Following up on my post from last evening regarding the wasteful Scheme-ulous Bill, I think it’s important and relevant to look at it in terms of what impact it will have on the current economic crisis. This is a detailed post but one that I think is critically important. Please read on!
It’s bad enough that the so-called Stimulus Bill mostly allots taxpayer dollars to pork, waste and other items that won’t create a single job, but the fact remains that even if it were a true ’stimulus bill’ it still wouldn’t fix our ecoonomic problems.
How do we know? Well, we already have 2 great examples to draw from where government spending and intervention failed miserably in improving ailing economies: the Great Depression and the economy of Japan circa 1990. In both cases, government spending and intervention worsened and prolonged the problems.
The failures of FDR’s New Deal programs, I think, have been fairly well documented of late. Nonetheless, an article in the Wall Street Journal by two University of Pennsylvania economists yesterday reinforces this point quite clearly.
Why wasn’t the Depression followed by a vigorous recovery, like every other cycle? It should have been. The economic fundamentals that drive all expansions were very favorable during the New Deal. Productivity grew very rapidly after 1933, the price level was stable, real interest rates were low, and liquidity was plentiful. We have calculated on the basis of just productivity growth that employment and investment should have been back to normal levels by 1936. Similarly, Nobel Laureate Robert Lucas and Leonard Rapping calculated on the basis of just expansionary Federal Reserve policy that the economy should have been back to normal by 1935.
So what stopped a blockbuster recovery from ever starting? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.
The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation’s antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of “fair competition” which spelled out what producers could and could not do, and which were designed to eliminate “excessive competition” that FDR believed to be the source of the Depression.
These codes distorted the economy by artificially raising wages and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment. Following government approval of each industry code, industry prices and wages increased substantially, while prices and wages in sectors that weren’t covered by the NIRA, such as agriculture, did not. We have calculated that manufacturing wages were as much as 25% above the level that would have prevailed without the New Deal. And while the artificially high wages created by the NIRA benefited the few that were fortunate to have a job in those industries, they significantly depressed production and employment, as the growth in wage costs far exceeded productivity growth.
The downturn of 1937-38 was preceded by large wage hikes that pushed wages well above their NIRA levels, following the Supreme Court’s 1937 decision that upheld the constitutionality of the National Labor Relations Act. These wage hikes led to further job loss, particularly in manufacturing. The “recession in a depression” thus was not the result of a reversal of New Deal policies, as argued by some, but rather a deepening of New Deal polices that raised wages even further above their competitive levels, and which further prevented the normal forces of supply and demand from restoring full employment. Our research indicates that New Deal labor and industrial policies prolonged the Depression by seven years.
By the late 1930s, New Deal policies did begin to reverse, which coincided with the beginning of the recovery. In a 1938 speech, FDR acknowledged that the American economy had become a “concealed cartel system like Europe,” which led the Justice Department to reinitiate antitrust prosecution. And union bargaining power was significantly reduced, first by the Supreme Court’s ruling that the sit-down strike was illegal, and further reduced during World War II by the National War Labor Board (NWLB), in which large union wage settlements were limited by the NWLB to cost-of-living increases. The wartime economic boom reflected not only the enormous resource drain of military spending, but also the erosion of New Deal labor and industrial policies.
The economy of Japan, nearly 2 decades ago now, arguably is even a better example than the Great Depression of the 1930’s. The circumstances that led to their problems are eerily similar to ours now. And the scary part is it took them nearly 2 decades to recover.
In an article by Cutting Edge Economic Crisis Analyst James Quinn, The Cutting Edge News, Mr. Quinn lays all of this out in detail:
A two-decade downturn has a high likelihood of occurring in the United States. There are many similarities between the U.S. and Japan, but in many areas the U.S. has a much dire situation. If the next decade resembles the Japanese experience, there will be significant angst and social unrest.
The talking heads on CNBC were almost unanimously predicting a second half recovery for the economy in the 1st week of January. Most of these people manage money and only earn money if duped investors steer their hard earned dollars in their funds. Their analytical case for predicting recovery is that it was so bad last year that it has to go higher in 2009. This is what passes for “analysis” on Wall Street. The market is already down 7 percent in four weeks. These “experts” fail to see the big picture and have no sense of history. It took 28 years to get to this point and it will take at least a decade to repair the damage. If the politicians running this country try to take the easy way out (very likely), add another decade to the recovery timeframe. Some indisputable facts will put our current predicament in perspective.
The U.S. National Debt was $930 billion in 1980, or 33 percent of GDP. Today it is $10.7 trillion, or 76 percent of GDP. The National Debt has grown by 1,150 percent in 28 years. With the planned fiscal stimulus (taxing future generations), the National Debt will reach 100 percent of GDP during the Obama administration. When Argentina’s economy collapsed in 1998, their National Debt as a percentage of GDP was 65 percent. The Great Deniers say we are not Argentina. They say we are safe because the U.S. dollar is the reserve currency of the world. This is like jumping off a 20 story building and as you pass the 10th floor someone yells out the window asking how you are doing. You answer, “Good, so far”.
GDP was $2.8 trillion in 1980. Today it is $14 trillion and declining. GDP has grown by 500 percent since 1980. Our National Debt has grown more than twice as fast as GDP. This is an unsustainable trend. Our economic disaster took 28 years to create and will not be fixed in a year or two.
