It's been famously said that the definition of insanity is to do the same thing over and over again and expect different results. Of course, if it's the government and their cheerleaders, they just bend the truth to suit their purposes at best or just plain old lie about the results at worst. And now that the economy is experiencing the bust end of the boom-and-bust cycle, just like America in the 1930s, the folks in Washington and their propagandists yakking on CNBC and scribbling for the New York Times are preaching "mo money and mo government" as the prescription to get us out of this funk.
You know the history: Mr. Laissez-faire Herbert Hoover wouldn't lift a government finger to aid the collapsed economy and it took the heroic Franklin Delano Roosevelt and his massive increase in government to make the Great Depression finally go away. As the story goes, thank goodness that the United States was provoked into World War II, otherwise America might have never got its economic mojo back. Oh and there's that bit about the Federal Reserve being too tight with money, leading current Fed Chief Ben Bernanke to apologize to economist Milton Friedman saying the Fed would never let it happen again.
So, if it worked (but maybe a little too slow) last time, the guys and dolls at the Treasury, the Fed, and the White House figure they better throw the whole government kitchen sink at this economic problem pronto. After all, the new administration wants to make universal healthcare happen along with cap-'n-trade and who knows what all. Obama doesn't have time for a depression right now — he's got teleprompters to read and places to be worshiped.
Of course, this is all nonsense, as Robert Murphy explains in his new book The Politically Incorrect Guide to The Great Depression and the New Deal. Hoover wasn't a devotee of free markets and small government. FDR's policies extended the depression and made it worse — and there is no such thing as wartime prosperity.
Like all books in the P.I.G. series, this edition is very easy to read with plenty of sidebars, suggested reading selections, along with schedules and graphs. The author is a rising star in the economic profession and a talented teacher. He knows how to present information to the modern reader. But at the same time, this is not lightweight stuff.
Murphy takes dead aim at 2008 Nobel Prize winner Paul Krugman who preaches to the big-government faithful from his Gray Lady pulpit each week. In a December 2008 column, Krugman wrote that the Hoover administration "tried to balance its budget in the face of a severe recession." But the real story is that Hoover ran a $2.6 billion deficit, which doesn't sound like much except as Murphy explains,
For comparison, in FY 2007 the federal government would have needed to run a deficit of $3.3 trillion — rather than the actual deficit of $162 billion — to achieve the same proportion of overspending as Hoover did in his allegedly tight-fisted year.
Just as with the case illustrated above, the bulk of the book is a one-by-one debunking of each and every myth we've been taught about the Depression and FDR's New Deal. But there is some great economic theory in Murphy's book as well. We are constantly barraged with the notion that a little bit of inflation is OK, and a lot of inflation is bad, but that deflation is catastrophic. It is the opposite that is true.
Deflation is fine: prices fall, money buys more, and more goods become available to more people. Living standards are raised. People will save more if there is deflation, making more capital available for entrepreneurs to make more products. And Murphy explains that entrepreneurs will continue to produce even in a falling-rate environment, pointing out that Henry Ford's Model T sold for $600 in 1912 and only $240 by the mid-1920s, and Henry was doing just fine as more and more consumers could buy his product.
However, there are only inflationists on Capital Hill and Obama has a bigger bag of boondoggles than FDR could have ever imagined. Reading about Hoover's and FDR's mistakes and the coming Obama miscues won't make the economy any better and may not make you feel better. But at least you'll know why this depression will last a long time.
This article originally appeared on Mises.org.
July 15, 2009
Doug French [send him mail] is president of the Ludwig von Mises Institute and associate editor for Liberty Watch Magazine. He is the author of Early Speculative Bubbles & Increases in the Money Supply. He received the Murray N. Rothbard Award from the Center for Libertarian Studies. See his tribute to Murray Rothbard.