Free Markets, Free People

Loser Spouts Off

Bob Shrum, perhaps best known for his masterful performance in shepherding John Kerry’s presidential race to…uh…it’s…conclusion, now sounds off about economic myths.

One of the most stubborn [myths] is what [John] Kennedy denounced at Yale—the notion that deficits are always evil and the balanced budget an inherent public good. This myth is now constantly exploited by do-nothing opponents of Obama’s recovery plan. On Sunday, George Stephanopoulos read a viewer’s complaint to Treasury Secretary Tim Geithner: “How do you justify printing money out of thin air?” Isn’t the inevitable consequence “hyperinflation?” Geithner calmly rebuked the cliché by pointing to the Federal Reserve’s capacity to counter inflation by raising interest rates once the economy is back on track.

Well, he’s cartainly right about that.  The Fed can always just raise interest rates.  It’s what Paul Volcker did as Fed Chairman in the late 70s and early 80s.  If by “back on track” he means that we can have an unemployment rate of 12%, as we did in 1982, and a Fed Funds rate of 14%, then, I guess he’d be right.  It certainly got rid of inflation.

After all, cutting spending now would accelerate, not reverse, the downturn, and trigger a spiral of declining federal revenues that could leave budget balancing out of reach no matter how deeply we cut.

And raising short-term interest rates by the Fed at some point in the future would…not?

This is elementary economics.

I certainly wouldn’t contradict that.

In reality, Roosevelt increased spending overall by 40 percent from 1933 to 1934, and the deficit by nearly a third. In the first five years of the New Deal, the gross domestic product rose more than 40 percent. The New Deal faltered not when FDR disdained conservative advice on deficits, but only when he briefly followed it. After Roosevelt drastically cut the deficit in his 1937 budget, the economy promptly tanked. When FDR reversed course, the economy turned around.

In reality, Roosevelt also increased tax rate; the top tax rate climbing from 63% to 79%.  No doubt his conservative critics encouraged that, too.  In other words, Roosevelt both decreased spending and increased taxes. In addition, there were new Social Security taxes in 1936 and 1937.  And a new corporate tax on undistributed earnings went into effect in 1937, too. If only we had some way to know what effect tax increases have on economic growth!

Oh, and the Fed doubled reserve requirements on banks from 1936 to 1937.

I wonder–pure speculation of course–if significant tax increases and contractions in the money supply might have, in some mysterious way, contributed to the economic downturn of 1937-1938.

Sadly, we may never know.

In 1933, FDR blew up a London economic summit that sought to set fixed currency exchange rates, a virtual return to the gold standard that would have hobbled his economic strategy.

In other words, FDR was a unilateralist cowboy who intentionally flaunted international consensus for his own political ends, and, incidentally, reversed course a year later.

There was a lot more stuff going on in 1933-1940 than simply government spending.  Not that you’d know it from reading Mr. Shrum’s amusing little article.


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3 Responses to Loser Spouts Off

