Posted on 09/29/2009 8:53:16 AM PDT by SeekAndFind
Arthur Laffer, the primary architect of Reagans debt bomb that we are currently trying to defuse, has now executed a complete 180° turn from his monetary policies that gutted the Midwest industrial base in the 1980s. In a WSJ article on September 22, 2009, he claims the problems of the Great Depression are not caused primarily by tight monetary policy but rather tariffs and taxes. While he gets the facts he mentions right, he ignores the timing of taxes and deficits, tariffs and balance of trade.
Hes right that talk of tariffs may have been the trigger that started the Great Depression. However, we are in a recession now so new trade restrictions are obviously not going to cause it, which was his first timing error. As the actual tariffs were relatively modest by historical standards and did not apply to most products, the tariffs are not considered the most important factor in the collapse of trade during the Great Depression. Laffers characterizing tariffs as tax increases is obviously self-serving as they were not intended to primarily generate revenue but to protect domestic industry.
The situation with the balance of trade is what makes restrictions in trade acceptable today when it was stupid in 1929. In 1929 the USA was a net exporter of manufactured goods while today we are net importers (even excluding oil). The fact that our trading partners exercise unfair trading practices is long established and the United States will continue to decline if nothing is done about it.
Laffer is also correct that increases in taxes made the Great Depression worse. However he leaves out the factor of timing to make his point that we should have no tax increases to balance the budget. The budget was balanced by tax increases from 1929 to 1932 while the economy was declining that so that there was no net stimulus from government spending increases during this period. The conservative economist and icon Murray Rothbard detailed these mistakes in his Americas Great Depression.
Hoovers mistake was in balancing the budget during a time of economic decline. Rothbard claims that without the distortion of this government reallocation things would have been better but there still wouldve been a significant recession and unemployment. Keynes proved that during times of recession the government can run deficits that will minimize the decline in the economy and employment. A key tenet of Keynesian thinking is that during times of full employment the government must not run deficits or it will cause inflation. This is accomplished by a cutback in government stimulus spending and tax increases. The tax increases of the 1990s showed that careful tax policy can increase taxes without slowing growth.
Below is a chart of the budget deficit and GDP growth from 1929 to 1940. From 1929 to 1931 the budget was basically balanced and the economy continued to decline. Recovery started once a significant deficit was started in 1932. In 1938 the budget was again balanced, primarily through the reduction in stimulus spending and the economy dipped into a short but severe contraction. During the Great Depression, tax policy had relatively little effect on overall economy activity as long as a deficit and loose fiscal policy was maintained .
Laffer also makes the claim that there was significant inflation during the middle of the Great Depression, though this appears to be simply to allow him to tip his hat to Friedman by once more stating that inflation was strictly a monetary phenomenon. Im sure Laffers numbers on inflation from 1933 to 37 were correct (though I couldnt figure out exactly where they came from, all of mine are from US Government sources) but they ignore the fact that prices had declined below the cost of production from 1929 to 1932 and had to recover. Below is a chart on Inflation versus GDP Growth. While there was some inflation after growth started in 1932 it did not begin to offset the deflation that occurred from 1929 to 1932.
Finally, Laffer made some comments on gold buying that ignored the fact that banks were collapsing due to the deflation in asset prices. Rothbart recognized this and concluded that Roosevelt had no choice in closing the banks. Gold was nationalized after trust in banks was reestablished by the introduction of FDIC. Gold was taken out of circulation and then increased in price to devalue the currency versus other nations and reestablish international trade. Because gold was no longer used in domestic exchange there was minimal inflationary impact inside the United States.
Mr. Laffers final statement: My fear is that they will misinterpret the evidence (of the Great Depression) and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits seems to imply that taxes should never be raised to balance a deficit. Running deficits during times of full employment is what got us into this mess and will simply lead into another debt bomb.
Perhaps hes just not able to say that the current Democratic administration is correct in trying to hold off budget balancing until after the economy is fully recovered. If this is the case, Mr. Laffer is correct in being concerned because a key lesson of the Great Depression is that balancing the budget during a time of economic downturn will have serious negative consequences.
Bush is out of office, so now are we supposed to say — “Laffer’s Fault!”?
I don't think so.
Stopped reading his blather right there.
Let’s all kneel in prayer and be thankful Obama is in charge now. SARC/
Hey, Reagan did his part. He even shut down the government at one point.
On top of that, he started the “President’s Private Sector Survey on Cost Control” — the Grace Commission. This found over $400 Billion in savings.
Unfortunately, even on this, the Congress did not act on the vast majority of it.
Blame Congress, not Reagan. Heck, no sitting president has EVER introduced a spending bill before Congress. All the president can do is use his bully pulpit, sign, or veto.
Screw this author.
I thought the primary architect of Reagan’s debt bomb was Rep. Thomas P. “Tip” o’Neill (D-Mass.), who pushed pork-laden bills through Congress during the Reagan years.
Hunh!? This is so abusrd, I might have to read it...
http://uspolitics.about.com/od/usgovernment/l/bl_party_division_2.htm
Exactly!
The President proposes, the Congress disposes.
Someone set up us the bomb.
I’m sure this author would contrast this with the “fiscal responsibliity under Clinton.” No mention at all of who was in charge of Congress during those years.
Zig.
I do take issue with this - "Arthur Laffer, the primary architect of Reagans debt bomb that we are currently trying to defuse". Reagan's debt bomb? The House is in charge of the purse strings. Not the President.
Reagan basically shifted expenditures around. He increased military spending from 22.7% to a high of 28.1% of the annual budget (4.9% to 6.2% of GDP). While spending on Human Resources (ie.SocSec, Medicare, Education), along with Physical Resources (ie. energy, commerce, transportation), went down under Reagan.
The problem is associated with Reagan having cut taxes without the House cutting overall spending. Tax cuts without spending cuts gives you larger deficits and an ever growing debt. Even as it was, Reagan fought the liberal establishment agenda to a standstill and was able to slowdown the growth of the social welfare state.
Doesn’t the House have the power of the purse? Hasn’t it always been that way?
Yep.
I oughta know I have a very dim-bulb living across the street who loves to spout off inaccuracies at neighborhood parties and then finds herself being corrected factually and then asked for the source of her information.....btw it's usually NPR (we usually laugh and translate the name to National Propaganda Radio), nuff said.
There was this little thing called the Cold War. We won. It wasn’t free. Neither were all the vote buying programs our Congresscritters came up with. In economics this is usually called the Guns-Butter debate. Reagan was forced to do both because the Republicrats wouldn’t cut the pork. He did the right thing, but that’s not to say it was the best we could do.
this drum is beiong beaten by the current round of oligarchs trying to justify the next rape of the middle class they’re trying to organize.
Laffer is exactly right. The Great Depression was caused, more than anything else, by the Smoot-Hawley Tariff on top of tight money. And there is not a reasonable economist out there who doesn’t know that.
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