Monday, May 13, 2013

FDR’s Voodoo Economics

The academic legend of Keynesian economics is that Franklin Roosevelt was its first and premier practitioner who saved the nation’s economy through its judicious ministrations during the The Great Depression. This theory of America’s economic history is at best hagiographic and at worst malevolent voodoo.
David Stockman has emerged in the aftermath of the 2008 economic collapse of the US as an elder statesman of traditional economic ideas which affirm the need for market discipline of the economy, the maladies and dangers of crony capitalism, and the necessity for fiscal sobriety, all of which have been entirely absent under the kleptocracies of George Bush and Barack Obama and their bankster handlers.
In a remarkable chapter of his book, The Great Deformation, Stockman lays waste to the naïve notions that Roosevelt was a Keynesian, or that his policies had any material effect on resuscitating the American economy from its severe contraction following the excesses of the 1920s. Others have led the way in this analysis but Stockman brings a larger and more sweeping narrative to the era of the Great Depression.
To understand the buildup to the 1929 collapse, Stockman notes that America’s unprecedented economic growth from 1914-1929 rested upon the spoils of victory of World War 1 which started on the farms which fed Europe and other parts of the world when war ravaged Europeans were unable to produce agriculturally. After the war, American aid was marshaled to feed Europe until its farms could return to self sufficiency, thus giving American farmers a huge bonus from 1914-1921.
America became the great creditor not only as banker for the war, but also as an exporting dynamo whose manufacturers loaned their customers the money to buy their goods. But the easy money of Benjamin Strong gave way to parsimony starting in 1928, eventually leading to collapse of foreign markets – the source of the great economic boom - to say nothing of domestic ones, including Wall Street stock exchanges.
America suddenly found itself with way too much industrial capacity and mal-investment in need of liquidation as it was no longer economically viable. But to add insult to injury, Herbert Hoover signed the Smoot Hawley bill as a protectionist measure in the belief that it would protect jobs and wages.
The measure was brought to a head by the disappearance of gold as a means of international trade settlement, leaving huge imbalances in currency valuations, further disrupting trade. The hapless Hoover's support of the Smoot Hawley Tariffs may have befriended his industrialist cronies, but screwed the average American citizen who was left unemployed by his and his successor’s economic malfeasance.
Stockman does not discuss the trail Hoover blazed for Roosevelt who simply carried on where the former left off. Roosevelt’s aides readily acknowledged that the new president simply expanded on the groundwork of the statist Hoover. When Stockman notes that Hoover was a diehard fan of free enterprise, he fails to observe that Hoover was in the business of bailing out his cronies and fellow travelers. He intervened to prop up soured investments when in fact he should have let them clear.
In spite of Hoover’s gross malpractice and bloated government, Stockman demonstrates that the economy had decisively turned the corner in July of 1932 and had nowhere else to turn but up. Unfortunately, Americans and business owners became extremely uneasy with Roosevelt even as he swept into office in a landslide, parroting in contempt conservative ideals which he planned to jettison as soon as he entered office.
From November 1932 until March 1933, the economy stalled as apprehensions about Roosevelt’s inflationary policies took hold. Stockman does an excellent job in describing the true nature of the banking crisis as one which Roosevelt instigated through his willful and treacherous silence about his administration’s strategy for dealing with the mess created by the Federal Reserve in the late 1920s to 1933, and not helped by Hoover's dramatic interventions.
The banking failures represented a small portion of the banking system’s assets and were confined largely to rural banks which had speculated recklessly during the farm boom, and to small regional banks which also squandered capital and prudence in ill-starred schemes. Even the upstart and large Bank of the United States failed without engendering systemic collapse.
FDR initiated his famous bank holiday as a smoke and mirrors charade which had no net effect on the banking recovery, which started the previous year, other than to retard it and engender fear. Over 90% of the banks closed were reopened and the ones which failed would have failed any way.
Finally, Stockman does a great number on the FDR-as-Keynesian myth. He shows that FDR’s policies were more akin to a mish-mash of dilettantism and pure economic quackery than thoughtful policy strategy, including FDR’s lucky number selection of the price of gold which brought significant and unneeded inflation.
Roosevelt enlarged the federal government, but its take of GNP was still under 10% at the end of the 1930s. His first budget director recommended cuts in federal government salaries and other expenses, hardly a Keynesian notion. His grand experiments with the WPA and PWA were mostly electioneering vehicles which ended in scandal when it was reported that poor workers' meager salaries were being panhandled by FDR’s lieutenants for New Deal politicians' political campaigns in 1938.
Stockman fails to note the heavy taxes Roosevelt inaugurated which put the economy in a tailspin in 1937. Again, high taxes for a frail economy do not follow Keynesian prescriptions. The economy’s GNP would not match that of 1929 until around 1941 or so – a ringing damnation of FDR’s utter failure to bring about economic rejuvenation. The evidence is clear that the economy was recovering in spite of FDR’s hodge podge of voodoo economics.
The main implication of Stockman’s analysis is that all of the politicians claiming to channel FDR during the economic meltdown of 2007/2008 were channeling a fraud who did not even practice the Keynesianism they so worshipped.
Simple ideas attract simple minds. Keynesianism is a simple idea.

