Herbert Hoover's quote fearing inflation resulting from government spending was made in the depths of the Economic Depression. So President Hoover's fear that government spending would create inflation in that context was completely wrong.
Now I think stimulus spending postpones and worsens the economic depression, and at worst delays the necessary liquidation of private debts as in Japan. So in this aspect Hoover had a reason to fear stimulus spending, just not the one he feared. Yet some relief spending will be needed to prevent starvation and destitution. But anyone who expect this to create inflation is as sorely mistaken as Herbert Hoover.
I think you'll find the actions which created the Great Depression seem as fresh and out current newspaper headlines since 1980.
TAX CUTS: Under Presidents Harding and Coolidge, the top income tax rate was reduced from 77% to 24% in steps during 1921, 1924, 1926, and 1928 to fight the 1920 t0 1921 post-WW-I recession. Secretary of the Treasury 1921-32, Andrew Mellon, was the architect of these tax cuts, much like the Reagan and his Reaganistas. Combined with loose credit policies, just like Reagan and Greenspan, total debt aka "the money supply" rose 7.7% annually for a total of 62% from 1921 to 1929.
FEDERAL DEFICITS: Mellon's Income Tax cuts began to create Federal government deficits, made much worse by the decline in income during the Great Depression. This spending deficit so greatly concerned Hoover that he increased top income rates from 24% back up to 63%.
FEAR OF MASSIVE INFLATION: In Hoover's August 1932 Acceptance Speech for the Republican nomination, when unemployment has reached 25.9%, Hoover was proud he had vetoed most of the relief efforts created in response to the Great Depression. americanhistory.about.com
"Our views upon sound currency require no elucidation. They are indelibly a part of Republican history and policies.
We have affirmed them by preventing the Democratic majority in the House from effecting wild schemes of uncontrolled inflation in the last 4 months."
As debt was liquidated Friedman and Schwartz showed total debt multiplied by the transaction rate aka "the effective money supply" shrank 27 percent from 1929 to 1933.
Yet in 1932 with nearly 26% unemployment, President Hoover was mistakenly very concerned about inflation wiping out the value of money. Instead saved money became ever more valuable against nearly "inflation hedge" money could purchase. The problem was he was myopically focused on Federal debt creation which was far smaller than the amount of private debts being liquidated in bankruptcies and foreclosures.
"PROTECTING" AMERICAN JOBS: I think it's good to prevent people from starving or becoming homeless, although Hoover believed unemployment benefits would become addictive and interfere with the desire to work. He passed protective tariffs against ruinous foreign competition (Smoot-Hawley), and Hoover deported 500,000 Mexicans and Mexican-Americans with US Citizenship to Mexico.
Now I agree with the late Joseph Schumpter that debt-funded stimulus spending merely postpones and worsens an economic depression. This is true regardless of whether or not the stimulus program is a stock bubble, a real estate bubble, a War, or aid to state governments. Our current problem, as in 1929 is too much debt relative to incomes.
WHAT's THE CURE?
The cure is bankruptcies and foreclosures - liquidation of excessive private debts. Economist Joseph Schumpeter said if you don't want the depression you need to avoid the credit bubble which preceded it - there's no other way.
In contrast Monetarists like Milton Friedman, Keynesians like Krugman and Nixon, and many other types of economists believe the government can spend our way out of a possible depression - by creating massive new debts to cure the problems caused by excessive debt. They have models which claim that each $1.00 of new debt spent creates something like $1.50 in new income making the debt more affordable. Let's graciously concede this might be true when total debt in the economy is not already excessive relative to income. But in out current situation I side with Schumpeter that we can't debt our way out of debt. Monetarist and Keynesian computer models are simply not predictive of reality when your economy's debt to income ratio has become excessive.
Government spending on unemployment benefits, soup kitchens, and make-work jobs will lessen the worst human suffering from the current economic depression, at the expense of making the eventual recovery more anemic - being saddled with some additional government debt. But liquidation of private debts is essential and should not be delayed. This will result in a temporary decline in GDP and personal incomes by perhaps 15%, but economies are cyclical and this is the only way to ensure our future economic well-being.
. |
