The Beginning of the End of the American Empire?

The New NEW Deal 2008…?

Most modern economists have not yet realized what Henry Hazlitt  already knew in the 1930s that the New Deal made the Great Depression persist longer and fall a lot deeper than it should have. It is a myth that the new deal "got us out of the Depression" and "saved capitalism from itself.” However, recently a few modern Ivy League macroeconomists have finally come to this conclusion as signified by an article in the Journal of Political Economy entitled "New Deal Policies and the Persistence of the Great Depression.”  (August 2004)   This is a big deal, since the JPE is arguably the top academic economics journal in the world.

LESSONS FROM THE GREAT DEPRESSION STATISTICS

"Real gross domestic product per adult, which was 39% below trend at the trough of the Depression in 1933, remained 27 percent below trend into 1939," and " private hours worked were 27 % below trend in 1933 and remained 21% below trend in 1939."

This should come as no surprise to anyone who has studied the reality of the Great Depression. The U.S. Census Bureau of Statistics shows that the official unemployment rate was still 17.2 % in 1939 despite nine years of "economic salvation" at the hands of the administration (the normal, pre-Depression unemployment rate was about 3 percent). Do you realize that GDP was lower 10 years later, in 1939 than in 1929 ($847 billion vs. $857 billion), as were personal consumption expenditures ($67.6 billion in 1939 vs. $78.9 billion in 1929), and net private investment was minus a total $3.1 billion from 1930–40.

Most people, especially economists, are surprised—even shocked—to discover these facts, primarily because they don’t bother to study economics properly and just accept Ivy League Socialist propaganda at face value. They can’t seem to understand the fact that the recovery from the Great Depression was "very weak": Simply because this data contrasted sharply with both Keynesian Monetarist and neoclassical theory and popular beliefs that state that there should have been a booming robust economy.  The weak recovery is puzzling to the Neoclassical economists as well to the Monetarists because the large negative shocks that they believe caused the 1929–33 downturns, including monetary shocks, productivity shocks, and banking shocks all become positive after 1933." Thus, according to their theories, the economy during a depression is somewhat dead, like the Frankenstein monster, but is then "shocked" back into becoming a living, breathing dynamic economy by lowering interest rates, increasing credit and money supply as well as demand augmentation by massive government spending. The monetary base increased more than 100% between 1933 and 1939, making the case that such a "monetary shock" should have returned the economy to normalcy, according to some well-known macroeconomists who once proclaimed that "positive monetary shocks should have produced a strong recovery, with employment returning to its normal levels by 1936."

However, it was just those very same, easy money policies of the mid to late 1920s that created all the over-investment that inevitably resulted (as it always has and will) in the great Bubble followed by the Great Depression in the first place. The only wise thing that should have been done was to allow the liquidation of unprofitable and overcapitalized businesses to occur, as was done in the 1919-1920 Depression (President Harding stopped Hoover from implementing those very same policies that he eventually implemented as President in 1930). The result being that the even sharper after war depression of 1919-1920 lasted less than two years and at its worst never led to the massive unemployment numbers of the 1930’s. Why? The simple reason was that wages were allowed to adjust downwards along with prices. On the other hand, in 1929, Hoover, now President, started massive spending programs and encouraged the Fed, beginning after the 1929 crash, too drastically increase the monetary base bring about more of the same problems that caused the Bubble.

Exactly the same as we are doing and plan on doing today

On top of that, virtually every single one of the "New Deal" policies were completely contrary to basic economic theory, destroying employment and further prolonging the Depression. Austrian economists have known this for a hundred years, but now at least a few of the Keynesians and Neoclassical model builders are finally catching on. They have been building models for a long enough period of time to discover that the so-called First New Deal (1933–34) was one giant cartel scheme to raise prices; completely confusing cause and effect, whereby the government attempted to enforce cartel price fixing through output reductions in hundreds of industries as well as in agriculture (Burning crops and pouring milk into the streets), drastically reducing employment. Falling prices are an effect, not a cause of a Depression. This, of course, was well documented in John T. Flynn's book, first published in 1948. Henry Hazlitt also wrote about it some fifteen years earlier. (I highly recommend reading his book, “Economics In One Lesson”). New Deal cartelization policies were a key factor behind the weak recovery, accounting for about 60% of the difference between actual output and trend output. The fact that it has taken so long to recognize this fact is truly astounding. For generations, Princeton as well as the other Ivy Leagues own neoclassical textbooks have taught that cartels "restrict output" in order to raise prices. If you restrict output, you need less workers, plain and simple. It has also been no secret that the heart and soul of the First New Deal was to use the coercive powers of government to prop up wages (similar to minimum wage laws today) and prices by cartelizing the entire economy.

Both Hoover and FDR and their Keynesian advisors mistakenly believed that the Depression was caused by low prices, therefore high prices—enforced by threats of violence, coercion and intimidation by the state—would be the "solution" to demand deficiencies. (IS that not the same as trying to prop up housing prices today?) Instead of dropping prices and clearing the massive over supply as dictated by any Free Market common sense. Moreover, it is hardly a secret that if less production takes place, fewer workers will be needed by employers and unemployment will subsequently be higher and demand greatly LOWER. It is also common sense that the higher you raise prices, the less you will sell and the fewer employees you will need? Thus, the First New Deal could not possibly have been anything but a gigantic unemployment-producing scheme according to common sense and basic economic theory. (who will be the president and what will the economic policies be in 2009?)