New Deal Myths of Recovery (Chapter 8), The Great Deformation, David Stockman, 2013

Copyright 2013 Tony Bonn. All rights reserved.


Anonymous said...

I must say that I find it amusing that you mention David Stockman in your critique of Keynesianism, which in your view is a "simple answer". My dad worked at OMB with Stockman, but my dad had the integrity to quit when Reagan came into office promising simplistic, non-Keynsian "solutions" such as raising taxes yet raising spending for one of the most bloated military budgets on record, at the same time preaching that "big government" was evil and that poor people who gained from government programs and from the labor movement were somehow "welfare queens" mooching off the system. Stockman disingenuously went along with Reagan's "Voodoo Economics" (Bush's term in 1980) but only had a change of heart AFTER he got his position selling this swill in the 1980 campaign. My dad, a career bureaucrat who had been a OMB for quite sometime, saw what Stockman saw way before. He left in 1981, and laughed when Stockman finally admitted that what he had been selling was complete b.s. I guess it takes some people longer than others.

As to simple answers, that's why I say that libertarianism is also a dumb idea because it's simple solutions don't hold up to real world problems, destruction of the commons being just one, corporate greed another.

FInally, my grandfather hated FDR and his social programs, and he didn't admit that it was corporate greed and lack of supervision that brought on the great depression. Most people know however that without government regulation of the markets, we just go back to frequent bank crashes like we had in the 19th century, innocent people fleeced of their hard earned savings. We need more regulation, not less. Less regulation of the markets brought on the Great Recession of 2008. Obama's boys and girls don't seem to have learned that lesson when they keep employing corrupt bond traders to manage the store.

Tony Bonn said...

Your reminiscences about your father and grandfather are interesting. Regarding Stockman's evolution, I am reminded of Keynes' famous answer about the receipt of new information.

I think that you meant to say that Reagan promised lower taxes with higher military spending. In any event, that is what Reagan delivered as have all presidents since. But deficits are worse than higher taxes because deficits come with a tax - interest.

The severing of spending from consequence is the great mischief which has efficiently destroyed this country.

The military industrial complex and government are hopelessly out of control.

There were many good provisions in Glass Steagal which we lost when Clinton and Rubin repealed that Depression Era legislation and we have paid a steep price for it.

But I can't jump into the regulatory bed with you. Some is good when it restrains the giants and the greedy, but can be inane in the extreme when left in the hands of professional pointy headed bureaucrats.

Anonymous said...

I like Nobel Prize winning economist Paul Krugman's take: The Democrats (and independents like Vermont's Bernie Sanders) worked for the most part to rein in the unregulated corporations whose greedy money grabs caused what he calls the "Depression of 2008". The repeal of Glass-Steagal was certainly a big problem, as was the Reagan-era deregulation, which led to free markets run rampantly out of control, and which led to a withering of the middle class, which had been built to great heights (as Krugman and others like James Galbraith point out) as a direct result of FDR's public spending, social improvements, and WW2 spending, which broke the back of the Great Depression of 1929.

I am a big fan of regulations, as long as there is transparency and public accountability---a check on abuse of power. As Senator Bernie Sanders points out, we have way too much money in politics today, and lobbyists write most of the legislation, so we don't have the democracy we were intended to have in our founding, even with Madison and Hamilton's distrust of the masses. Taxes and regulation are the cost of a civilized society. Anarchy and elite control are the end result of loss of regulatory government, democratically set up or otherwise. If we keep going the way we are headed, we will end up as a feudalistic society of individual kingdoms, a few kings ruling over a mass of peasants----a far cry from the middle class societies of egalitarian post-war Europe, or even middle class America in the booming 1950's.

I'd welcome a return to FDR's public spending and Keynesian practices, to his pragmatism and willingness to reining in of robber barons, imperfect as his presidency was. And if we as a global collection of humanity are to have ANY chance of reducing our carbon emissions and slowing the threat of global warming, which if unchecked will wipe humans off the planet, we will need a collective, regulatory (dare I say rationing of goods) like you and I have never seen before.

Tony Bonn said...

i agree entirely that power must be checked and balanced and we have lost that greatly, especially since clinton-rubin dismantled glass-steagal - but the strategy began as early as the late 1970s. the robber barons have returned with a vengeance.

but you seem to have failed in grasping the point of stockman and others (eg., at the von mises institute) who have shown decisively that fdr's spending and program tactics did not break the back of the depression - it is part of the uninformed myth perpetuated in academia. the evidence is lacking entirely, a point i developed in my post referencing another author in All the Crap I Learned in High School.

i will never accept the broken window theory of depression fighting. it is one of george bush's favorite - something he advocated to the president of brazil: start a war - it's great for the economy. but at least he was consistent in following his own prescriptions.

yet i agree entirely that a deep and broad middle class is a sign of economic health - health we have lost because of the concentration of wealth and power in the hands of a few ill tempered (evil) plutocrats. but right winged and left winged demaguogery got us to that point.

unfortunately your zealousness on carbon emissions with its implied endorsement of moar government is the type of concentration of power which will destroy us.

