As in simple minded thinking. Yet this kind of simpleton's discussion gets disseminated far and wide by newspaper editorial staff. It's very unhelpful to our nation - which desperately needs to elevate, not depress the level of public discussion of currency operations and fiscal policy.
Letter to the Editor
Taking Exception
If Mr. Obama is looking to propel economic recovery, he could do far worse than to embrace the legacy of Harding.
Harding was elected during the “panic” (depression) of 1920, when unemployment grew from 4 percent to 11.7 percent, the gross domestic product fell by 24 percent, and the production of goods and services dropped by 21 percent. These conditions were worse than those in the first year of what became known as the “Great Depression” a decade later.
Under Harding’s leadership, federal spending was cut in half by 1922 and, unlike Herbert Hoover and Barack Obama, he did not seek nor implement a stimulus policy. With these policies in place, the post-World War I depression ended by the summer of 1921. The unemployment rate fell to 6.7 percent in 1922 and then to an astonishing 2.4 percent in 1923, the last year of Harding’s administration.
Richard E. Sincere Jr., Charlottesville
The writer is a member of the Charlottesville City Republican Committee.
ps: There's only one comment to his article, at the Post, but at least it raises some of the many context-dependent flags comparing different contexts.
If this passes as editorial approach to public policy, are we doomed?
If this passes as editorial approach to public policy, are we doomed?
8 comments:
So what's the MMT perspective on the Harding era?
That it's irrelevant to today. There are quaint details to leave to economic historians to argue, but they're entirely academic.
The 1920 panic (depression) was short lived (7 mos) and probably had to do with returning soldiers who were out of work and wartime factories shut or retooling for commercial production. However, the deficits that the government ran up in 1918 and 1919, as a result of fighting the war (12% of GDP and 17% of GDP, respectively) put a HUGE amount of money into the hands of the citizenry. That was the fuel that propelled the entire period known as the "Roaring Twenties." Deficits that large would be like the U.S. running $3 trillion deficits today for several years.
By the time Harding cut spending, a HUGE amount of stimulus had already been injected into the economy.
Depression of 1920–21
The factors that resulted in the depression are multiple and the causality is disputed. But this was a post-war period of adjustment (demobilization) with the country on the gold standard, in which the bias is deflationary. Looks like it could have been avoided with a different policy approach, but instead the adjustment was deep and forceful although not prolonged except for those unfortunate enough to have been affected.
The issue seems to have been the Fed looking at the exchange rate during the gold standard era rather than to domestic policy needs. As we've seen this is an issue under a gold standard.
And don't forget all the debt the private sector started to add during the Harding years. The deficit wouldn't have shrunk and the economy wouldn't have grown without it - and there wouldn't have been a bubble to burst leading to the Great Depression.
Thanks everyone. Good comments!
Ed Harrison has a good post up on the long term effects of ZIRP: The Efficacy of the FOMC’s Zero Interest Rate Policy, with quotes from the St Louis Fed. Apologies if this has already been referenced here...
Dan: Good question and thanks to the others for answers.
Roger Erickson, I disagree that it is irrelevant to today. The power of MMT understandings is that they provide a real description of macroeconomics and thus should be able to explain any period in terms of sectoral balances, private credit creation, and in the gold standard period, the other constraints at the time. It is only because of this rational analysis that I have come to embrace MMT. I think an update, or counterpoint, of Friedman's magnum opus should be written, A Modern Monetary History of the United States, which provides a more complete analysis. This would be fascinating.
Regards, Jim Thomson
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