Austrians and Keynesians Agree: Milton Was Wrong About the Depression
I don’t usually find much of value in Paul Krugman’s articles, but in this piece he relates something very important:
For many years most economists believed that preventing another Great Depression would be easy. In 2003, Robert Lucas of the University of Chicago, in his presidential address to the American Economic Association, declared that the “central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”
Milton Friedman, in particular, persuaded many economists that the Federal Reserve could have stopped the Depression in its tracks simply by providing banks with more liquidity, which would have prevented a sharp fall in the money supply. Ben Bernanke, the Federal Reserve chairman, famously apologized to Friedman on his institution’s behalf: “You’re right. We did it. We’re very sorry. But thanks to you, we won’t do it again.”
It turns out, however, that preventing depressions isn’t that easy after all. Under Mr. Bernanke’s leadership, the Fed has been supplying liquidity like an engine crew trying to put out a five-alarm fire, and the money supply has been rising rapidly. Yet credit remains scarce, and the economy is still in free fall.
Don’t let Krugman’s smarmy tone fool you: He is right. According to the monetarists, the Fed behaved just fine during the 1920s. After all, output was booming, and consumer price inflation was virtually nonexistent. (In my forthcoming book I will have quotes from people like Irving Fisher saying how the Fed had done a great job achieving the much ballyhooed “price stability” during the period.)
If the Fed behaved OK during the 1920s, then if you’re a fan of the free market, you have to blame the Great Depression on either the Smoot-Hawley tariff and/or Fed behavior in the early 1930s. And, as Krugman says, that’s just what Milton Friedman and other supply-siders have done. I myself adopted this view when I was younger, since it fit so neatly into my anti-government worldview: “Ha! You think it was laissez-faire that caused the Great Depression? Nonsense! The Fed let the money supply fall by a third. What do you expect to happen when the authorities are such nincompoops?”
Well now the proponents of “scientific” economics have their chance. As my favorite chart below reminds us, the Fed certainly hasn’t allowed the money supply to drop. Yet I think we are in store for the worst depression since the Great one.
If nothing else, this episode will discredit the monetarist interpretation of the 1920s and 1930s. (Poor Alex Tabarrok! Look at what he was reduced to in trying to defend the Friedman position. He actually argued that the Fed hasn’t been injecting liquidity into the system; it’s all a statistical illusion.) That will leave us with the Austrian theory, versus those (such as the Keynesian and Marxist) that blame the Depression on the inherent instability of capitalism. Proponents of free markets, take your pick.
(Incidentally, for a refutation of Friedman’s theory that it was government “intervention” to not inflate the money supply amidst the bank runs of the early 1930s, see Matt Machaj’s great article.)
Tyler Cowen Went to the Dark Side a Long Time Ago
You think I’m referring to his (always very qualified and nuanced!) support for government intervention? Nope, I am being quite literal. Today in a post designed to bring new readers up to speed with what his blog is all about, Tyler links to his 2005 post on Star Wars. Now in fairness, go read his post to see the tone; there are some funny lines. But all in all I think he’s serious, and remember, this isn’t some random post upon which I stumbled in my stalking of Cowen–he listed it as one of MR’s highlights of all time. Anyway here is our favorite economist:
The core point is that the Jedi are not to be trusted:
1. The Jedi and Jedi-in-training sell out like crazy. Even the evil Count Dooku was once a Jedi knight.2. What do the Jedi Council want anyway? The Anakin critique of the Jedi Council rings somewhat true….Aren’t they a kind of out-of-control Supreme Court, not even requiring Senate approval (with or without filibuster), and heavily armed at that? As I understand it, they vote each other into the office, have license to kill, and seek to control galactic affairs. Talk about unaccountable power used toward secret and mysterious ends.
3. Obi-Wan told Luke scores of lies, including the big whopper that his dad was dead.
4. The Jedi can’t even keep us safe.
5. The bad guys have sex and do all the procreating….
6. The prophecy was that Anakin (Darth) will restore order and balance to the force. How true this turns out to be. But none of the Jedi can begin to understand what this means. Yes, you have to get rid of the bad guys. But you also have to get rid of the Jedi. The Jedi are, after all, the primary supply source and training ground for the bad guys….
8. The core message is that power corrupts, but also that good guys have power too. Our possible safety lies in our humanity, not in our desires to transcend it or wield strange forces to our advantage…
Addendum: By the way, did I mention that the Jedi are genetically superior supermen with “enhanced blood”? That the rebels’ victory party in Episode IV borrows liberally from Leni Riefenstahl’s “Triumph of the Will”? And that the much-maligned ewoks make perfect sense as an antidote to Jedi fascism?
On his blog, I said that, much like his belief in Paulson’s rhetoric, this post makes me say: “Then you truly are lost.”*
I was going to engage in a point-by-point refutation, but we can largely avoid such geekiness by linking to Bryan Caplan’s response.