Anonymous said...

"unfortunately your zealousness on carbon emissions with its implied endorsement of moar government is the type of concentration of power which will destroy us"

Nature doesn't really care how we humans organize to turn around carbon emissions. It just reacts. I'm just saying that if we leave solutions to global warming up to the corporations, we're toast. Obviously individuals, operating Ayn Rand-like (tragedy of the commons anyone?) won't solve the problem either. We will need some kind of global solution. The only global solutions that have had any teeth since the dawn of civilization have involved some form of government, either Roman-Empire corrupt or whatever (Scandinavian democratic?).

The fact is, if we humans want to go on living on this planet, we're going to have to do something about global warming. The planet will go on---nature doesn't care if we inhabit it or not. But humans operating out of individualistic self-interest alone ain't going to cut it. We'll need government to mobilize the masses, just as in war you need command to get the troops off the beachhead and into the hedgerows.

John Maynard Keynes' followers were right: Government stimulus spending started to break the back of the Great Depression, but FDR got curtailed by a GOP resurgence in 1938. We dipped back into depression. Then WW2 came along, the largest stimulus ever. That spending broke the depression. The post-war period, from 1945-65 was a period that saw the largest middle class boom in American history. We also had stronger unions then, and higher taxes on wealth and corporations. When we started to cut back on Keynesian policies after the 1970s and particularly under President Reagan, the middle class shrank, and taking away regulation of banks led first to the savings and loan fiasco of the late 80s, followed by the crash of 2008, when bankers got unleashed, unregulated while government got too weak and lost its regulatory power. Have I made my point clear, Tony?

Tony Bonn said...

you made your point clear, but you still failed to make it.

the problem with your statements on global warming is that you have assumed it, and having assumed it, failed to make a case that it is significant. without that significance, extremist solutions sound like another fire at the reichstag.

the world has experienced many regional warming and cooling trends over the centuries, but life usually continued, and when it didn't total government would not have solved it. some things are even too big for big nazi government.

the latest data point to level or falling temperatures. it is too easy to stir a tempest in a small teapot of time.

your dichotomy between your absolutist governmental solutions and the ayn rand cowboy straw man are the type of polarizing logic becoming of a cia propaganda campaign. left / right, blue / red, pepsi / coke, paper / plastic. it is not the path to good solutions. please leave your party politics at the door - it is not productive.

fdr simply followed in the path of hoover a fortiori. thus 15 years of failed government programs could do nothing to bring national output back to its 1929 levels. 15 years of a collection of hack programs suggests to me that causality is entirely lacking, especially considering the depression was the longest and deepest in the nation's history, further suggesting that those very programs you laud prolonged and deepened, in part, the depression.

insofar as the economy did recover, other pathways explain its resurgence.

you simply described a sequence of events, failing to note that as morganthau did that all of the tricks in the great dilettante's bag failed to put the economy back together again - after 15 years of interventionist policy. (it started with hoover).

about the only point where i agree with you is that we have lost vital checks on both corporations and government - both are too large, both embraced in a symbiotic parasitic relationship which has sucked the life out of the economy and middle class. but we can't overlook the fed in this great tryst. it is the great oz hiding behind the curtain of 2 party politics.

At least i have fodder for a couple of more blog posting :-o

Anonymous said...


Your argument about global warming makes no scientific sense. Are you saying that manmade carbon emissions DON'T create a greenhouse effect, that the oceans are NOT acidifying, that the glaciers and polar ice caps are NOT melting? Cursory evidence as well as peer reviewed data contradict your assumptions. Therefore, unless you can prove otherwise, I can't accept your conclusions/opinions.

As they say, you're entitled to your opinions, but not to the facts.

Tony Bonn said...

i wasn't commenting so much on the scientific aspects as on the policy implications of what i assume are your comments.

My main objection in this thread is the strategy of not wasting a good crisis, as North American MOSSAD director Rahm Emmanuel once stated.

much of the global warming data is manipulated and manufactured as we discovered with the UN. on the other hand, where there is smoke there may be fire. I will comment on the science in the coming days. I have moderated my opinions on it in the past, but not on the policy.

as always, impact and significance ought to be considered in terms of time.

there will never be a crisis which justifies the totalitarian state.

kerdasi amaq said...

How much carbon based fuel will we have to burn so as to double the quantity of CO2 in the atmosphere?

I think that the warmists are exaggerating mankind's ability to affect the planet for their own nefarious political purposes.