  • Shrum’s arguments are ridiculous on their face.  Going into debt is good for the nation, or at least OK???  While there are circumstances such as a war that may well require deficit spending, having any sort of long-term debt isobviously pernicious as it requires that some fraction of the budget go, not to providing government services or otherwise supporting government programs, but rather to paying interest.  Hence, citizens pay taxes and get absolutely nothing for them.  Anybody who has carried a credit card balance for any length of time has experienced this: some fraction of one’s income goes merely to paying interest and fees.  If one makes no serious efforts to pay off the debt but instead piles more and more debt on top of it, it may well be that the interest / fee payments get to be unsustainably large.  This sort of thing has played a role in causing our current economic crisis.  Shrum, however, defends the practice, at least when Uncle Sugar does it.
    Shrum also seems to think that the sole source of spending in the US economy is the federal government: “After all, cutting spending now would accelerate, not reverse, the downturn, and trigger a spiral of declining federal revenues that could leave budget balancing out of reach no matter how deeply we cut.” What Shrum doesn’t get is that the federal government, though unfortunately the source of MUCH spending in the US economy, is not the sole source or even the largest source.  Further, in order to spend a single penny, the government must take it from somebody: either a citizen or a corporation.  Unless Shrum believes that people and businesses burn or bury money that they don’t pay in taxes, we must accept that they spend it (and probably in a much more sensible manner than Uncle Sugar).  It would be interesting to ask Shrum how he thinks the country ever survived and even prospered in the dark days before FDR, when government spending accounted for only a tiny fraction of US economic activity.
    Shrum cites President Kennedy as a guru on economic matters (that would be the President Kennedy who cut taxes, but I’m sure Shrum would prefer to ignore that).  For the benefit of those interested, this is what President Kennedy had to say in more detail:
    Next, let us turn to the problem of our fiscal myth. Here the myths are legion and the truth hard to find. But let me take as a prime example the problem of the Federal budget. We persist in measuring our Federal fiscal integrity today by the conventional or administrative budget with results which would be regarded as absurd in any business firm in any country of Europe or in any careful assessment of the reality of our national finances. The administrative budget has sound administrative uses. But for wider purposes it is less helpful. It omits our special trust funds and the effect that they have on our economy; it neglects changes in assets or inventories. It cannot tell a loan from a straight expenditure. And worst of all it cannot distinguish between operating expenditures and long term investment.
    This problem, in relation — This budget, in relation to the great problems of Federal fiscal policy which are basic to our country in 1962, is not simply irrelevant; it can be actively misleading. And yet there is a mythology that measures all of our national soundness or unsoundness on the single simple basis of this same annual administrative budget. If our Federal budget is to serve not the debate but the country, we must find ways of clarifying this area of discourse.
    Still in the area of fiscal policy, let me say a word about deficits. The myth persists that Federal deficits create inflation and budget surpluses prevent it. Yet sizeable budget surpluses after the war did not prevent inflation, and persistent deficits for the last several years have not upset our basic price stability. Obviously deficits are sometimes dangerous — and so are surpluses. But honest assessment plainly requires a more sophisticated view than the old and automatic cliché that deficits automatically bring inflation.
    There are myths also about our public debt. It is widely supposed that this debt is growing at a dangerously rapid rate. In fact, both the debt per person and the debt as a proportion of our gross national product have declined sharply since the end of the Second World War. In absolute terms the national debt, since the end of World War II, has increased only 8 percent, while private debt was increasing 305 percent, and the debt of state and local governments — on whom people frequently suggest we should place additional burdens — the debt of state and local governments have increased 378 percent. Moreover, debts public and private, are neither good nor bad, in and of themselves. Borrowing can lead to over-extension and collapse. But it can also lead to expansion and strength. There is no single, simple slogan in this field that we can trust.
    John F. Kennedy
    June 11, 1962
    Shrum makes the very error that President Kennedy cautioned against: trying to use a simple slogan to explain a complex issue.  Worse, Shrum twists Kennedy’s words to try to prove that deficits are GOOD, something with which I think it obvious Kennedy would have disagreed with.  Please note this particular line from President Kennedy’s speech:
    “If our Federal budget is to serve not the debate but the country, we must find ways of clarifying this area of discourse.”
    It is clear to me that Shrum, in his partisan goal of trying to justify the staggering deficits proposed by his party and TAO, is continuing the very practice of using myths and half-truths that he decries.  Too bad JFK isn’t around to take this buffoon to the forensic woodshed.

    One final note: Shrum asserts that the GDP rose 40% in the first five years of the New Deal.  This seemed a little suspicious to me as it seems reasonable to assume that an economy growing at that pace would be a boom, not a depression, so I checked into it.  According to the Bureau of Economic Analysis, these are the figures (in billions of current dollars):

    1929 – 103.6
    1930 – 91.2
    1931 – 76.5
    1932 – 58.7
    1933 – 56.4   Begin New Deal
    1934 – 66.0
    1935 – 73.3
    1936 – 83.8
    1937 – 91.9
    1938 – 86.1
    1939 – 92.2
    1940 – 101.4
    1941 – 126.7

    Once again, Shrum uses his evidence to mislead.  Yes, the GDP increased during the New Deal, but after it had bottomed out after the Crash in 1929.  Look at the numbers: it took nearly eight years of New Deal before the GDP returned to pre-crash levels.  And what else was going on during that time?  Why, the US was starting (too little, too late) to arm in response to the deteriorating world situation.  One could therefore argue that defense spending “stimulates” the economy far more than government handouts, something I’m sure Shrum would dispute.

    Once again – and no surprises – dishonesty from a democrat (spit).

  • Ack, typo: You’ve got “flaunted” for “flouted”.