David R. Henderson  

Obama's New Deal

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An Anti-Stimulus Conference... Reply to Robert Waldmann...

On a recent talk show, I made the point that although Obama's fiscal "stimulus" is likely to destroy wealth, at least he is not making four major mistakes that Herbert Hoover and FDR made: (1) substantially raising tariffs (Hoover with Smoot-Hawley), (2) cajoling (Hoover) or coercing (FDR) businessmen to have high wages, (3) increasing income taxes (Hoover), and (4) keeping prices of goods high (FDR with the National Recovery Administration and the Agricultural Adjustment Administration).

Well, I might have to strike (4). According to an editorial in the January 28 Wall Street Journal, "dairy and beef cattle producers butted heads over talk that the government might buy up dairy cattle for slaughter to drive up depressed milk prices." Of course this might not happen, but it might. One of the most destructive things government can do in a recession is reduce output. Just as FDR's output-destroying agricultural policies and NRA kept prices higher than otherwise, thus reducing output and extending the Great Depression, so government purchase and destruction of dairy cattle would restrain output and extend this recession.


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COMMENTS (17 to date)
Jacob Oost writes:

Have they thought of people like me, living pay check to pay check, overjoyed when milk goes on sale at $2 a gallon?

Amazing that this kind of thing can even be discussed as a possibility. Shows how lousy our education system is. IMO it's almost as necessary to teach economics as reading, writing, and arithmetic.

Willem writes:

This is something that should come natural to Keynesians. They want to fill the short-run gap between consumption and full capacity production with government spending. Last thing they would want to do is lower the production frontier at the same time. Or are they advocating a structurally lower wealth for the coming years?

Matt writes:

Don't the 'buy American' clauses in the 'stimulus' packages count as an example of 1?

Arthur James writes:

I agree with Matt.

The importance of avoiding protectionism, which will creep up on the world in all sorts of disguised forms before its true malevolent features as economic nationalism becomes evident, is so important.

This, as you imply, is one of the great lessons of the 1930s. My thinking about this has been reinforced even more by reading about how J M Keynes came to think that if the major economies were committed to macro policies aiming at high employment, and if there was an international monetary system that enabled countries to pursue stimulatory policies when needed (like now), then he favoured a very high degree of freedom of trade. This seems to be central to Markwell's depiction of "the mature Keynes" in his book on Keynes and international relations.

I think we need a "protectionism watch" to bring ALL forms of creeping economic nationalism to instant public attention internationally!

Peterargus writes:

Re: #1 and last two comments:

From the Telegraph:
"US-EU trade war looms as Barack Obama bill urges 'Buy American'"

"...Catherine Ashton, the EU trade commissioner, said: "We are looking at the situation. The one thing we can be absolutely certain about, is if a bill is passed which prohibits the sale or purchase of European goods on American territory, that is something we will not stand idly by and ignore." "

and...

"Countries in Europe and Asia are planning major injections of cash into infrastructure to boost their economies, and US firms don't want to be left out of potentially lucrative contracts."

The Obama administration seems to be remarkably ignorant (indifferent?) of the trade agreements we have made through international organizations, particularly for someone who has been touted as "President of the World".

caveat bettor writes:

Teaching economics is not enough. I took 3 econ courses at Cornell, and didn't realize until many years after graduation that they had successfully hidden Milton Friedman and classical schools from me. I think teaching history of economic theory combined with a survey of Nobel Laureates contributions would be more helpful than what I received.

dave smith writes:

Yea...everyone is right on #1.

Why is it that no one is worried that the world will hate us when we effectively starve millions with our buy American policies of our President.

Socal Bill writes:

How about #2? Cajoling or coercing businesses to have high wages, as in the Equal pay for women act signed yesterday.
Putting a floor on the price of any good or service, keeping it from going lower than the market will bear, creates less of a demand for that good or service. Or so I've been told. Fewer jobs for women then?

Brandon Robison writes:

While it's not technically a tariff, doesn't the "Buy American" section of the "stimulus" bill passed by the House have some of the same effects? I guess it's closer to a quota. But anyway, read: http://www.washingtonpost.com/wp-dyn/content/article/2009/01/28/AR2009012804002.html

Snark writes:

The incredible thing is that, in the face of all experience and evidence to the contrary, they continue to push this deal as if our country, allegedly teetering on the edge of utter collapse, depends on it. The true motive behind it is more sinister and, assuming it passes, will prove to be much more destructive to the future of free enterprise than any real damage it may cause to our economy.

dearieme writes:

I suggest that,to a first approximation, everything that Hoover and FDR did proved bad, with the sole exception of FDR's stopping the run on the banks.

Methinks writes:

Have they thought of people like me, living pay check to pay check, overjoyed when milk goes on sale at $2 a gallon?

No, they haven't Jacob. You and people like you are the forgotten man.

Jacob Oost writes:

"Buy American" is merely a prelude to "Buy Union," as the unions spent hundreds of millions on getting Obama elected and they expect a return on that investment, or they ain't helping him in 2012.

p. sigmon writes:

It is hard for me to believe that spending taxpayer money to buy cattle soley for the purpose of driving up milk prices can even be considered. This is a disgraceful waste of American's hard earned money.

Governmental intervention in matters such as these strike me as generally short sighted, knee jerk reactions that eventually cause more harm than good. Let the market sort itself out and leave my money in my wallet where it belongs.

RJ writes:

I love the "sinister conspiracy theorists" round here. Especially Oost.

It's called politics. To the winner goes the spoils, or more accurately, the future of the country. But there is nothing sinister or under the rug about this. For all those complaining about the "looming trade war" with China, I would remind you that China has been manipulating its markets for years to gain the upper hand and accelerate it's exports industry.
http://angrybear.blogspot.com/2009/02/steel-made-in-america-or-made-in-china.html

David, I appreciate your concern, but this pig-headed idea will not survive. The AAA is not making a comeback.
God I hope it doesn't...

Snark writes:

If it weren’t for the fact that Keynesians have proven time and again to be theoretically unsound and empirically false in their assumptions, there would be little reason to suspect something more “sinister” at work behind fast-tracking this spending bill through the house and senate. But I fail to see how it can be claimed by Team Obama that they are motivated by any credible evidence to the contrary where none exists.

So what are we to believe is the true motive behind President Obama’s stimulus plan? Logic suggests one of two possibilities:

1. An unwavering faith in the basic tenets of Keynesianism. This seems unlikely for a chief executive with an IQ of 136, who allegedly retains from his childhood and experiences growing up a suspicion of all things dogmatic or certain in the pursuit of understanding. Neither does he strike me as a neophyte who could be easily persuaded by advisors attempting to thoroughly hose him down with Keynesian doctrine.
2. Strategic growth through exploitation of public anxiety over an impending economic collapse. Parkinson’s Law predicts that work expands so as to fill the time available for its completion. The balance of power within government heavily favors socialist bureaucrats, whose primary objective is agency growth and who benefit tremendously by building their empire and increasing the resources under their control.

We can accept the first possibility as miguided policy with no ulterior motive. Some may view the second possibility as nothing more than politics as usual. IMO, showing apathy towards experience and evidence that contradicts what plan advocates claim will be a positive outcome is not only destructive, but sinister.

psikeyhackr writes:

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