $6,761
1937 $911.1 $7,065
1938 $879.7 $6,769
1939 $950.7 $7,256
1940 $1,034.1 $7,827

The economy bottomed out in 1933 and except for 13 months started growing after that.

Unemp Rate
1929 3.2
1930 8.7
1931 15.9
1932 23.6
1933 24.9
1934 21.7
1935 20.1
1936 16.9
1937 14.3
1938 19.0
1939 17.2
1940 14.6

Did government deficits cause the great depression? Apparently not:

Gov't Deficit (%GDP, minus is deficit):

1929 0.71%
1930 0.81%
1931 -0.60%
1932 -4.66%
1933 -4.61%
1934 -5.48%
1935 -3.74%
1936 -5.27%
1937 -3.03%
1938 -1.37%
1939 -4.19%

I tend to agree with Milton Friedman that staying on the gold standard and deflating was the leading cause.

CPI

1929 17.13
1930 16.70
1931 15.23
1932 13.66
1933 12.96 (prices stabalize)
1934 13.39
1935 13.73
1936 13.86
1937 14.36
1938 14.09
1939 13.89
1940 14.03

Real GDP GDP/pop (growth)

1929 6.04% 4.84%
1930 -8.61% -9.59%
1931 -6.42% -7.14%
1932 -13.00% -13.56%
1933 -1.27% -1.86%
1934 10.81% 10.11%
1935 8.90% 8.16%
1936 13.00% 12.29%
1937 5.14% 4.50%
1938 -3.45% -4.19%
1939 8.07% 7.19%
1940 8.77% 7.87%

Charlie

Charlie October 28, 2008 at 4:37 pm

Some people might prefer looking at CPI in terms of growth rate as we typically see it.

CPI

1929 0.00%
1930 -2.51%
1931 -8.80%
1932 -10.31%
1933 -5.12%
1934 3.32%
1935 2.54%
1936 0.95%
1937 3.61%
1938 -1.88%
1939 -1.42%
1940 1.01%

Oil Shock October 28, 2008 at 5:26 pm

Now, let's look at the Japanese experience. We all have heard the expression Japan's lost decade – 1990s. Is that description really accurate? Japanese stock market recently hit the 1982 levels just last week. So it is more like 3 lost decades in terms of stock market. Japanese followed the advise of the Keynesian and Monetarist economists. They started running huge deficits and public works programs ( Keynesian ) and dropped interests rate to effectively zero and printed money like it was going out of style ( monetarist ) and yet 20 years after the crash in Japan, the economy still sputters. The public works program has put the entire country under a think layer of concrete ( Isn't it amazing that the evironmentally friendly Keynesians would put whole nation under layer of concrete, to stimulate consumption? ), and yet it had no stimulatory effect.

Charlie October 28, 2008 at 8:15 pm

Why don't you post the GDP, CPI, unemp rate, and gov't deficit in Japan, so that we can see if it really fits your description?

It'll be good, because it will force me to read up on Japan. But I do seem to remember that they had a negative real interest rate for some time, which means they had deflation and weren't printing enough money even at a zero nominal interest rate. I always thought they were running surpluses and protecting their currency for some time. Anyway, I hope you post the data, I'd enjoy seeing it.

Charlie

Oil Shock October 28, 2008 at 10:36 pm

How can a country have negative real interest rates and deflation at the same time, when the nominal interest rates are zero?

Why do you think GDP is such a great metric to look at? DO you see any draw back to the GDP statistic?

Couple of other questions regarding 1929:

1) Why do you think the depression that started in Late 1929 was so special compared to all the others before it? Why do you think it was so much more severe than anything that we had witnessed in peace time prior to it

2) Particularly, Why didn't the depression of 1921 become a great depression. WHat was so different about it?

3) Why do you think unemployment stayed high through out the 30s, even though according to your GDP data, economy recovered in 1933-34?

