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Tuesday, March 3, 2009

History Note: It's the same orthodoxy as in 1929

Back to the Depression. It is no exaggeration to say that the economics purveyed by the Right, the Cato Institute, the Heritage Foundation, the American Enterprise Institute, could not survive in the free market it champions. In a competitive market the many and varied shortcomings would have seen it withdrawn long ago. But these institutions and their economics are subsidized by the corporate moneyed interests that benefit from a free hand in the markets they control.

It is also no exaggeration to say that the economics currently purveyed by the right and these institutions is the same economics that led into the Great Depression and failed so well to address any of the collapse.

Following John Kenneth Galbraith, we observe that economics in normal times is lacking in drama. After the stock market crash of 1929 and the financial sector crash of this era, however, have come marked and dramatic downturns. The theater now present reveals, as it did in the 1930s, actors of no enormous talent. The kingpins of Wall Street, the Mozillos, Madoffs, Thanes, and even Greenspans and Rubins, are unprepossessing and even dull readers of dull texts when the genius of the boom is bust.

Currently, as then, the stock market is assumed to be anticipating or reflecting underlying forces and financial analysts tend to look to it for answers. "The market is telling us this or that about policy." In fact, as George Soros suggests, the Market is reacting to itself. The current collapse of business, commodity prices and imports is completely parallel to that coming at the end of 1929. For a time it was, and in some circles still is, assumed that the crash was a superficial phenomenon, a signal, rather than part of the deflationary mechanism.

As Galbraith insists, the crash and the causative speculation were not passive reflections of deeper trends in the economy. And they will have solid consequences in the years ahead. In the 1930s the consequence was a decade of idle plant capacity and persisting unemployment, until World War II, not economic wisdom, brought it to an end. As we've argued elsewhere, the New Deal mitigated the most brutal aspects of this flaw in capitalism. And here, Keynesianism did not arrive in sufficient scale until the War.

To repeat, the so-called natural forces of the economy, to which we heard Arthur Laffer refer, do not tend to the optimal outcome, but can as easily find their equilibrium in depression or recession. The economics of the so-called free market are the same as they were in the 1930s. The government should get out of the way. Tax cuts, of course, are needed, and never mind the huge subsidies being extracted by the failure of the markets at the same time.

The heroes of the free market, the unregulated banking sector, only a few years ago, are now the goats. The free marketeers may take credit for what meager success there was, but they need not take blame for the collapse, but only sentence the offenders to failure and move on. It is a hypocrisy and irresponsibility that makes the sub-prime borrower look like a saint.

I am not expressing very well how similar the economics of the orthodoxy in 1932 was to that of the Republican Right today. Let me just add the anecdote of the Hoover tax cut. Once he slackened in his assurances that the economy was fundamentally sound, Hoover instituted a step in resonance with today. He reduced income taxes. A taxpayer with an income of $5,000, very comfortable in those days, saw a reduction of two-thirds, from $16.88 to $5.63. Someone with $10,000 in income, roughly the equivalent of $175,000 today, saw his tax go from $120 to $65.

As Galbraith noted, Nothing is more constant in depression or recession than the belief that more money for the affluent, not excluding oneself, will work wonders as to recovery. In that event, as in the current one, the depression will continue as before.

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