Wednesday, February 04, 2009

Possible Hiatus

I go in for yet more dermatological surgery later today. Such is the high quality of private medical services in Australia that I will be away from home for only about an hour but I do tend to get a bit depressed for a short while after such events so posting thereafter may be light for a day or two.


How Government Prolonged the Great Depression

Policies that decreased competition in product and labor markets were especially destructive

The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office. Total hours worked per adult, including government employees, were 18% below their 1929 level between 1930-32, but were 23% lower on average during the New Deal (1933-39). Private hours worked were even lower after FDR took office, averaging 27% below their 1929 level, compared to 18% lower between in 1930-32.

Even comparing hours worked at the end of 1930s to those at the beginning of FDR's presidency doesn't paint a picture of recovery. Total hours worked per adult in 1939 remained about 21% below their 1929 level, compared to a decline of 27% in 1933. And it wasn't just work that remained scarce during the New Deal. Per capita consumption did not recover at all, remaining 25% below its trend level throughout the New Deal, and per-capita nonresidential investment averaged about 60% below trend. The Great Depression clearly continued long after FDR took office.

Why wasn't the Depression followed by a vigorous recovery, like every other cycle? It should have been. The economic fundamentals that drive all expansions were very favorable during the New Deal. Productivity grew very rapidly after 1933, the price level was stable, real interest rates were low, and liquidity was plentiful. We have calculated on the basis of just productivity growth that employment and investment should have been back to normal levels by 1936. Similarly, Nobel Laureate Robert Lucas and Leonard Rapping calculated on the basis of just expansionary Federal Reserve policy that the economy should have been back to normal by 1935.

So what stopped a blockbuster recovery from ever starting? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s

The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation's antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression.

These codes distorted the economy by artificially raising wages and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment. Following government approval of each industry code, industry prices and wages increased substantially, while prices and wages in sectors that weren't covered by the NIRA, such as agriculture, did not. We have calculated that manufacturing wages were as much as 25% above the level that would have prevailed without the New Deal. And while the artificially high wages created by the NIRA benefited the few that were fortunate to have a job in those industries, they significantly depressed production and employment, as the growth in wage costs far exceeded productivity growth.

These policies continued even after the NIRA was declared unconstitutional in 1935. There was no antitrust activity after the NIRA, despite overwhelming FTC evidence of price-fixing and production limits in many industries, and the National Labor Relations Act of 1935 gave unions substantial collective-bargaining power. While not permitted under federal law, the sit-down strike, in which workers were occupied factories and shut down production, was tolerated by governors in a number of states and was used with great success against major employers, including General Motors in 1937.

The downturn of 1937-38 was preceded by large wage hikes that pushed wages well above their NIRA levels, following the Supreme Court's 1937 decision that upheld the constitutionality of the National Labor Relations Act. These wage hikes led to further job loss, particularly in manufacturing. The "recession in a depression" thus was not the result of a reversal of New Deal policies, as argued by some, but rather a deepening of New Deal polices that raised wages even further above their competitive levels, and which further prevented the normal forces of supply and demand from restoring full employment. Our research indicates that New Deal labor and industrial policies prolonged the Depression by seven years.

By the late 1930s, New Deal policies did begin to reverse, which coincided with the beginning of the recovery. In a 1938 speech, FDR acknowledged that the American economy had become a "concealed cartel system like Europe," which led the Justice Department to reinitiate antitrust prosecution. And union bargaining power was significantly reduced, first by the Supreme Court's ruling that the sit-down strike was illegal, and further reduced during World War II by the National War Labor Board (NWLB), in which large union wage settlements were limited by the NWLB to cost-of-living increases. The wartime economic boom reflected not only the enormous resource drain of military spending, but also the erosion of New Deal labor and industrial policies.

By 1947, through a combination of NWLB wage restrictions and rapid productivity growth, we have calculated that the large gap between manufacturing wages and productivity that emerged during the New Deal had nearly been eliminated. And since that time, wages have never approached the severely distorted levels that prevailed under the New Deal, nor has the country suffered from such abysmally low employment.

The main lesson we have learned from the New Deal is that wholesale government intervention can -- and does -- deliver the most unintended of consequences. This was true in the 1930s, when artificially high wages and prices kept us depressed for more than a decade, it was true in the 1970s when price controls were used to combat inflation but just produced shortages. It is true today, when poorly designed regulation produced a banking system that took on too much risk.

President Barack Obama and Congress have a great opportunity to produce reforms that do return Americans to work, and that provide a foundation for sustained long-run economic growth and the opportunity for all Americans to succeed. These reforms should include very specific plans that update banking regulations and address a manufacturing sector in which several large industries -- including autos and steel -- are no longer internationally competitive.

Tax reform that broadens rather than narrows the tax base and that increases incentives to work, save and invest is also needed. We must also confront an educational system that fails many of its constituents. A large fiscal stimulus plan that doesn't directly address the specific impediments that our economy faces is unlikely to achieve either the country's short-term or long-term goals.