Japan's Consumer Price Index
—————————-
1989 91.3
1990 94.1
1991 97.3
1992 98.9
1993 100.2
1994 100.8
1995 100.7
1996 100.8
1997 102.7
1998 103.3
1999 103.0
2000 102.2
2001 101.5
2002 100.6
2003 100.3
2004 100.3
2005 100.0
2006 100.3
2007 100.3

Japan's Monetary Aggregates

Why do you think monetary policy in Japan has been akin to pushing on a string?

To compare the value of yen, one needs a consistent measure to compare against. Dollar has been week for most of this decade. I don't know if the japanese monetary authorities maintain a yen index, similar to the dollar index.

Japan's public debt in year 2007 was 170% of GDP, most of it accumulated since the bursting of the bubble back in 1989.

Oil Shock October 29, 2008 at 12:16 am

A comment regarding the unemployment rate in Japan.

THrough out the 1960s and 70s, the unemployment rate in Japan varied between 1 and 2%, and during the 80s some times it crept up over 2.5%. But most of the 90s and 2000s, the unemployment rate in Japan have been over 4% and very often over 5% and some times around 5.5%.

those unemployment rates are akin to unemployment rates between 10 and 15% in the United States. What would you think of the U.S economy if the unemployment rates were at those levels for 2 decades in a row?

Charlie October 29, 2008 at 11:03 am

How can a country have negative real interest rates and deflation at the same time, when the nominal interest rates are zero?

That was a dumb thowaway statement I made, without really thinking it through.

Why do you think GDP is such a great metric to look at? DO you see any draw back to the GDP statistic?

Ugh, you want to talk about macroeconomics without talking about national income? without talking about standard of living? I have no idea why. If I want to study economic growth, I think it's pretty important to measure economic growth.

Couple of other questions regarding 1929:

1) Why do you think the depression that started in Late 1929 was so special compared to all the others before it? Why do you think it was so much more severe than anything that we had witnessed in peace time prior to it

2) Particularly, Why didn't the depression of 1921 become a great depression. WHat was so different about it?

Monetary policy wasn't nearly so bad. We severely contracted the money supply right as our economy was entering a slowdown. We were essentially sacraficed on the cross of the gold standard. We should have printed money maintained a modest inflation rate as best we could (2-3%).

3) Why do you think unemployment stayed high through out the 30s, even though according to your GDP data, economy recovered in 1933-34?

Because look at how bad it got! The economy grew for the most part of 1933 to 1940, the problem is that it was growing from a severely decreased place. 1937 felt like a recession because people remembered the 1920s, if they compared it to 1932 they'd feel great. There were some second-order effects that caused the economy and unemployment especially to return more slowly than it should have. Labor markets were more restrictive than they should have been. Monopolies were somewhat legally inforced. Trade barriers inacted/continued. I'm not advocating those policies, but they are small errors compared to bad monetary policy.

Why do you think monetary policy in Japan has been akin to pushing on a string?

Japan needs a negative real interest rate to get people to demand enough goods to meet their productive capacity. Since prices are stable or decreasing, a zero nominal interest rate still has a positive real rate. Since the central bank can't take the nominal rate blow zero, they can't stimulate the economy enough. What they needed to do is cause inflation to go up. Driving inflation up will decrease saving and increase demand until Japan gets back to their productive capacity, then they could go back to a standard monetary policy. Since they can't raise inflation buying short-term debt, since zero is a binding nominal cut-off. They could buy long term gov't debt. Basically, they'd be buying up IOUs from gov't with printed money, which is the same as printing money and spending it. Inflation would go up, real interest rates would go down, people would save less and spend more restoring the economy to capacity. And then the economy could ease off and go back to a relatively stable prices, growth trend.

Charlie

I gathered a bit of data that seems to suggest the economy does better when the real interest rate goes down. I haven't looked at it past 2003. Someone else is welcome to.

