Thursday, April 14, 2011

The myth of 'Herbert Hoover economics'

Leftist dishonesty knows no bounds. They reverse history

by Jeff Jacoby

TO CONVEY THEIR DISDAIN for the ongoing Republican pressure to reduce federal spending -- pressure that led to the recent agreement with President Obama for $38 billion in cuts in the current fiscal year -- critics have been reaching back eight decades for what they seem to regard as the ultimate in fiscal put-downs.

"Watching the debate in Washington," write Douglas Cohn and Eleanor Clift in a recent column, "it's like Herbert Hoover versus John Maynard Keynes, and sadly Hoover is winning." Hoover, they explain, "was curiously passive" in the face of the Great Depression and "he responded with a renewed focus on balancing the budget."

Populist Jim Hightower blasts Republicans for enabling Hoover to make "what looks to be a full comeback to power," complete with a return to Hoover's economic prescription: "Insist on reducing the size and spending of governments. . . . 'The deficit is the devil,' cry the New Hooverites, as they wildly slash spending and try to kill federal programs."

New York Times columnist Nicholas Kristof asserts that "one of the most basic principles of economics is that when an economy is anemic, governments should use deficit spending as a fiscal stimulus." A lawmaker who "believes that the response to a weak economy is to slash spending," he says, "is embracing the approach that Herbert Hoover discredited 80 years ago." Last month, Kristof's colleague Paul Krugman scorned House Speaker John Boehner "for declaring that since families were suffering, the government should tighten its own belt." That, Krugman snorted, is "Herbert Hoover economics."

If there is one thing most people have learned about Herbert Hoover, it is that his timid response to the financial crisis of 1929 brought on the Great Depression. Instead of slashing federal spending and clinging to laissez-faire economics, the received wisdom goes, Hoover should have done just the opposite: plowed more money into the economy, relying on deficit spending to stimulate growth.

The only thing wrong with that narrative is that federal spending under Hoover didn't plummet. It went through the roof.

Hoover was sworn in as the 31st president of the United States on March 4, 1929. By the time his term ended four years later, federal outlays had climbed more than 50 percent in dollar terms; they had almost doubled when measured in purchasing power; and they had tripled as a fraction of national income. "If stimulus is the solution to high unemployment," remarks Santa Clara University economist and law professor David Friedman, "the Great Depression should have ended almost before it began."

Following the Wall Street crash of 1929, the Hoover administration went into spending overdrive. Real federal expenditures climbed by 4.7 percent between 1928 and 1929, but over the next three years they rose, respectively, 8 percent, 17.2 percent, and 15.7 percent. Exclude military outlays, and spending under Hoover exploded by a phenomenal 259 percent. Looking back at the federal government's growth during the 1920s, economist Randall Holcombe points out that in percentage terms, expenditures grew more in the four Hoover years than they would during the first seven years of Franklin Delano Roosevelt's presidency.

FDR is remembered today, of course, for the vast expansions of the New Deal. But as the Democratic standard-bearer in 1932, he lacerated Hoover as a big-spending Republican. "For three long years," Roosevelt said in accepting his party's nomination, "I have been going up and down this country preaching that government . . . costs too much. I shall not stop that preaching."

Stop that preaching he didn't. He accused Hoover of presiding over "the greatest spending administration in peacetime in all our history . . . an administration that has piled bureau on bureau, commission on commission." He slammed the Republican's record of "reckless and extravagant" spending, and of thinking "that we ought to center control of everything in Washington as rapidly as possible." He mocked those who thought "a huge expenditure of public funds" was the best way to grow the economy of succumbing "to the illusions of economic magic." His running mate, Texas Congressman John Nance Garner, even warned that Hoover was "leading the country down the path of socialism."

For his own part, said FDR, "I ask you very simply to assign to me the task of reducing the annual operating expenses of your national government." Indeed, he promised to enforce "absolute loyalty to the Democratic platform and especially to its economy plank." That plank called for "an immediate and drastic reduction of governmental expenditures by . . . not less than 25 per cent."

In its zeal to cut today's multi-trillion-dollar budgets, the GOP is certainly fair game for critics. But those critics might want to think twice before blasting contemporary Republicans for their Hooverian impulses. Herbert Hoover can be fairly faulted for many things, but rolling back the federal budget isn't one of them.



