by Burt on August 31, 2010
In the last blog post, I told you that President Obama says we need yet more government spending–a business aid package that he asks Americans to support. On Monday, August 30, he said, “My economic team is hard at work identifying additional measures that could make a difference.” But why, we should ask, should we keep repeating the same story and expecting the elusive recovery? Isn’t the classic definition of insanity the notion of doing the same thing over and over and expecting different results?
History helps us here. In the 1930s, Presidents Hoover and Roosevelt experimented with massive government spending in an effort to end the recession of 1929. Both presidents tried public works spending and farm subsidies. FDR also tried a huge road building program (WPA), special youth employment programs (CCC and NYA), huge infrastructure investments (TVA), and a business subsidy program (NRA). Just for good measure he also threw in social security, minimum wage, and special privileges for unions. What was the result? After seven years of these experiments under FDR, the U. S. unemployment rate was more than 20 percent. At the same time (the year 1939), for most of Europe, unemployment averaged about 11 percent, according to a detailed study by the League of Nations.
Why does stimulus spending fail so often when it is tried? Because it assumes that politicians in Washington can spend our money better than we can spend it ourselves. They can’t. Politicians can tax us and borrow from China all they want, but they simply can’t pump it into the economy more effectively than Americans can themselves. True, politicians can direct tax revenue into key states and congressional districts to win votes at election time. So sometimes we have key battleground states benefiting from other people’s money. But “spreading the wealth around,” as President Obama calls it, only works when people are voluntarily spreading their own wealth around, not having politicians do it for them.
In the wake of economic failure, however, President Obama has taken one good step–he announced Monday that he might consider keeping the Bush tax cuts in place. Fine idea. If people know they are going to get to keep more of what they earn, they will be able to spend more and invest more. Free people freely spending their own money is the first step to economic recovery.
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by Burt on August 30, 2010
Let’s tell a story. Once upon a time we had a president who very recently announced the need for an economic stimulus package, a “booster shot,” as he called it, for the struggling economy. Our storybook president called his bill the “Economic Stimulus Act.” When he signed it, he proudly proclaimed, “The bill I’m signing today is large enough to have an impact.”
Then something sad happened. The stimulus package, instead of rescuing the economy, seemed to depress it. Unemployment went up and more layoffs occurred.
Of course, we don’t have to imagine such a story. It actually happened–to President George W. Bush. Remember? In February, 2008, President Bush promoted a $152 billion stimulus package that yielded not more jobs, but fewer jobs as national unemployment rose from 4.8 percent in February to 5.8 percent in July to 6.9 percent in November, the month when Barack Obama was elected.
Oddly, the new President Obama decided to repeat the Bush story. The new president proposed yet another stimulus package, this one to be almost $800 billion–much larger than the one Bush put forth the previous year. The bigger the better, we were told. What happened? The same thing. Unemployment went up after the Obama stimulus became law — from under eight percent to about ten percent.
A year and a half after the second stimulus flop, President Obama says we need yet more government spending–a business aid package that he asks Americans to support. On Monday, August 30, he said, “My economic team is hard at work identifying additional measures that could make a difference.” But why, we should ask, should we keep repeating the same story and expecting the elusive recovery? Isn’t the classic definition of insanity the notion of doing the same thing over and over and expecting different results?
(Look for the answer to this question in the next blog post.)
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by Burt on August 24, 2010
One of the benefits of studying history is that we can see what worked and what didn’t work in the past. That helps us put the present in perspective. My larger point is that many ideas that are fashionable today will be discarded and in the dumpster thirty years from now. In fact, my task as a teacher is often to explain to students how it is possible that so many people in a given generation could have believed something that today is obviously so silly. Let’s look at some examples.
In 1920, most Americans genuinely believed that if we prohibited the manufacture of alcoholic beverages, people would mostly stop drinking and morality would improve. For a while it worked. But a dozen years later the experiment was clearly a flop, and law enforcement agencies around the country were swamped trying to stop bootleggers from selling imported or home-made booze. But that was okay; we put prohibition aside because we had a new fashion–the idea the we could outlaw war. Dozens of nations around the world–the United States leading the way–signed the Kellogg-Briand Pact, which committed nations to outlawing war in international policy. It was all supposed to be that simple. Pass a law, and war will be gone. And then came Mussolini. Then came Hitler. Then came the Japanese. End of Kellogg-Briand Pact. But it was the wisdom of its day.
Finally, in the 1930s came the Keynesian idea that if we had an economic downturn, we should just “stimulate aggregate demand,” that is, spend money we don’t have and that would spark economic growth in the economy. Thus, the U. S. went on a course of massive deficit spending. In Franklin Roosevelt’s first two terms in office, the U. S. amazingly doubled its national debt through a flurry of new programs such as WPA, TVA, AAA, and CCC. What was the result? Toward the end of FDR’s second term, unemployment was 20.7 percent, the top income tax rate was 79 percent, and the Great Depression had become the worst economic catastrophe in U. S. history.