R. Int Rate GDP
1993 0.62% 0.78%
1994 1.14% 1.19%
1995 0.76% 1.41%
1996 -0.27% 2.63%
1997 -1.47% 2.15%
1998 -0.28% -1.22%
1999 1.47% -1.43%
2000 0.75% 0.84%
2001 1.30% -1.10%
2002 0.41% -1.57%
2003 0.50% -0.08%

Oil Shock October 29, 2008 at 1:07 pm

Ugh, you want to talk about macroeconomics without talking about national income?

Why do you think GDP accurately measures National Income? WHy do you think national income is measurable? DO you see any draw back in the GDP method?

Monetary policy wasn't nearly so bad. We severely contracted the money supply right as our economy was entering a slowdown. We were essentially sacraficed on the cross of the gold standard. We should have printed money maintained a modest inflation rate as best we could (2-3%).

Do you have any data on this monetary policy? Why do you think recessions of 1800s were never was as bad as the 1930s? There was no co-ordinated monetary policy back then? What was the monetary policy in 1921?

From what I have read, money supply shrank dramatically in 1921 and yet economy recovered very quickly.

If negative real interest rates are important to growth, why do you think the economy grew 5900% in the 19th century ( versus only 2300% in the 20th century )? None of the productivity tools were available back in the 19th century. Not even abundant energy in the form of cheap oil that could be pumped from the earth. I would think effective use of plenty of energy is one of the biggest factors in economic growth and productivity. No assembly lines, no computers, Still very primitive farming.

the same basket of goods that you could buy in 1820s for $100 could have been bought for about $65 in 1920, and the economy grew, why was it?

Charlie October 29, 2008 at 2:29 pm

"Why do you think GDP accurately measures National Income? WHy do you think national income is measurable? DO you see any draw back in the GDP method?"

How about you give whatever upsets you about GDP numbers and I'll respond to that, rather than trying to list everything that GDP is and does and the different ways of measuring it?

"If negative real interest rates are important to growth, why do you think the economy grew 5900% in the 19th century ( versus only 2300% in the 20th century )?"

This one is easy.

19th 20th
Real GDP 4.12% 3.30%
Real GDP per capita 1.39% 1.96%

Per capita growth is much higher in the 20th than the 19th, but in the 19th century population growth was much higher. The 19th century was one of heavy immigration. So pointing to the 19th century as a time of more prosperity on the basis of GDP is misleading.

Also, I take issue with this, "If negative real interest rates are important to growth" I never said that. Negative real interest rates were specific to Japan, because the saving rate is so high. Economic theory isn't so simple as "always do such and such," the theory is more complex, the specifics matter. That's why we build models, so we can study how things relate to each other and apply that knowledge to specific situations.

Your other questions can be answered by looking to A Monetary History of the United States, 1867 – 1960 by Schwarz and Friedman.

Charlie October 29, 2008 at 2:37 pm

"No assembly lines, no computers, Still very primitive farming."

This is an odd conjecture that I've heard before people seem to have, somehow that once we have developed lots of technology it is easier to grow. That's not necessarily true. The assembly line is a simple and incredibly useful technology. Using an assembly line can have a huge produce in productivity. An assembly line is "low hanging fruit."

It's possible technology helps create more technological growth so much that we'll have computers creating computers and have exponential growth. But so far it hasn't happened yet, technological growth in just about everywhere that's grown over long periods has been pretty balanced, that is it grows and constant rates. Why exactly is a source of on going debate.

Charlie

Oil Shock October 29, 2008 at 2:47 pm

Per capita growth is much higher in the 20th than the 19th, but in the 19th century population growth was much higher. The 19th century was one of heavy immigration. So pointing to the 19th century as a time of more prosperity on the basis of GDP is misleading.

India's population went up 5 times in the 20th century and yet economic growth started picking up when population growth started slowing.

Population growth in Africa is spectacular. They must have the biggest growth in "GDP" based on your theory.

Increasing population only adds more mouths to feed, without a corresponding increase in productivity. All the growth since late 1800s have been aided by the availability of cheap energy.

