Worst response to a recession since the Great Depression
Published in The Tennessean, Sunday, May 30, 2010
Worst response to a recession since the Great Depression
by Richard J. Grant
The 1970s began with the rate of price inflation over five percent. This was unusually high and of great concern to people at that time. Few could foresee that by the end of that decade, when price inflation reached 14 percent, a return to five percent would come as a relief.
When problems arise, many are too quick to assign blame. With the prices of consumer goods rising, many consumers automatically blamed businesses for raising their prices. Business owners and managers responded by blaming their increased costs of doing business, particularly the high union wages pushed upon them by the strike-threat system. But union leaders could argue that they needed wage increases to keep up with the rising cost of living.
Around the blame went. One side would claim that prices must rise because the prices of supplies and labor were rising, while the other side would claim that wages must rise because the price of consumer goods was rising. A surprisingly large number of economists were found to be on one side or the other. But these two popular explanations for inflation amounted to little more than "prices went up because prices went up."
The public argument was missing the point. As a result, government was called upon (as usual) to do something, anything. The government responded by doing what it does best, which is to treat symptoms rather than causes. President Richard Nixon introduced wide-ranging wage and price controls: they failed. President Gerald Ford’s approach was more sophisticated, but still blind to the real causes. His “Whip Inflation Now” program is remembered only for the “WIN” buttons, which caused laughter even then.
Reluctantly, mainstream economists were forced to yield to those who had been insisting all along that the cause of inflation was the government itself, specifically the Federal Reserve System. Until August 1971, the Fed's main task was to maintain the value of the dollar such that the price of gold would remain steady near its official price. But throughout the 1960s, its monetary policy was inconsistent with that goal. The Fed was inflating the dollar supply.
This episode in our history is another example of a problem being perpetuated, and made worse, by the government's failure to recognize its own ignorance while taking actions that leverage that ignorance. The 1970s – a decade of loose money, excessive government spending, and oppressive economic regulation that raised costs and made us less able to adapt – also gave us the word, “stagflation.”
Eventually, President Jimmy Carter took some positive, though ineffectual, steps toward deregulation and a tighter monetary policy. It wasn't until President Ronald Reagan made decisive and systematic strides toward deregulation, lower marginal tax rates, and monetary restraint, that the economy shrugged off the past and began to grow. Despite an obstinate, spendthrift Congress, Reagan brought renewal with a new optimism rooted in reality.
The administrations of the 1970s were not competent to handle their inheritance from the Johnson years. But they were neither the first nor the last to be in that position. President Franklin D. Roosevelt campaigned against the interventionism of the Hoover years but, once in office, embraced it and expanded it beyond all precedent. Not letting a crisis go to waste, he forbade US citizens from owning gold bullion (i.e. traditional money), oversaw new regulations, and increased government control and ownership within several sectors of the economy.
Although some understood the problem at the time, only recently has it become generally recognized that FDR was not the savior of the nation. His policies misdirected resources, reduced people’s freedom to adapt, and thwarted recovery. Roosevelt took the Hoover recession and gave it the persistence that we now call the Great Depression.
In a spooky reincarnation, the Obama administration is compounding the errors that gave us the Bush recession. Given that we know better, it is the worst response to a recession since the Great Depression.
Richard J. Grant is a professor of finance and economics atLipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:rjg@richardjgrant.com
Copyright © Richard J Grant 2007-2010
Worst response to a recession since the Great Depression
by Richard J. Grant
The 1970s began with the rate of price inflation over five percent. This was unusually high and of great concern to people at that time. Few could foresee that by the end of that decade, when price inflation reached 14 percent, a return to five percent would come as a relief.
When problems arise, many are too quick to assign blame. With the prices of consumer goods rising, many consumers automatically blamed businesses for raising their prices. Business owners and managers responded by blaming their increased costs of doing business, particularly the high union wages pushed upon them by the strike-threat system. But union leaders could argue that they needed wage increases to keep up with the rising cost of living.
Around the blame went. One side would claim that prices must rise because the prices of supplies and labor were rising, while the other side would claim that wages must rise because the price of consumer goods was rising. A surprisingly large number of economists were found to be on one side or the other. But these two popular explanations for inflation amounted to little more than "prices went up because prices went up."
The public argument was missing the point. As a result, government was called upon (as usual) to do something, anything. The government responded by doing what it does best, which is to treat symptoms rather than causes. President Richard Nixon introduced wide-ranging wage and price controls: they failed. President Gerald Ford’s approach was more sophisticated, but still blind to the real causes. His “Whip Inflation Now” program is remembered only for the “WIN” buttons, which caused laughter even then.
Reluctantly, mainstream economists were forced to yield to those who had been insisting all along that the cause of inflation was the government itself, specifically the Federal Reserve System. Until August 1971, the Fed's main task was to maintain the value of the dollar such that the price of gold would remain steady near its official price. But throughout the 1960s, its monetary policy was inconsistent with that goal. The Fed was inflating the dollar supply.
This episode in our history is another example of a problem being perpetuated, and made worse, by the government's failure to recognize its own ignorance while taking actions that leverage that ignorance. The 1970s – a decade of loose money, excessive government spending, and oppressive economic regulation that raised costs and made us less able to adapt – also gave us the word, “stagflation.”
Eventually, President Jimmy Carter took some positive, though ineffectual, steps toward deregulation and a tighter monetary policy. It wasn't until President Ronald Reagan made decisive and systematic strides toward deregulation, lower marginal tax rates, and monetary restraint, that the economy shrugged off the past and began to grow. Despite an obstinate, spendthrift Congress, Reagan brought renewal with a new optimism rooted in reality.
The administrations of the 1970s were not competent to handle their inheritance from the Johnson years. But they were neither the first nor the last to be in that position. President Franklin D. Roosevelt campaigned against the interventionism of the Hoover years but, once in office, embraced it and expanded it beyond all precedent. Not letting a crisis go to waste, he forbade US citizens from owning gold bullion (i.e. traditional money), oversaw new regulations, and increased government control and ownership within several sectors of the economy.
Although some understood the problem at the time, only recently has it become generally recognized that FDR was not the savior of the nation. His policies misdirected resources, reduced people’s freedom to adapt, and thwarted recovery. Roosevelt took the Hoover recession and gave it the persistence that we now call the Great Depression.
In a spooky reincarnation, the Obama administration is compounding the errors that gave us the Bush recession. Given that we know better, it is the worst response to a recession since the Great Depression.
Richard J. Grant is a professor of finance and economics atLipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:rjg@richardjgrant.com
Copyright © Richard J Grant 2007-2010