Congeries of cross connected concepts
As we watch the American Street vote to repeat the 1930s I think it might be a bit different this time around.
One view that I held in the past but have changed is the long term viability of social democratic governments. In the 1980s it looked to me like you could have a large welfare state if you were willing to accept relatively higher unemployment and much slower growth, as exemplified by the European model.
Thirty years later things look much less sustainable. The corrosive effects and lack of limits predicted by the free market ideologues are playing out as we watch, except in those nations (such as Sweden) who are shifting back towards a more limited state. This points out a key difference from the 1930s which is that states are already large and heavily indebted, there is no slack in the system as there was then. Keynsian economics has been shown to be mostly unimplementable in the real world because governments will not cut back on spending during boom times as Keynes’ theory required. The debt just keeps mounting and it’s becoming clear that even the anemic growth we see is dependent on that borrowed money. What happens when the cost of borrowing goes up and becomes larger than the artificial growth it induces?
Now and then, here and there, we have seen pull backs from this decline (New Zealand, Margaret Thatcher, Reagan) but even those were rather limited and temporary. It is an open question how things will proceed over the next 10 years or so. It doesn’t seem possible that even the USA can continue to borrow 40% of its budget year after year with out end. If something can’t go on forever, it won’t but that doesn’t tell you when or how.
The doom and gloom crowd thinks that way because they look at Argentina and see how a once democratic and prosperous nation end up fascist and broke. The challenge here is to indicate how the doomers are wrong - what will stop our following the same path as Argentina, given the massive personality cult that is operating on behalf of our current President, the policies of his party, and the willingness of voters to vote for continued economic malaise. While I am generally very harsh in my comments on the EUlite I must admit they seem to have a lot more self control with regard to welfare states. None of them have grown their government programs at the rate Obama or even Bush have done so I think it very plausible that the USA could easily go in to decline faster than Europe has so it’s unclear how much of a useful bad example Europe will be over the next decade.
| Bret Friday, 16 November 2012 at 11:01 |  |
Repeating the 1930s? The GDP is currently about 20 times what is was in the 1930s and GDP per capita is somewhere between 7 and 8 times what it was 80 years ago. We’d have to have a reduction in the economy of over 85% to get to the 1930s. That would bring us roughly down to the level of Guatemala.
We’re a long, long ways from the 1930s.
In theory, the US could probably borrow 40% of its budget forever. Rules are different when borrowing in your own fiat currency. In practice, it’s probably a dangerous experiment, so it would be better to cut spending and maybe only borrow 10 to 20% of our budget (which is certainly sustainable forever, in and of itself, though the related spending might not be).
I didn’t realize you were a Keynesian (“…growth we see is dependent on that borrowed money”). I see it the exact opposite - that growth would be picking up some if it weren’t for the increase in government spending and regulation (borrowing is just to finance spending and pull the money back out of circulation and has minimal effect in and of itself).
I partially subscribe to Tyler Cowen’s Great Stagnation hypothesis. It doesn’t matter too much what the government does - there are structural and investment issues right now that will take some time to resolve. Reducing regulation, especially at the state level (for example, it’s pretty silly that one needs formal training and a license to paint fingernails in most states), and keeping taxes of all sorts from going up too much would help some though. Deirdre McCloskey (author of “Bourgeois Dignity”) would claim that rhetoric like “you didn’t build that” and the general demonization of business is also very unhelpful and I’m inclined to agree.
Given human nature and public choice theory, we’ll almost certainly ultimately follow the path of Argentina. The goal is to make that journey take as long as possible. Every story has to end as so does every great power and civilization.
| Peter Friday, 16 November 2012 at 11:45 | |
the general demonization of business
That subject is worth a post of its own, Bret. Both about the history of it and the dumb things the right often says that enable it.
| Annoying Old Guy Friday, 16 November 2012 at 12:06 | |
Bret;
Come on. By “repeating the 1930s” I mean a decade or more of stagnation due to government policies that thwart recovery. By your criteria we can never repeat anything and history holds no lessons.
I’m not really a Keynsian but I do think government spending works a lot like cocaine - it does in fact boost things. For a while. Until the dosage required becomes enough to kill you. Just like bankrupty, it’s slow until it’s sudden.
It doesn’t matter too much what the government does - there are structural and investment issues right now that will take some time to resolve
I just can’t agree on that. I think we have those issues all the time, but it doesn’t take a lot of comparison to see that stagnation like this correlates very strongly with specific government policies.
| Bret Friday, 16 November 2012 at 13:36 | |
Stagnating at the current levels or pulling back 10% or so from here will not be anywhere near as unpleasant to live through as the stagnation in the 1930s. That lack of misery will enable a much wider range of political dynamics and potentially allow even worse policies to take hold and an even longer period of stagnation.
