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Thursday 22 January 2009
America needs to re-create self-sustaining spending
Franklin Roosevelt’s popularity with the voters was all-important for America’s conquest of the Depression. Pray that Mr. Obama’s emerging critics will not delay and jeopardise the return of prosperity by 2012 or sooner.
America needs to re-create self-sustaining spending
By PAUL SAMUELSON 22 January 2009
One lesson was learned from the 1929-1937 Great Depression. Slow and feeble response from President Herbert Hoover allowed a weak 1930 Main Street recession to metastasise into the malignant cancer of long-lasting depression. The three years following the 1929 global and US stock market crash were so much wasted time as to require the saving of capitalism by Franklin Roosevelt’s New Deal to take another several years.
President Barack Obama’s team will not make the Hoover mistake. I hope the Republican minorities in Congress yield to the challenge of promoting necessary deficit- spending programmes on Main Street. Such spending will have to be both short-run and long-run.
My economics teachers at Chicago in the 1930s were slow to frame good advice because, prior to 1929, business cycles had been normally moderate. Today’s macro-economists have been quicker to react. Your typical Ivy League or Big Ten scholars, as well as their bank and corporation colleagues, were awakened fast from their complacency that central banks’ orthodox lean-against-the- wind credit manipulations could keep business cycles temperate. Painful reality purged their notion that deficit fiscal spending was only a secondary recovery weapon.
Don’t believe that eloquent oratory about how confidence can, by itself, catapult Main Street into recovery of jobs and rising real wages. Talk not backed by genuine actions only breeds disappointment.
How much will the needed spending all cost in the end? No jury of experts can tell. What is certain is that spending too little in the short run and in the long run will worsen future inflation and public debt. Dollars of preventive spending will save more dollars of spending later.
Non-economists mislead themselves when they talk of ‘jump-starting’ the economy. Recharging a dead auto battery comes to naught if plentiful gasoline is not available to propel the car forward.
There is a still different fallacy that hopes to achieve recovery by ‘priming the pump’. Farm boys know that wetting the dried valves of a pump can produce a sustained flow of water only if the underground wells already have chock-full reservoirs. Healthful deficit spending is not a one-time thing. Perforce it must be renewed spending over multiple pre-recovery years.
Alas, former President George Bush’s legacy to the American people is universal risk aversion as well as trillions of dollars of debt that will never get repaid. Mr. Obama and Congress will need to re-create anew market spending that is ultimately self-sustaining.
I learned all this in 1932, after I began my economics study at the famous but conservative University of Chicago. My professors were known worldwide. But alas it took a Depression to teach them that no market system can ever stay stable and be self-healing.
Roosevelt’s critics thought wastefulness would beggar America permanently. They were wrong. Even prior to Pearl Harbour in 1941, the US economy had become the powerhouse that saved the world from an Adolf Hitler victory. Did New Deal rescues generate end-of-1930s moral hazards? Economic historians document that this was not the case.
Mr. Obama will face a tough prospect. His predecessors - the ones who let the meltdown happen - will say, ‘Don’t overspend.’ They do not come into court with clean hands.
Franklin Roosevelt’s popularity with the voters was all-important for America’s conquest of the Depression. Pray that Mr. Obama’s emerging critics will not delay and jeopardise the return of prosperity by 2012 or sooner.
Today’s travails trace back directly to the Ronald Reagan 1980 electoral victory. An ageing president was surrounded by the ‘radical right supply-siders’ who planted the seeds of Bush-type market deregulation. Both Bushes came to the White House with Reagan’s rash notion that government is the problem, not the solution. This has been the mantra of the Milton Friedman libertarians. That kind of Republicanism has been bad for Main Street prosperity.
Periodically, the US way of life broke away from Reaganism when Paul Volcker broke the back of inflation by tough-love Federal Reserve policy. In the late 1990s, Bill Clinton’s centrism bequeathed the young George Bush both a balanced fiscal budget and a healthy Schumpeterian innovation economy.
