"I'm sure everyone feels sorry for the individual who
has fallen by the wayside or who can't keep up in our competitive society, but
my own compassion goes beyond that to the millions of unsung men and women who
get up every morning, send the kids to school, go to work, try and keep up the
payments on their house, pay exorbitant taxes to make possible compassion for
the less fortunate, and as a result have to sacrifice many of their own desires
and dreams and hopes. Government owes them something better than always finding
a new way to make them share the fruit of their toils with others."
--Ronald Reagan
When I was an economics major in
college, I was taught that Franklin Roosevelt saved capitalism using Keynesian
principles. The unchallenged assertion was that the sole reason the Great
Depression lasted a decade was because New Dealers were too timid in spending
borrowed money. In many economists’ minds, skyrocket spending to win World War
II proved conclusively that huge deficits were the cure for slow growth. To a
large extent, this is a rewriting of history. It didn’t happen this way.
Instead of spending our way back to
wealth, two phenomena saved the American economy. Impending war forced
Roosevelt to cease bashing business and the 80th Congress elected in
1946 balanced the budget and undid the worst aspects of the New Deal.
Freedom’s Forge, How American Business Produced Victory in World War II by Arthur Herman does an excellent job
of describing the shift from an anti-business bias to acquiescence of capitalism
during Roosevelt’s third term. The new tolerance of a profit motive had a huge impact on the production of war materials. The United
States manufactured two-thirds of all weapons and supplies used by the
Allies, “yet the output of consumer goods was larger every war year than it had
been in 1939, despite the restrictions and rationing. In 1945 Americans ate
more meat, bought more shoes and gasoline, and used more electricity than they
had before Hitler invaded France … total economic production in the United
States had doubled; wages rose by 70 percent.”
Deficit spending is often referred to
as demand-side economics. This is the concept that when demand is present,
producers will automatically ramp up production to meet demand. Supply-side
economics puts the focus on growing the private sector faster than the public
sector by restraining government growth and encouraging profit making
enterprises.
The government sector grew enormously
during the war, but as the size of government grew, government regulatory and
tax restraints were moderated. The profit motive was back big time. The problem
with the demand side is that unless producers can make a profit, they don’t
produce. Demand alone is meaningless. Ask Japan, where for the last two decades there has been enormous amounts of cash sitting on the sidelines along with massive worldwide demand. Government debt and public sector growth annihilated the late 20th Century powerhouse.
The end of the war proved the case for
supply-side economics. War time government spending suddenly collapsed and ten
million men and women in uniform suddenly returned to civilian life. This was a
dramatic shift. New Dealers were shouting from the rooftops that this would
result in high unemployment and a return to a depressed economy.
Herman writes in Freedom’s Forge, “A report released by Senator James Mead of
New York predicted massive unemployment and inflation in the war’s aftermath,
as America’s fighting men would be returning to empty factories and empty store
shelves … ‘There should be no mincing of words’ with the American people, the
new head of the Office of War Mobilization and Reconversion, John Snyder,
warned President Truman … The end of war production would mean the end of
prosperity, and lead to eight million unemployed by the spring of 1946.
Economist Leo Cherne thought that number wildly optimistic. It would be closer
to 19 million, he asserted. Paul Samuelson, later the dean of American
economists, warned that unless the government took immediate action, ‘there
would be ushered in the greatest period of unemployment and industrial
dislocation which any economy has faced.’”
New Dealers insisted that massive
government intervention was needed to avoid catastrophe. The American public
had a different notion. In 1946, Republicans ran against “big government, big
labor, big regulation, and the New Deal’s links to communism.” The elections
were a rout, with Republicans capturing the Senate and House for the first time
since the start of the Depression. Republicans beat thirty-seven of sixty-nine
liberal Democrats in Congress, which made the minority party more conservative
as well. The Eightieth Congress passed the first balanced budget since the
Great Crash, cut taxes, shreded regulations, overrode Truman’s veto of the
Taft-Hartley Act—which restricted unfair labor practices—and shut down price
controls. Opponents screamed that Republicans were driving the nation back into
the Great Depression.
The naysayers were wrong. The country enjoyed more than two decades of prosperity.
The naysayers were wrong. The country enjoyed more than two decades of prosperity.
You can’t be called an economist
without a Ph.D., so they all consider themselves pretty smart people. Undergraduate
work is about relationships between different types of economic activity. Graduate
economics is about using these relationships to guide, nudge, and push the
economy in a desired direction. Ronald Reagan and I only earned a bachelor degree in
economics. We learned the basic theory, which is clear and noncontroversial.
For instance: if this factor goes this way, how will this other factor react? A
firm grasp of these relationships is what made Reaganomics so successful.
Why are economic computer models so
often wrong and why do they frequently violate observable phenomenon? The
answer is tens of thousands of variables, which leave plenty of room to skew a
model toward a desirable outcome. Computer models have made a mash of things.
Don’t be influenced by Ph.Ds. trying to elbow their way into a policy position
by telling politicians what they want to hear. Common sense and your own eyes
will work just as well.
If you feel you need more, Economics for Dummies by Sean Masaki Flynn will give you more insight than a doctorate. The world really does work the way it seems. There are no short cuts, and as Milton Friedman liked to say, “There’s no such thing as a free lunch.”
If you feel you need more, Economics for Dummies by Sean Masaki Flynn will give you more insight than a doctorate. The world really does work the way it seems. There are no short cuts, and as Milton Friedman liked to say, “There’s no such thing as a free lunch.”
No comments:
Post a Comment