This morning, the Strib had one of those point/counterpoint op-ed pages — so beloved by the MSM — on the issue of financial stimulus. Mark Weisbrot has the affirmative, while Andrew Mellon has the negative:
The Keynesian solution was wrong when it was first proposed, and it's wrong now. Stimulus doesn't help one whit. Tax cuts and austerity do.
Really, that’s William Shughart II (sounds better than “Junior” apparently; wonder if his dad is William Shughart I) channeling old Andy.
But here’s the genuine Andy on what do in the teeth of the Depression:
Mellon became unpopular with the onset of the Great Depression. He advised Herbert Hoover to "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people." Additionally, he advocated weeding out "weak" banks as a harsh but necessary prerequisite to the recovery of the banking system. This "weeding out" was accomplished through refusing to lend cash to banks (taking loans and other investments as collateral), and by refusing to put more cash in circulation. He advocated spending cuts to keep the Federal budget balanced, and opposed fiscal stimulus measures. In 1929-31, he spent much of the time overseas, negotiating for repayment of European war debts from World War I. In February 1932, Mellon left the Treasury Department and accepted the post of U.S. Ambassador to the United Kingdom. He served for one year and then retired to private life.
You know why he left his Treasury post, don’t you? He was impeached by the House, but Hoover sent him into exile in England for a while before the Senate could try him, rendering a trial moot.
I have always loved the Mellon quote. Here’s a guy, like so many financial quacks, born with a silver foot in his mouth (allusion cheerfully stolen from Molly Ivins, RIP), never knowing a day of want in his life, but ever ready to point out the path of grace for everybody else.
And Shughart Two could be Andy Two.
Let’s turn to Paul Krugman to describe the situation:
The U.S. economy has been crippled by a financial crisis. The president’s policies have limited the damage, but they were too cautious, and unemployment remains disastrously high. More action is clearly needed. Yet the public has soured on government activism, and seems poised to deal Democrats a severe defeat in the midterm elections.
That sums it up pretty well doesn’t it?
But here is where the economic historian in Krugman drops the bomb:
The president in question is Franklin Delano Roosevelt; the year is 1938. Within a few years, of course, the Great Depression was over. But it’s both instructive and discouraging to look at the state of America circa 1938 — instructive because the nature of the recovery that followed refutes the arguments dominating today’s public debate, discouraging because it’s hard to see anything like the miracle of the 1940s happening again.
Now, we weren’t supposed to find ourselves replaying the late 1930s. President Obama’s economists promised not to repeat the mistakes of 1937, when F.D.R. pulled back fiscal stimulus too soon. But by making his program too small and too short-lived, Mr. Obama did just that: the stimulus raised growth while it lasted, but it made only a small dent in unemployment — and now it’s fading out.
Just how did we get out of the Depression, finally?
Consider Gallup polling from March 1938. Asked whether government spending should be increased to fight the slump, 63 percent of those polled said no. Asked whether it would be better to increase spending or to cut business taxes, only 15 percent favored spending; 63 percent favored tax cuts. And the 1938 election was a disaster for the Democrats, who lost 70 seats in the House and seven in the Senate.
Then came the war.
From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today.
And tax rates during the war went way up.
I’ll bet most of the boomer readers here remember being taught in government and economics classes in high school that a Depression could never happen again, because we’d wised up on how to prevent them.
One of my other favorite quotes is from Karl Marx. But it could have been Groucho.
History happens twice; the first time as tragedy, and the second time as farce.