But, you’ve made yourself clearer, and I appreciate that.
| Bret Friday, 16 November 2012 at 13:37 | |
Peter wrote: “the general demonization of business…That subject is worth a post of its own”
My co-blogger wrote a nice post on that subject.
Perhaps you missed it.
| Annoying Old Guy Friday, 16 November 2012 at 14:19 | |
will not be anywhere near as unpleasant to live through as the stagnation in the 1930s
No, it won’t. But why go through even that milder unpleasantness when there are obviously better approaches, demonstrated repeatedly in the last 100 years? I can’t understand voters who think this economic climate is better than the Bush years.
You do make a good point about relative misery and how the fact that we are so much wealthier makes a real difference in policy choices. Yet the voters even back in the 1930s supported the policies that immiserated them, although I admit the historical record was not as yet so clear.
I think my biggest objection to your view is the dynamic nature of things. For what reason would a pull back stop here or at -10%? The vigor with which the Tranzis pursue economically destructive policies is astonishing, even to me (e.g. the EPA plans for Obama’s second term). My post itself is about my emerging doubt that such a point is stable.
| Bret Friday, 16 November 2012 at 16:10 | |
“But why go through even that milder unpleasantness…”
Because for most it won’t be noticeably less pleasant.
The voters in the 1930s didn’t know better. Neither did FDR or anybody else. There was a feeling that shortages and hard-times were the natural state and that there was nothing FDR and his administration could do about it.
“For what reason would a pull back stop here or at -10%?”
I’m guessing that it’s a negative feedback loop. If things get noticeably worse, then people will be more open to the conservative ideas. I could easily be wrong.
| Annoying Old Guy Friday, 16 November 2012 at 17:38 | |
Because for most it won’t be noticeably less pleasant.
We disagree on that. For some enclaves that’s true but with this many people out of work (some estimates of real unemployment are up to 16% which is approaching Depression era levels) most people will be negatively affected, either directly or by relatives or friends who cannot find work.
If things get noticeably worse, then people will be more open to the conservative ideas
Perhaps. But that’s precisely what went wrong in Argentina and to a large extent in the 1930s (as they had the example of the Harding Administration to look back on for a counter-example, although do admit it wasn’t nearly as clear). I also think Old Media will all that it can (which is a lot) to prevent any reconsideration of those conservative ideas. Unfortunately we are clearly going to play out the experiment and see.
| Hey Skipper Friday, 16 November 2012 at 18:51 | |
I think it is going to be far different, but for different reasons.
Perhaps the most important factor, and which has been getting some press recently, is the very real likelihood of the emergence of Saudi America. Hubbard Peak Oil proved the attractiveness of sciencey-sounding TLAs (hat tip to Peter), but nothing else. That means there is the possibility of taxing energy exports to greatly reduce, if not eliminate, government debt. And given the overall size and diversity of the US economy, there isn’t any chance doing so will lead to the sorts of ills that typically befall extraction economies.
Fortunately, there are and will be plenty of cautionary examples to be had. Greece, and, more locally, California which is now apparently a one-party state. Yes, people will vote with one eye on their self-interests, but I don’t think most voters are stupid. They fully realize that the spending spree can’t go on forever, and are at least numerate enough to comprehend that taxing the well off — no matter how high the rate — isn’t going to come anywhere close to solving the problem; moreover, I think most Americans are receptive to fairness arguments, one of which being that the top 20% of earners pay nearly 70% of income taxes does not probably horribly deprive everyone else.
Also, the Republican party can (must) reject its coercive approach to social issues — it can’t be intrusive government and small government at the same time. And once it ditches that, it can obtain far wider appeal by emphasizing personal freedom and responsibility, as well as much smaller and decentralized government. Lord knows collectivists won’t.
In the 1930s, the zeitgeist was essentially fascistic; everybody took it for granted that centrally planned, collectivist, economies were the way to go, because an economy without an underlying plan and goals couldn’t possibly keep up. Even into the 1980s, the British Labor Party advocated nationalizing the means of production. No one, outside of Chavez, Castro, and the Norks — all additionally cautionary tales — believes that anymore.
Finally, while the level of indebtedness a government can reach before it can stop borrowing isn’t clear, it is even harder to know what the effects of printing money to pay off debt would be. The obvious answer is rampant inflation. But with productivity and technology increasing and advancing as they have (and didn’t during the 1930s), we are living in a deflationary period (CPI be damned). As Orrin has said many times, and is probably right most of them, nothing is getting more expensive. There is probably a fair amount of money that could be run off the presses before demand-pull inflation could be even a remote possibility.
| erp Friday, 16 November 2012 at 20:23 | |
skipper, i’d sleep a lot better if i could believe this, but i think the left doesn’t care about anything but grabbing power and the only way they can do that is by making us serfs or as i like to call us, cogs in the great socialist wheel.
