The standard history of the Great Depression holds that Herbert Hoover deepened the Depression by not doing enough, that Franklin Roosevelt’s spending improved the situation but that his attempt to balance the budget in 1937 sent unemployment back up to nearly the level of 1932. Then came World War II when all restraints were off and with the end of the war came untrammeled economic progress, with management and labor walking hand in hand under the rainbow of a benign government. Then, depending on how old your history professor is, along came Richard Nixon or Ronald Reagan or George W. Bush, who ruined everything. All that is necessary for the triumph of the Little Man is unrestrained Keynesianism with all dissenters locked away somewhere.
But there is a different way of looking at the story. That it is more realistic than the standard Keynesian myth is irrelevant for the millions of people – bureaucrats, lawyers and the rest of society’s snake oil salesmen – whose livelihood depends on this myth.
Even with the large deficits the Federal government was running, the net debt in the economy – individual, corporate, local, state and federal government – dropped steadily throughout the thirties, freeing up private and local government balance sheets to allow them to borrow more and reinvest. The importance of “deleveraging” is nothing new. Hoover’s first Secretary of the Treasury, Andrew Mellon, famously argued that the solution to the Great Depression was to “liquidate capital, liquidate industry, liquidate the farmers.”
The result, of course, was that Mellon himself was liquidated and policies were put in place to prop up failure. Deleveraging is still considered as a possible solution in every credit crisis, but while it is always proposed it is always ignored. One of the pre-TARP proposals was for the government to buy up bad debt and to liquidate it over time, allowing banks to create new debt without having to deal with the baggage of old debt. The argument for rejecting that idea was that there was no way to price bad debt, but that is downright silly. You just buy at a high enough price not to bankrupt the banks and a low enough price to keep Uncle Sam from losing his shirt. Then you provide a mechanism for the bank to share in recoveries above that amount. The real reason the idea was rejected is that it would have forced those in the executive suites to show just how bad the stewardship of their institutions had been. Heads would have rolled. TARP, like the President’s stimulus bill, was designed to save jobs, not create any.
The recession of 1937 had more to do with the social legislation of the New Deal – high taxes, social security (which was being taxed but not yet paid out), the Wagner Act which empowered labor unions – stifling the private economy. FDR accused capital of “going on strike” but he had induced the strike. Capital doesn’t go on strike unless it is facing an uncertain future. Today we have the same thing: Obamacare and the raft of regulations being churned out of Washington are big scary unquantified liabilities looming over the economy. Why pour your money into a hole in the ground when you have no idea how deep the hole is?
When World War II broke out, there was a sudden demand for goods of all types. But here was the kicker: people were earning money, but rationing prevented them for spending any of it. The post-war boom resulted from four years of pent-up demand, factories with enough resources to move into products which were in demand and the undeniable fact that the industrial capacity of the rest of the world was bombed flat, creating a foreign demand for American goods (and equally important, a lack of competition domestically).
The effect of these three elements wore off by the early 1970’s leaving Presidents Nixon, Reagan and Bush to try to muddle through within the paradigm created by FDR. As America lost its supremacy and then its industry, it fell into a position where the old paradigm no longer works. This week, Fred Barnes of The Weekly Standard called the Obama Administration “reactionary,” but the President is pushing the policies of the academic, political and media establishments. Reactionary they may be, but they think of themselves as progressive.
These reactionaries are encouraged to think of themselves as progressive since there is not yet a coherent body of ideas coalescing around the opposition. The Tea Party knows that something is very wrong, but they are a mass movement of middle class and working class Americans, the same people who in 1860 and 1930 knew something was terribly wrong with the framework of society, but had no intelligible body of ideas to deal with it. Tax cuts are not a complete public policy.
This is nothing new. When a paradigm has become obsolete, there is no full blown platform of ideas to replace it. Abe Lincoln was lucky to have the platform of the Whig Party which had been held up by the Democrats for twenty years, but even he flailed around with many issues. He was, after all, against emancipation before he was for it. FDR was a famous experimenter, borrowing concepts from Herbert Hoover, Benito Mussolini, Adolf Hitler, Teddy Roosevelt, Woodrow Wilson, Francis Everett Townsend, Huey Long and any other crank, tyrant or crackpot who had a vaguely attractive idea to flog.
So where are the new ideas going to come from? Despite the lack of a coherent policy, FDR kept the Government Printing Office busy grinding out new laws and regulations. Abe Lincoln had a legislative program which in its ambition and effect was even greater and more important than that of the New Deal.
But both of those Presidents had advantages we don’t have today. Abraham Lincoln and FDR both had advisors who were practical men of affairs. America had not yet strapped itself into the strait jacket of an academic elite coming from academic ivory towers and a business elite which has more in common with postal workers than entrepreneurs. The media was not yet a morass of unthinking scriveners who all say the same thing, but was a vibrant market of competing opinions.
If we are to climb out of the current dead end we find ourselves in, we have to rethink a great many things. New ideas won’t come from the left. All humans have a tendency to confuse self-interest with public interest, but the elites – those who have reached the top of the ladder of the current economic system – have the power to influence the future, which makes their confusion more dangerous than that of the average person. Since the left constitutes the bulk of the current elite, radical ideas will not be coming from them. This is made worse because the current elite, unlike the agricultural interests which dominated before 1860 and the industrial interests which dominated before 1930, have no vested interest in anything but keeping themselves on top. The cotton grower had to protect the environment in order to keep his fields productive, the industrialist had to build a useful product in order to find a market for his goods. The academic, the media and the day trader don’t have anything riding on the long term.
The left controls most of academia and the media and as both of those august institutions strive to prop up the current economic regime, they inevitably betray the neutrality and quest for the truth which is the reason they exist. These istitutions either have to be reformed or replaced.
It’s time to explore whether there are alternate ways to frame society which will keep the best of what we have, but leave behind those elements which benefit some of us to the detriment of everyone else.
Thomas F. Berner
www.WeThePeopleBlog.net
comments@wethepeopleblog.net
