Quote:
Originally Posted by TexTushHog
Perhaps you should reread Keynes. Cutting spending by the single biggest spender during a liquidity trap induced recession is suicide. The kind of spending cut idiocy you endorse is what caused the recession of 1937-38 (the foolishness of Richard Vedder and Amity Shales not withstanding). Enjoy the ride down.
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Keynes
never advocated fiscal surges in the presence of already-large structural deficits. In fact, he was quite specific on that issue, insisting that budgets be in balance or even in surplus during good times so that governments could afford to engage in countercyclical spending in order to mitigate the severity of downturns. Keynes would probably roll over in his grave if he could see the sort of irresponsibility invoked in his name.
Spending cut "idiocy" had little to do with the 1937-38 downturn. That's what gets taught in many of our universities by left-wing professors, but it's complete nonsense. In the first place, the cuts actually put in place were quite miniscule. Several other factors caused that secondary downturn. The Federal Reserve tightened the money supply (by way of large bank reserve requirements) in 1936-37. There were big tax increases on high incomes and undistributed corporate profits as the New Dealers railed against what they called the "princes of greed." Compulsory unionization ran amok, driving up wages and keeping the unemployment rate extremely high. It should have come as a surprise to no one that a lot of capital decided to take an extended vacation, just as it's doing now in response to anti-growth economic policy in the U.S. Paul Krugman will not tell you any of this, since it does not fit in with his narrative that you need massive increases in government spending in order to blast out of recessions.
If you do decide to follow Krugman's prescription, just look what happens. Japan had a horrific asset bubble burst about 20 years ago. It failed to stimulate its economy with monetary policy when it bumped up against the zero bound. The government tried surge after surge of "stimulus" spending, tripling its debt/GDP ratio and running it up to almost 200%. It didn't work. The Japanese economy has been mired in stagnation for many years. Japan's experience has been called the "Lost Decade", although now they're finishing two decades of stagnation. That could be where we're headed if we don't change course.
By contrast, look at the severe recession of 1920-21 in the U.S., which followed the boom & bust of the teens. Industrial production dropped off a cliff and the stock market fell precipitously. Year-over-year price deflation is estimated to have been as high as 15%. The downturn was actually worse than the first year of the Great Depression. Government responded by cutting taxes
and cutting spending, and quite dramatically. The economy recovered quickly and robustly.
Yes, there are plenty of lessons to be learned from the Great Depression, but unfortunately they are not the ones being taught. We all suffer from the fact that no one ever seems to learn from economic history, even historians and economists -- who obviously should know better.
Britain is doing exactly what it should be doing -- indeed, what it
must be doing. I don't hold out much hope that we're going to do anything similar anytime soon, at least not until forced, but it's what we must do -- since the alternative is so much worse. We need to cut everything across-the-board. Everything means everything. There can be no sacred cows. That's what the U.K.'s government is doing, and it's obviously politically tough. I applaud them for it.
If we stay the course in the U.S., I'm afraid we'll find that we have been building a bridge to the next bust, not to a more prosperous future. You can't just run trillion-dollar deficits forever without a credible plan for doing anything about them.
Unfortunately, fiscal and currency crises are not kind enough to announce their arrival a couple of years in advance so that you can get your house in order.