The good news is that we learned some lessons: prohibition didn’t work and unfortunately, we can’t outlaw war. Human nature will not let that happen. But the bad news is that we never got around to discarding the notion that “spending money we don’t have will stimulate economic growth.” For some reason, that fantasy has lingered, and remains in economic fashion in top political circles today. The sooner we can dump that idea in the dustbin, the sooner we can begin again to prosper as a nation.
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by Burt on August 17, 2010
“Republics they say are ungrateful. . . . The people that create or build to make victory possible . . . are war profiteers to be subjected to suspicion, to be investigated, to be harassed.” Thus spoke Andrew Higgins, the inventor of the Higgins boats that were so essential to the U. S. D-Day landings in WWII. Eisenhower called Higgins “the man who won the war for us.” But when the war was won, Higgins was socked with an IRS investigation and then was largely forgotten. I grew up in Nebraska, where Higgins was born and raised, but I never heard about Higgins in history class. Instead we studied William Jennings Bryan, the Nebraska politician who wanted government to set the prices of gold and silver. Oddly our American republic seems to honor manipulative politicians more than creative entrepreneurs.
The first billionaire in U. S. history was John D. Rockefeller. He dominated oil refining so strongly that his Standard Oil company alone held a 65 percent world market share of oil refining in the late 1800s. In other words, just Rockefeller alone sold about two-thirds of all the oil used in the entire world. No OPEC or Middle Eastern cartels squeezed the U. S. while that man lived. Yet in Cleveland, Ohio, where Rockefeller achieved his success, we find no memorial to his creative brilliance. In Kentucky we have major roads dedicated to Rep. Gene Snyder and Senator Wendell Ford, but no monument to Col. Harlan Sanders, the founder of Kentucky Fried Chicken. Those who have created the jobs that helped make the U. S. a world economic power seem less important than the politicians, who have redistributed much of their wealth to the nation’s non-producers.
Why does the U. S. economy in 2010 continue to stagnate? Maybe we are looking at the wrong role models. When we honor politicians, who bring home pork to build roads, and neglect our nation’s entrepreneurs–our real job creators–we send our children the wrong message about how to preserve and sustain a free society.
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by Burt on August 9, 2010
Should we redistribute wealth from rich to poor or should we follow the Constitution, avoid entitlements, and give everyone a right to life, liberty, and the pursuit of happiness? FDR was the first president to come down clearly on the side of redistribution. The WPA was FDR’s principle means of shifting wealth from large wealthholders (taxed at a top marginal income tax rate of 79%) to masses of lower income voters, who received the political patronage FDR was offering them. The shift in money is perhaps best stated by V. G. Coplen, the Democratic county chairman of Indiana, who said, “What I think will help is to change the WPA management from top to bottom. Put men in there who are . . . In favor of using these Democratic projects to make votes for the Democratic Party.”
FDR attracted many groups to the Democratic party–all eager to receive tax dollars at the expense of wealthier Americans. For example, FDR targeted African Americans through the PWA. During the 1930s, FDR fervently hoped that with targeted federal subsidies, African Americans might switch political allegiances from the party of Lincoln and natural rights to the party of FDR and redistribution. In
New Deal or Raw Deal?
(page 185) I describe how Harold Ickes, FDR’s secretary of interior, used the Public Works Administration to dole out $13 million in federal money to African American colleges, hospitals, and low-rent housing projects. Eight days before the election of 1936, Ickes gave a radio address targeted to African American audiences and listed various subsidies FDR was giving to African American groups. After the speech, one telegram to Ickes said, “Tremendous swing for Roosevelt of Negro vote in southern California since the Secretary’s broadcast at Howard University.” In that election of 1936, FDR became the first Democratic president to win the African American vote.
Today, the current Democratic party seems to be copying FDR’s playbook. The stimulus package often targeted Democratic spending projects and even the GM and Chrysler bailouts benefited unions and traditional Democratic voting blocs. The SEIU has had frequent access to President Obama, and the president has consistently backed union goals of redistribution.
How has redistribution worked in the economy? Under FDR we had almost 21% unemployment well into his second term. Under President Obama, unemployment has already increased from 8 to almost 10%, with no sign of decrease on the horizon.
How about the constitutionalists? Under Presidents Harding and Coolidge, unemployment dropped from almost 12% to 2.4% from 1921 to 1923. Under President Reagan unemployment was slashed from the Carter years. Yes, President Reagan did have an increase in the national debt, but even the federal budget deficit as a share of GDP declined from 6% in 1983 to 3.2% in 1987. Under President Obama, the current federal budget deficit is 10% of GDP, almost three times that of Reagan’s in 1987.
Are we better off under redistributionists or constitutionalists? The answer is that the Founding Fathers knew best.
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