Don't Push Banks to Make Bad Loans: "There is a widespread belief that banks are now refusing to lend as much as they should, and that Congress should pressure them to extend more credit to consumers and businesses. In reality, banks as a whole increased their lending during 2008 -- the notion they haven't is based on a misunderstanding of U.S. credit markets. Pressuring banks to lend more could backfire. As far as commercial banks go, Federal Reserve data released last week show that their lending increased 2.36% during the last quarter of 2008. For all of 2008, commercial-bank lending rose by $386 billion, or 5.63%, even as the economy slid into recession. Over that 12-month period, business lending jumped $152 billion, or 10.6%, real-estate loans were up $213 billion, or 5.9%, and consumer lending rose $73.5 billion, or 9%. Other categories of bank lending such as loans to farmers, broker-dealers and governments, declined $53.2 billion, or 5.4%. Fed data also show that during the first three quarters of 2008, the total amount of credit supplied to the economy increased $1.91 trillion, or 3.8%, with $540 billion of that amount coming from foreign lenders".

Stimulus: The power of names: "A well chosen name wins an argument by assuming its conclusion. Label cash subsidies to foreign government as `foreign aid' and who can be so hard hearted as to oppose them. Call subsidies to the public schools `aid to education' and you neatly skip over the question of whether additional spending in the public school system results in more education. Label something `pollution' and is no longer necessary to offer evidence that it is bad, since everyone knows pollution is bad - even thermal pollution, otherwise described as warm water. Occasionally we even get dueling names. Both `right to life' and `pro-choice' are obviously good things; how could anyone be against either? For a more recent example, consider Obama's economic policy. Everyone - including Obama, back when he was running for President - is against deficit spending. Relabel it 'stimulus' and everyone is for it."

Quarterly Exxon Obscene Profit Reality Check : "Yes...Exxon made a profit of $45 billion. Feign shock/disgust/outrage at the "obscene" profits if you want. But know this...your rage is aimed in the wrong direction. While Exxon was earning a $45 billion profit out of $477 billion of revenue...governments around the world were squeezing a profit of $116 billion out of that same revenue. Yes, that is right. According to the numbers, Exxon paid $116 billion is total taxes in 2008. That is a profit 2.5x the one that Exxon is supposedly guilty of earning. So if you think we need a 'Windfall Profit Tax" when it comes to oil profits, perhaps we should levy it on government, because no one made a bigger windfall than them....."

Australian terrorist leader gets 15 years: "The leader of a Melbourne-based terrorist cell has been sentenced to 15 years' jail. Abdul Nacer Benbrika, 48, of Dallas, was sentenced to a non-parole period of 12 years. He has already been in custody for 1184 days. Justice Bernard Bongiorno in the Supreme Court said a terrorist organisation led by Benbrika had been dedicated to the destruction of non-believers but the group had not planned specific attacks despite the evidence of a key prosecution witness. Benbrika became the first Australian to be convicted of leading a terrorist group last September, following the country's biggest terrorism trial that lasted seven months and cost tens of millions of dollars. The father-of-seven faced a maximum 25 years' prison for directing the terrorist group that the jury heard had discussed attacking Melbourne's Crown Casino and bombing the MCG. Benbrika was also convicted of possessing a compact disc connected to the preparation of a terrorist act... Benbrika used warped teachings of Islam to recruit his young followers and encourage them to wage violent jihad against "non-believers" in Australia. Justice Bongiorno said that, although the word jihad had many meanings in Islam, Benbrika used the term only to mean a violent attack by his group to advance the Islamic cause. He said Benbrika had admired Osama bin Laden and believed that killing people and destroying buildings was justified as it would help pressure the Australian Government into withdrawing troops from Iraq and leaving the American alliance. The court heard Benbrika had told one of his followers, Abdullah Merhi, not just to kill a few people but to "do a big thing"."

Attacks on Jews in Venezuela: "In the past, as today, several Venezuelan governments have expressed their solidarity with the Palestinian cause or the Palestinian people. However, since the events in Gaza that began on December 27 2008, the present government of Venezuela has adopted an aggressive and dangerous tone never previously heard, clearly inciting against the Jewish Community. The Government's supporters nationwide picked up on the Government's lead with clearly anti-Semitic expressions - with no effort whatsoever by Government to stop them. The expulsion of the Israeli Ambassador followed, and subsequently, a final breaking off of diplomatic relations. Furthermore, there is a well-orchestrated campaign on TV, radio, print and Internet media owned by the government, openly questioning Israel's right to exist, even including publication of such anti-Semitic materials as The Protocols of the Elders of Zion. A group of pro-government journalists is urging the population to boycott businesses owned by Jews in Venezuela."

The New England Cottontail Rabbit : "Most of the impacts on private property from the federal Endangered Species Act have occurred in the south and the west. This story notes that the New England cottontail rabbit isn't on the ESA's list of threatened or endangered species yet, largely due to workload issues at the U.S. Fish and Wildlife Service. Typically environmental activists sue to force such species on to the list, but not apparently not in this case. New England liberals have a much easier time supporting the draconian species laws when those laws don't have any impact on their own backyards. If and when the rabbit jumps onto the list and land use suddenly becomes a swirl of delays and expensive planning, lawsuits and devalued land, it will be interesting to see how the Congressmen from up north view the ESA then."


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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)


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