Thursday, July 01, 2010

Slapping Sowell

Wherein Vox reminds T. Sowell that arguing about 3/10 of 1% is not useful.

the net effect of the $328 million reduction in the balance of trade on the economy amounted to only 0.3 percent of 1929 GDP. --Vox, quoting his own book

The thing that is so patently absurd about the Smoot-Hawley tariff theory of the Great Depression is that America was not an import/export-based economy 80 years ago. The percentage of imports and exports as a percentage of GDP was so small that not even shutting them down completely could have caused such a massive contraction in the 1930s American economy. Debt was the problem then and debt is the problem now. The federal stimulus exacerbated the problem then, and the global stimulus is exacerbating the problem now.

Of course, the Smoot-Hawley argument is usually advanced by people who enjoy pushing straw men into the arena.

You note that the Left doesn't really give a rip about debt now--and they hope like Hell that we don't bring up the 'debt-then' problem.


J. Strupp said...

The Smoot-Hawley argument hasn't been pushed by anyone who knows anything about the Great Depression. Not Bernanke, not Eichengreen, not anybody. I'm not sure why anyone would push this notion anymore.

And debt levels most certainly did NOT make the Great Depression great. That's revisionism at it's worst. The Great Depression became great in a matter of 3 years (from 1928-31) when financial crisis was followed by Mellon's liquidationist economic policies and the insane idea that remaining on the gold standard was a good idea. Both policies caused the most horrific bout of deflation this country has ever seen and put over a quarter of the American population out on the streets.

The period from 1932-1936 saw almost double digit average GDP growth y-o-y and a unemployment rate that went from roughly 25% down to roughly 14% in that same time period. Not back to full employment unfortunately, but i'm not sure how you re-employ a quarter of the American population in a matter of a couple years time. Of course, this was the New Deal era and debt/GDP levels exploded. If excessive debt made the Depression great then why were we able to continue to increase our debtload over a decade later? Keep in mind, much of the New Deal happened before the second World War so that can't be the reason.

In other words, Roosevelt didn't give a rip about debt in the Great Depression and we shouldn't now either (in the short run) because government spending in a depression is effective and a relatively inexpensive approach to increasing employment and boosting capacity utilization.

And before your readers fly off the handle and say that this country doesn't have anymore debt capacity, make sure they check the 10 year U.S. teasury yield again today which currently stands at below 3%.

The idea that we, as a nation, are pushing austerity into the face of 10% unemployment and 3% treasury yields is not only disgraceful, it's flat out stupid policy (which is why the GOP no doubt make immediate austerity the cornerstone of it's party rhetoric in the coming months).

Dad29 said...

It is CONSUMER debt, not national debt, which created both the '30's depression AND the one we have now.

As to why the national debt was able to grow during WWII, that's easy.

We were the only country without bomb-craters AND the only country able to export after WWII.