The only additional point I want to make–and one that really does have more to do with Tyler’s view of things than just Star Wars–is to focus on his point #2. He’s upset that the Jedi are allowed to exclude people from their ranks. Huh?! Suppose I want to start blogging at Marginal Revolution. Should Harry Reid have a say in the matter?
* UPDATE: Thanks to Bill R. for giving me the precise spot in the clip where the crucial dialogue occurs, and also for showing me how to “jump” to that spot! Note that in the clip Obi Wan doesn’t have the word “truly” in the line, but I swear he said it in the theaters. (Also, I had googled it to refresh my memory, and the website I found agreed with my recollection, and had Obi Wan saying “truly.”)
Kling Compares Stimulus to the Somme
Arnold Kling today presents the single best criticism of the stimulus that I have seen, relying on Public Choice/Austrian-type arguments rather than mainstream economics. An excerpt:
Mark Thoma gives us Joseph Stiglitz and Martin Feldstein being interviewed by Charlie Rose. I listened to it last night, and I found it so chilling that it adversely affected my sleep. Two issues stand out.
1. Both of them are keen on re-working mortgages. Neither of them mentions non-owner-occupied housing or any of the other issues that make re-working mortgages extremely difficult. At one point, Stiglitz says that banks may be postponing writing down loans because they are waiting to see what sort of bailout they might get from the government. But he doesn’t draw the obvious conclusion that government interference is the problem, not the solution.
2. Both of them are keen on trying a big stimulus. Stiglitz says that everything done so far has been a failure, but again he doesn’t draw the obvious conclusion. Instead, he says we have to try something bigger and different.
I was reminded of the Battle of the Somme, one of the worst policy blunders of all time. Having experienced nothing but failure using offensive tactics up to that point, the Allies decided that what they needed to try was….a really big offensive. Just as Feldstein and Stiglitz pay no attention to the on-the-ground the housing market, the British generals ignored the impact of machine guns on men advancing over open fields.
My guess is that in 1916, anyone who doubted his own ability to direct an enormous offensive involving hundreds of thousands of soldiers would never have made it to general. Similarly, today, anyone who doubts the ability of a handful of technocrats to sensibly allocate $800 billion would never make it into government or the mainstream media.
Yet More on the Bogus Credit Crunch
Casey Mulligan has designated this “WMD week” on his blog. His point is that the Bush Administration’s expensive (and liberty-sapping) efforts to avert financial disaster were as poorly justified as the invasion of Iraq to eliminate WMD.
Although I love the spirit of his task, my problem for some of his earlier posts was that Paulson et al. were claiming that their plan would avoid disaster–not that we would get disaster anyway. So since the plan passed, and disaster didn’t happen… You see the problem?
However, in today’s post, Mulligan looks at payroll data and argues that the scare-mongering clearly was bogus. He deals with my problem by pointing out the exact timing of when the TARP, er, CPP money actually reached the troubled banks. Further, he points out that you can’t even say, “Well, once the plan passed, the businesses knew help was in sight, so they went ahead and paid their employees.” Because remember, the whole point was that even sound businesses wouldn’t be able to use short-term credit markets to make payroll without giving the banks an injection of quick cash.
I Knew I Should Have Left My Blackberry On During Christmas Break!
Sam Bostaph passed along this article with this shocking sentence:
Only one outside economist contacted by Obama aides, Harvard’s Greg Mankiw, who served on President Bush’s Council of Economic Advisers, voiced skepticism about the need for an economic stimulus, transition officials said.
I’m sorry everyone. I left my contact information with Governor Blagojevich’s office, but apparently he hasn’t been in communication with the President-Elect.
"Trillion Has Become the New Billion"
What a fantastic line from the CNN guy interviewing Ron Paul! Incidentally, Ron Paul lights it up in this interview. How many other people mention Mises, Hayek, and Rothbard, as if all the cool kids know these names? And check out his reaction to the Krugman reference. (HT2LRC)
PRI Report on the "Sizzle of Economic Freedom"
Over the summer I helped Lawrence McQuillan at PRI with its new report, “The Sizzle of Economic Freedom,” that summarizes the empirical literature on the benefits of economic freedom. (Press release here, actual report pdf here.) The way it works is that there are a few fairly objective rankings of countries (or smaller regions such as US states) in terms of economic liberty. Then, economists have run regressions etc. to test whether economic liberty is a significant explanatory variable when it comes to things as diverse as GDP growth, unemployment, literacy rates, and childhood vaccination. I was surprised by how much empirical work has already been done in this area. It’s not just “blind faith” in markets anymore.
Sex & Money
In an effort to boost ratings, we occasionally pass along titillating links. Reader Phil Maymin sent me his article comparing central banking to a government sperm bank (though he did not specify the analog of fiduciary media–OH!). And CNBC reports that the porn industry is looking for a bailout too. (Some bad double entendres are already in the article so I will spare you.)
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