Bob Higgs, writing in yesterday’s Investor’s Business Daily, very nicely summarizes his research on the question of why the Great Depression lasted as long as it did, and why it is incorrect to say that it ended with WWII. Here are some key paragraphs:
In truth, however, the government did try to spend us out of the Depression, as it has tried to spend us out of downturns several times since. But careful analysis shows that hyperactive government policies complicate and prolong recovery, rather than trigger it.
After an economic bust, bad investments must be liquidated, so salvageable assets can be reallocated to their most valuable uses. If the government props up failed endeavors through bailouts and other programs, necessary readjustments of the economy’s capital structure are slowed or halted, and the toxic mistakes of the past become locked in place, obstructing recovery and hindering the creation of future wealth. The New Deal recovery efforts had exactly these effects, as do current government policies.
It was bad enough that Roosevelt’s recovery program expended billions of dollars willy-nilly with no sound economic logic. But the president and his subordinates made matters worse when, especially from 1935 on, they threatened private property rights by attacking private investors, calling them “economic royalists,” and pushing through policies attacking the very foundations of private enterprise.
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I think Higgs makes some damn good points. Unfortunately, most American’s are force fed propaganda that FDR was the “second coming.” You can see that in the writings of Sunstein and the rhetoric of Obama as they continue to use FDR as a model for this crisis, spurred on by the vestiges of Keynes and his over-reliance on aggregates. It’s going to be interesting to see what happens in the next five years.
Will the “textbook” work? I don’t think so, but the next question is what will emerge?
Having recently read Rothbard’s America’s Great Depression, I noticed that he made the argument similar to that quoted above that “bad investments must be liquidated” throughout the book…I brought that up in an economics class in reference to the bailouts and the professor’s response was that with current bankruptcy procedures, letting a company, and especially a bank, fail would not necessarily mean that its assets would be promptly liquidated before the market would recover from the recession. Is that a valid argument, or is there more to the story?
I don’t know enough about financial law to comment on the technical aspects of that argument, Eric, but my initial reaction is “So, what?”
Even if your professor is correct in stating that the assets could not be quickly liquidated, it’s still not at all clear that it’s more beneficial to preserve banks that would otherwise fail. The obvious interventionist response to my argument is that allowing the financial institution to fail could cause systemic problems and result in the failure of additional businesses that might have been sound had the assets of the bank not been tied up in bankruptcy court. However, to paraphrase Arnold Kling, “Too anything to fail is a self-defeating philosophy.”
would not necessarily mean that its assets would be promptly liquidated before the market would recover from the recession.
A comment which assumes that the market will recover with or without that prompt liquidation.
I marvel how amid all the criticism from the right and left about banks being over leveraged, you never hear criticism of fractional reserve demand-deposit banking.
The shortest distance between two points is a straight line; likewise, the shortest time between recession and recovery is a liquidation of debt.
Man I would sure love to see him address what lead up to the vase smashing into a million pieces rather then explaining how poorly a job was done putting them back together again.
“For 12 years our nation was afflicted with hear nothing, see nothing, do nothing government… 9 mocking years of the golden calf and three long years of the scourge… ( crazy years at the ticker and three long years in the bread line…”
FDR
If the best Kenysians have to offer is comparing the economy to a vase… I think this argument is all but won.
I often cringe at some of the examples Ron Paul uses, but vases smashing = economy is definitely a new one. I suppose government spending = cow poop, I win, would be formally similar.
Obama is now attacking private equity and venture capital firms (which grew out of the restrictions of the Great Depression). This will simply lead to more restricted access to capital for entrepreneurs.
On the other hand, the public sector is growing like a weed. Why should I be optimistic about the future of this country again?
Well that was mighty Austrian of Mr. Higgs, was it not?
I mean, he didn’t actually use the word ‘malinvestment’, but he came mighty close…
Kudos to him, though, for working the word ‘orgy’ into the the title of his article.