The hot air administration

On 12.3.2009 Treasury Secretary Timothy Geithner said that "revving up the economy and get companies to start creating jobs again was Job No.1" The article can be found here. During the ensuing 2 years the federal government was the primary creator of jobs and those jobs, due to the project centric nature of the American Reinvestment and Recovery Act were transitory in nature. In other words the job only existed during the duration of the project. Now that most of those projects are winding down, it should be expected that those jobs will be eliminated. Once that occurs, unemployment will revert to an essentially unchanged level at the mid 9% range or higher.

On 3.10.11 Transportation Secretary Ray LaHood said that President Obama's administration was "focused like a laser beam" on gas prices. The article can be found here. The article goes on to say that in Thursday of that week gas was at $3.59. In February it had been $3.17 and in March of 2010 the price had been $2.76. As I write this 4/12 the price is $4.00. Three months before the last election, then Senator Obama called for release of fuel from the Strategic Petroleum Reserve, which had recently reached $4.11. The source can be found here. So I don't get it, if he is focused like a laser beam, he makes several speeches over a two week period that have no effect, he doesn't take the action that he advocated a previous President take and then he moves on with no effect to show for the effort.

To some extent President Obama is our creation. We as a people, and here I am stereotyping, have attention spans comparable to gerbils. Our ADD President was hired by us primarily because of his ability to entertain us not because of his track record of doing anything. Did we really expect that a Senator whose major accomplishment during his tenure in Illinois was to vote "present" was going to suddenly learn to roll up his sleeves and stick with problems until they are resolved?

If past behavior is indicative of future behavior, what behavior and results should we expect from this President? I think today's announcement by Michelle Obama is a good case in point. The template seems to be that a close advisor (Treasury Secretary, Transportation Secretary, First Lady) makes an announcement that some issue pressing to the populace has risen to the President's attention (Unemployment, Oil Prices, The state of military families). The President then makes a speech or speeches indicating that 1) He feels our pain 2) He will make it a high priority (Job No.1, Focus like a laser etc.). The "focus" and by this I mean speeches, last for about two weeks and then he moves on to NOT solve another problem.

I've given you examples from the past, I gave you an example from the present, now let me predict the future. In the next few days some close advisor to the President will announce that it has come to the attention of the President that the Federal Debt, associated interest payments and tax burden are strapping middle-class and poor people. That the President will focus like a laser on this problem. For two weeks (until the Federal Debt Ceiling is raising by another Trillion dollars) we will hear speeches indicating his knowledge and caring on the problem, how he is "rolling up his sleeves" and "locking arms with Republicans" and other such crap and then our attention will wane and he will move on.



The Fed Obliterates the Savings Ethic

Depression babies learned early that "saving for a rainy day" was not something one hopes to do but a requirement. The saying originated when most people worked on the farm. And when it rained, the fields were too wet to plow, and the farmer — not to mention the hired hands — made no money.

Of course, my grandfather was the diligent sort who would use rainy days to do required maintenance on his implements, noting with derision other farmers who spent rainy days at the bar in town. He believed they would surely end up with broken equipment when the sun would reappear, keeping them from making hay.

So the idea of savings is not necessarily the return one receives on the money that's socked away, but the piece of mind that, when the weather doesn't cooperate, the saver has a little stash to tide him over. Of course, the vast majority of us don't have to worry about the weather.

But an economic storm hit a couple years ago and plenty of people have not had work, rain or shine. Those who took heed of that old saw have no doubt weathered the storm better than those who didn't. Most financial advisors recommend that a person have three month's worth of living expenses saved — and some say six months worth, just in case. But how many people heed that advice?

There is no caveat to the counsel that says, "Keep six months of savings around if the money is earning at least six percent." Even if the money sits there all shiny, not earning a thing, it's the liquidity and insurance against the unknown that's the issue.

Unfortunately, a central bank's debauchery of the currency serves to raise people's time preferences and impair their judgment. In a blog post recently, I highlighted the advice of life coach and author John P. Strelecky, who advises people to spend their tax refunds on an experience they will remember forever, rather than saving the few hundred or thousand dollars that the IRS may be giving back.