You are heavily discounting the fact that the growth in 19th was achieved with still relatively primitive tools.

You need to address why economy recovered typically in less than 18 months after each panic during the 19th century.

You also failed address the fact that Japan didn't experience any meaningful contraction in money supply in the last decade, infact money supply has been growing at a healthy clip.

simple guy October 29, 2008 at 2:53 pm

In the pdf, it talks about how Canada's banking system was more resilient because it was so unregulated. Is that true?

simple guy October 29, 2008 at 2:57 pm

Here is another article which claims that Canada's banks have been protected by strict regulation.

Charlie October 29, 2008 at 4:01 pm

I think you don't understand what growth is. For instance, this is a meaningless statement, "Increasing population only adds more mouths to feed, without a corresponding increase in productivity."

It's sort of true, but really irrelevent. Think of it this way, suppose you and I have the same income and we call that our Gross Household Product. Then we decided that we should live in the same house (bc we like lively discussions). One of our gross household products would go up 100%! Whoa! Except our per capita product is the same. Obviously, neither of us is better off just bc we added incomes together.

The same happens with GDP when population grows, especially when that population grows from immigration. Suppose an immigrant comes to the US and earns the same income that he had in his/her home country. The US GDP goes up, but neither the US or the person is better off. We just accounted for the same amount of aggregate prosperity differently.

I don't know about India's specific situation, but the accounting identity doesn't change. It's possible they had population growth that was offset by average income contraction or they had a "baby boom" where the birth rate went up. Obviously, when a baby is born, the US GDP doesn't go up any. Quite possibly, it goes down by making the mother or father less productive. But give it 16 – 24 years and that child begins working and generating income and raising GDP. That may be what happened in India, maybe it was a combination. You'll have to look at some data to find out. But in the end, it's an accounting identity-it isn't theory-just math.

Also, I still think your confused about growth and productivity gains. Remember growth is a relative thing. It is easy to get wowed by computers and airplanes as opposed to "primitive tools," but remember the difference between a shovel and a stick is a huge increase in productivity, much more so that a computer and a faster computer. The assembly line, steam power, printing press, interchangeable parts, cotton gin, railroads…these were all huge innovations from primitative tools to slightly less primative tools. We look at the computer age as an age of technological wizardry, but 100 years from now someone like you will ask how they were able to grow with such "primitive tools."

Charlie

Oil Shock October 29, 2008 at 11:53 pm

But give it 16 – 24 years and that child begins working and generating income and raising GDP.

First of all, I wasn't talking about per capita GDP. There were many 16-24 year period in the time between 1901 and 2007. India's economic growth rate according to GDP averaged about 1-1.5% until the late 80s.

Also, I still think your confused about growth and productivity gains. Remember growth is a relative thing. It is easy to get wowed by computers and airplanes as opposed to "primitive tools," but remember the difference between a shovel and a stick is a huge

You are confused. 10 people doing hard labor with primitive tools can improve the growth only so much. Yes growth is relative. 100 years from now, growth wil have to come from improvements over those years in the efficiencies of energy use.

But that is not the same as not having much of a source of energy outside of hard labor to having an abundant source of energy. Which is one of the reasons why the Asian economies have the potential to grow a lot faster than the western ones. THey have so much potential to grow their energy use per capita, which is similar to what happened in AMerica in the early part of 20th century.

As for the criticism of GDP itself, I suggest you go to mises.org and search for GDP or go to austrianeconomists.typepad.com and do the same. I don't have the time to develop it here in detail.

You are still silent as to how economies recovered quickly from downturns without any fed interventions. Negative interest rates is BS. Do you think people lent their gold for a negative interest during the panics of the 19th century?

Charlie October 30, 2008 at 9:38 am

-Oil shock

We don't appear to be getting anywhere. Your last post shows a lack of understanding of most of the points I was making. Perhaps you think the same of my posts. I don't plan on spending any more time on this, but found the discussion enjoyable.

Charlie

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