It is unambiguous that we have borrowed ourselves to the brink of disaster. Both government and consumers have leveraged themselves to an untenable level. The only logical way to resolve this quandary is to reduce spending, pay down the debt, and increase savings. This is what consumers have begun to do. With consumer spending accounting for 72 percent of GDP, we are experiencing a serious recession due to the decrease in consumer spending. The excesses are being painfully wrung out of the system. The government and Federal Reserve have already committed $8 trillion of taxpayer funds to bailing out criminally negligent insolvent banks. Now the Obama administration is going to spend in excess of $1 trillion in an effort to stimulate the economy. They insist that it must be bold and swift. How about also being well-thought out, deliberative, and effective?
Every single dime of the next $1 trillion will be borrowed foreign countries and then handed out to constituents, this while encouraging them to resume borrowing and spending. Senators Barney Frank and Charlie Rangel will force insolvent banks to lend money to companies, consumers, and deadbeats in foreclosure proceedings. “The change we can believe in” is this: we will borrow and spend our way out of the largest debt bubble in history.
Consumers and companies are acting rationally and trying to purge themselves of debt. But the government will not allow that to happen. A massive additional dose of leverage will revive the patient. The definition of insanity is doing the same thing over and over, expecting a different result. Are the politicians running this country insane, unintelligent, or just so corrupt that special interests outweigh the interests of the American people? The current pork laden stimulus package will lead to a rerun of Japan’s lost decade, with one vast difference. Our lost decade will terminate in a hyperinflationary collapse.
Mr. Quinn on what the Japanese government did wrong:
When you listen to the Obama marketing team selling their $1 trillion stimulus package, they say we must avoid the disastrous course of Japan. After examining Japan’s lost decade, the results weren’t very bad. The economy was not dynamic, but Japan has retained its position as the 2nd largest economy on the planet. After growing at a 3.9 percent annual rate during the 1980’s, Japan’s GDP grew at only an annual rate of 1.1 percent between 1991 and 2003. Considering the missteps by the government and the huge demographic headwinds blowing against them, Japan still grew their economy. Japan’s cumulative per capita growth this decade has been 13.7 percent, compared with 12.5 percent for the United States. And its horrible deflation was not so horrendous.
Consumer prices in Japan have been relatively flat for fifteen years. CPI there has declined in a few years, but has never reached -1 percent in any particular year. The lack of demand from consumers has been a function of people being burned in the dual bubble collapse and an aging, declining Japanese population. Japanese consumers have rationally paid down debt and increased savings. The actions of the Japanese government were not rational or intelligent. Yet a replay of these blunders is taking place in the United States today.
The Japanese government has prolonged its downturn for an additional decade by not allowing bankrupt banks and corporations to liquidate. Zombie banks and corporations existed for decades without writing off the billions of bad debts. They hoarded all of the money provided by the government. The Japanese tried every trick in the Keynesian playbook. Zero interest rates, public works projects tax rebates and tax decreases. The government built thousands of bridges and roads, driving up government debt to enormous levels. Between 1990 and 2000, the Japanese government instituted 10 fiscal stimulus programs totaling $1 trillion. None of these programs worked.
The Bank of Japan purchased commercial paper. The government bought shares of public companies to prop up the stock market. Japan created a $500 billion bank bailout fund, with over $200 billion going towards the direct purchase of stocks. Politicians chose which companies would be propped up. This further distorted the free market. Japan has the highest elderly population of all the developed countries in the world. With the huge loss of real estate and financial wealth, the aging population of Japan needed to increase savings and reduce consumption to insure people would not starve to death in their old age. An aging population deciding to save for the future—making a rational decision.
Economist Benjamin Powell clearly explains what happens when government intervenes in free markets using the Japanese model. “Japan created a structure of production,” Powell writes, “that did not meet consumers’ particular demands. Producing things that nobody wants and propping up mal-investments cannot possibly help any economy. This policy is equivalent to the old Keynesian depression nostrum of paying people to dig holes and fill them. Neither policy will revive the economy because neither forces businesses to realign their structures of production to match consumer demands.”
Clearly, the Japanese government created the enormous stock market and real estate bubble through its loose monetary policies in the 1980’s. No matter how much money the Japanese government threw at the problem, they could not convince consumers or companies to borrow and spend. Even with zero interest rates, Japanese companies continued to pay down debt. The billions spent on infrastructure added to the National Debt and did nothing to revive the economy.
If Japan had faced up to the bad debt on its banks balance sheets immediately, it would have experienced a short painful recession of a couple years. By not honestly assessing the true extent of the bad debt and propping up insolvent banks and corporations, Japan sentenced itself to two decades of stagnation. Japan entered this difficult period as a net exporter, with consumers who saved 12 percent of their income, and a government that had leeway to increase governmental debt. The U.S. has entered a more dangerous period with none of those advantages.
I highly recommend reading Mr. Quinn’s piece in its entirety, as well as this similar piece which is backed up with graphs and statistics.
But the bottom line is this: we are now poised to embark on a course that will very likely deepen and prolong our current circumstances. This is serious business, particularly when you start thinking about the entitlement obligations the nation will be facing in the near future when the Baby Boomers begin retiring en masse.
This spending bill being pushed by the Democrats and the Obama Administration must be defeated. It must be killed, cremated and buried deep in the ground. Our nation’s prosperity depends on it.
Cross-posted at Conservatives with Attitude!