Live your life for today, says the life coach — a couple thousand bucks isn't going to matter anyway. I posted to the Mises Blog to point out how ludicrous this advice is. But most who commented sided with Strelecky:
I think his advice is spot-on, at least given the constraints of the times in which we live. What's the point in saving if inflation will ravage whatever you manage to accumulate?

You play by the rules of the game. Your savings growth will be puny due to pathetic interest rates, erased by inflation, and confiscated by a rapacious state. So go ahead, enjoy the "money" now, while it still has some value.

Most people don't really have a better place to put the money than into a pleasurable experience, which is all you will want in the end.

Gotta agree with the comments. Maybe not trips or other "experiences." But I feel safer with stuff than I do with Federal Reserve notes going forward.

That's just what central bankers like to hear. They are worried about deflation. A few months ago, the Chicago Fed's Charles Evans said,
It seems to me if we could somehow get lower real interest rates so that the amount of excess savings that is taking place relative to investment is lowered, that would be one channel for stimulating the economy.

Lord Keynes was constantly worried that people were saving too much and consuming too little — thus the need for more and cheaper money to stimulate the economy. Mr. Bernanke is nothing if not a good Keynesian, and his low rates make even the savviest question whether to forgo consumption.

And likely no retiree, when contemplating leaving the workforce, figured 1 percent interest rates (or less) into their retirement cash-flow planning. In a front-page article, the Wall Street Journal took a look at "retirees who find themselves on the wrong end of the Federal Reserve's epic attempt to rescue the economy with cheap money."

The WSJ rightly points out that the Fed's low rates have been a windfall for banks and borrowers, but a problem for those needing income from their savings to live on. People who thought they played the game right, worked hard, saved money, and now want to take it easy, are panicked that money-market funds are throwing off but 24 basis points. "That's one-tenth the level of late 2007 and the lowest on records dating back to 1959," the Journal reports.

As bad as the Fed-engineered low rates are for those trying to live off past savings, reporter Mark Whitehouse makes the point that the low rates keep young people from building up funds for the future — whether it's for emergencies or retirement. Working Americans put less money into financial assets last year than at anytime on record — except 2009, when people pulled money out. And while the Department of Commerce says the personal savings rate has risen to 5.8 percent, Whitehouse explains, "That's in large part because it counts reductions in personal debt, such as mortgages and credit-card balances, as savings." But most debt reduction, Whitehouse writes, has been driven by defaults, rather than saving.

The Fed's interest-rate policy also leads people into taking more risk with their savings than they should. "That's why most of us are in the stock market, because there's no place else to go," says 70-year-old John Lehman, who would rather have his money in bank certificates of deposit but must resort to speculating. "I hope my assets don't run out before I die."

Many retire with next to nothing as it is. According to AARP, 16 percent of Americans have not saved a dime for retirement, and nearly half have saved less than $50,000.

Those with no savings are more dependent on government and others when the unexpected occurs, whether it's job loss or the washing machine quits. Professor Paul Cantor reminds us in his article, "Hyperinflation and Hyperreality: Mann's 'Disorder and Early Sorrow,'" that "money is a central source of stability, continuity, and coherence in any community. Hence to tamper with the basic money supply is to tamper with a community's sense of value."

When the Fed makes saving seem futile and immediate pleasure seem rational, the world has been diabolically turned upside down. Just one step away from hyperinflation, the central banks' actions are threatening "to undermine and dissolve all sense of value in a society."

"Thus inflation serves to heighten the already frantic pace of modern life, further disorienting people and undermining whatever sense of stability they may still have," Cantor explains.

The social order is upended in Mann's story as wealth is transferred from those who diligently saved all of their lives to speculators. As it was in the Weimar Germany that Mann describes, so it is today, as people believe it futile to sock away a little money here and there, and instead feel compelled to either speculate or just blow what they have on good times.

And while the retirees mentioned in the WSJ article are being crippled financially, Cantor points out that Mann's portrayal of hyperinflation uncovers "something psychologically more debilitating happening to the older generation." Impetuous, high-time-preference behavior displayed by the young appears rational in an inflationary period, while prudence and conservatism appear to be not even quaint but downright silly.

As Mann described so long ago, the world of inflation is the illusion of wealth, created by the government's printing press, distorting everything we see and perverting our judgment. Meanwhile the cry for stimulus continues, while our culture and values are buried under a pile of paper.



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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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