Mr. Obama alone cannot return us to those sounder conditions. New generations of voters will have to fight that good fight. -- Tribune Media Services Inc
The writer is considered a founder of modern neo-classical economics and was awarded the Nobel Prize for Economics in 1970
1 comment:
America needs to re-create self-sustaining spending
By PAUL SAMUELSON
22 January 2009
One lesson was learned from the 1929-1937 Great Depression. Slow and feeble response from President Herbert Hoover allowed a weak 1930 Main Street recession to metastasise into the malignant cancer of long-lasting depression. The three years following the 1929 global and US stock market crash were so much wasted time as to require the saving of capitalism by Franklin Roosevelt’s New Deal to take another several years.
President Barack Obama’s team will not make the Hoover mistake. I hope the Republican minorities in Congress yield to the challenge of promoting necessary deficit- spending programmes on Main Street. Such spending will have to be both short-run and long-run.
My economics teachers at Chicago in the 1930s were slow to frame good advice because, prior to 1929, business cycles had been normally moderate. Today’s macro-economists have been quicker to react. Your typical Ivy League or Big Ten scholars, as well as their bank and corporation colleagues, were awakened fast from their complacency that central banks’ orthodox lean-against-the- wind credit manipulations could keep business cycles temperate. Painful reality purged their notion that deficit fiscal spending was only a secondary recovery weapon.
Don’t believe that eloquent oratory about how confidence can, by itself, catapult Main Street into recovery of jobs and rising real wages. Talk not backed by genuine actions only breeds disappointment.
How much will the needed spending all cost in the end? No jury of experts can tell. What is certain is that spending too little in the short run and in the long run will worsen future inflation and public debt. Dollars of preventive spending will save more dollars of spending later.
Non-economists mislead themselves when they talk of ‘jump-starting’ the economy. Recharging a dead auto battery comes to naught if plentiful gasoline is not available to propel the car forward.
There is a still different fallacy that hopes to achieve recovery by ‘priming the pump’. Farm boys know that wetting the dried valves of a pump can produce a sustained flow of water only if the underground wells already have chock-full reservoirs. Healthful deficit spending is not a one-time thing. Perforce it must be renewed spending over multiple pre-recovery years.
Alas, former President George Bush’s legacy to the American people is universal risk aversion as well as trillions of dollars of debt that will never get repaid. Mr. Obama and Congress will need to re-create anew market spending that is ultimately self-sustaining.
I learned all this in 1932, after I began my economics study at the famous but conservative University of Chicago. My professors were known worldwide. But alas it took a Depression to teach them that no market system can ever stay stable and be self-healing.
Roosevelt’s critics thought wastefulness would beggar America permanently. They were wrong. Even prior to Pearl Harbour in 1941, the US economy had become the powerhouse that saved the world from an Adolf Hitler victory. Did New Deal rescues generate end-of-1930s moral hazards? Economic historians document that this was not the case.
Mr. Obama will face a tough prospect. His predecessors - the ones who let the meltdown happen - will say, ‘Don’t overspend.’ They do not come into court with clean hands.
Franklin Roosevelt’s popularity with the voters was all-important for America’s conquest of the Depression. Pray that Mr. Obama’s emerging critics will not delay and jeopardise the return of prosperity by 2012 or sooner.
Today’s travails trace back directly to the Ronald Reagan 1980 electoral victory. An ageing president was surrounded by the ‘radical right supply-siders’ who planted the seeds of Bush-type market deregulation. Both Bushes came to the White House with Reagan’s rash notion that government is the problem, not the solution. This has been the mantra of the Milton Friedman libertarians. That kind of Republicanism has been bad for Main Street prosperity.
Periodically, the US way of life broke away from Reaganism when Paul Volcker broke the back of inflation by tough-love Federal Reserve policy. In the late 1990s, Bill Clinton’s centrism bequeathed the young George Bush both a balanced fiscal budget and a healthy Schumpeterian innovation economy.
Mr. Obama alone cannot return us to those sounder conditions. New generations of voters will have to fight that good fight. -- Tribune Media Services Inc
The writer is considered a founder of modern neo-classical economics and was awarded the Nobel Prize for Economics in 1970
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