The tripling of taxes, and increased regulation of business, combined with the relentless anti-business propaganda also contributed to a worsening of the Great Depression. But it was the labor policies that were probably the most harmful to the employment prospects of American workers.  The NIRA codes established minimum (higher) wages for less-skilled and higher-skilled workers alike. Employers were told that they must bargain collectively with unions, which were given multiple legislated advantages in the bargaining process, all enforced by the newly-created National Labor Relations Board. All of these policies made labor more expensive. Consequently, as Natures laws of Supply and Demand inform us, the inevitable result was less employment. GM and Ford have been closing plants in America while every other Car company is opening one new plant after another, all non union and all in Right to Work states.

Strike activity doubled from 14 million strike days in 1936 to 28 million a year later, and in the midst of the depression, wages rose by 15% in 1937 alone. The union/nonunion wage differential increased from 5% in 1933 to 23% by 1940. Newly-enacted Social Security payroll and unemployment insurance taxes made labor even more expensive. What all of this means is that during a period of weak or declining  demand for labor, government policy pushed up the price of labor very significantly, causing employers to purchase less and less of it. Any decent econometric evaluation of these labor cost-increasing policies would have concluded that most of the abnormal unemployment of the 1930s would have been avoided were it not for these policies. It’s estimated that by 1940, the unemployment rate was eight percentage points higher than it would have been without the legislation-induced growth of unionism and government-mandated employment costs. The conclusion is that the Great Depression was very significantly prolonged in both its duration and its magnitude by the impact of New Deal programs.

Recently a few Ivy League economists have also finally come to the conclusion that New Deal labor and industrial policies did not lift the economy out of the Depression. Instead, the joint policies of increasing labor's bargaining power and legalizing collusion prevented a normal recovery by creating rents (monopolies) and an inefficient insider-outsider friction that raised some wages significantly and restricted employment. The abandonment of these policies coincided with the strong economic recovery of the mid to later 1940s and beyond.

In more recent analysis as to why the Depression lasted so long and why prosperity resumed only after the War rather than as most might expect during the war, showed that it was the relative neutering of New Deal policies, along with a reduction (in absolute dollars) of the federal budget from $98.4 billion in 1945 to $33 billion in 1948, that brought forth the economic recovery. Private-Sector production increased by almost one-third in 1946 alone, as private capital investment increased for the first time in eighteen years.

In short, it was capitalism that finally ended the Great Depression, not cartel, wage-increasing, unionizing, and welfare state policies. It's good to see that the Journal of Political Economy, the University of Chicago, and UCLA are finally beginning to catch up with the Austrian School, concerning the New Deal at least.

Modern Day Economic Policy

However when it comes to modern day economics, everyone from both sides of the isle, all seem to be Keynesians. Even though in their ivory towers Economists  of every stripe all know that Keynesianism doesn’t work, yet most still seem to be focusing on increasing demand, expanding credit and the money supply while keeping interest rates low as a solution to all our problems. For some reason they can’t grasp the fact that it has always been easy money in the form of below market interest rates, easy credit, a rapidly expanding money supply all backed up by massive Government spending that causes the problems in the first place

The definition of Insanity: Is doing the exact same actions over and over again and yet always expecting a different outcome.

Perhaps expecting economists and politicians to study the past, going back 80 years is too much to ask since none of them were alive then. But what about studying Japan? Is looking back 20 years also too much to ask? Do they really believe that instituting the exact same monetary and fiscal policies that Japan has implemented over the last 20 years will produce a different result here in the USA than they have in Japan? Keep in mind that Japan has a 40% savings rate while ours is -1%. Also today’s Japan has both a Trade and Balance of Payments surplus. Need I remind you what kind of shape the USA is now in?

THERE IS NO SUCH THING AS A SHORTAGE IN AGGRAGATE DEMAND BECAUSE OF EXCESS SAVINGS.  Excessive Savings is an oxymoron.

BAILING OUT HOME OWNERS

Congress’ attempts to bail out homeowners is just a red herring to cover up who are the real beneficiaries of taxpayer largess, the World’s major Banks, Brokers and Institutions. Bernanke, Paulson and company will end up having to inject $2 trillion and in the process destroy our currency.  History repeats and as I predicted as far back as two years ago, we will see the “New Deal of the 21st Century” as we repeat the exact same mistakes today that we did back then. By the way, while we are at it lets get the heads of our failed oversight agency’s to draw up new rules and regulations, giving them more power than they already had up until now. That should do the trick, once again, doing more of the same.  

IS THERE ANYTHING THAT WE CAN DO ABOUT IT?

The simple answer is NO I don’t think so; unless everyone of us got on the phone to his congressman and demanded appropriate action: But most likly  IT’S TOO LATE, besides who would listen to me? Even my Conservative Republican friends won’t listen. So the best you can do is protect yourselves, by tightening your belts, pay off all your debt, Buy Gold and Subscribe to my Bi Weekly letter:
 “UNCOMMON COMMON SENSE”  For Information call 561-840-9767

                                                                                                 April, 16, 2008

GOOD LUCK AND GOD BLESS

Aubie Baltin  CFA. NFA. CFP. Phd.
UNCOMMON COMMON SENSE
2078 Bonisle Circle
Palm Beach Gardens FL  33418
[email protected]
561-840-9767