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The do nothing method of finance, would it work?

Would the do nothing financial model work?

Poll closed Mar 16, 2009.
  1. No

    16.7%
  2. Yes

    33.3%
  3. The socialist model is better (bail outs of banks and or nationalisation of banks).

    0 vote(s)
    0.0%
  4. I prefer another model: discuss if you can

    16.7%
  5. We're all screwed and nothing will work, we just have to accept boom and bust

    16.7%
  6. Flamingo?

    16.7%
  1. Jan 30, 2009 #1
    Link.

    So what should be done and do the libertarians/conservatives have it right in returning to a capitalist ideal not a socialist plan? If not what other options are there?
     
  2. jcsd
  3. Jan 30, 2009 #2
    No. Theoretically, when private demand is low, increased federal spendings is an economy's best interests. In practice, there have been superb examples of this; see Roosevelt's New Deal, or Hitler's/Schacht's pre-War economic recovery.
     
  4. Jan 30, 2009 #3

    Vanadium 50

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    But the New Deal didn't end the Depression.
     
  5. Jan 30, 2009 #4
    Taken from the Wikipedia article, here's a plot of GDP measured in constant currency in function of the years spanning 1920 - 1940.

    [​IMG]

    To be sure, only the years preceding 1939 are interesting. Clearly, from 1933, the time of the New Deal's inception, to 1939 there is a disturbed but sharp rise in GDP.

    The New Deal didn't go so far as to end the Depression, but it alleviated it.
     
  6. Jan 30, 2009 #5
    But who's tried a do nothing plan? And how can we be sure that wont work?

    If you ask me that graph may be indicative of nothing more than the usual boom and bust cycle we see with capitalism in general.
     
  7. Jan 30, 2009 #6

    Vanadium 50

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    GDP is only part of the story - the great depression was characterized by high employment: and it didn't drop below 10% until 1942 (and it didn't drop below 1929 levels until the following year).
     
  8. Jan 30, 2009 #7

    LowlyPion

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    Looks to me like we just had 8 years of that, except for the last frantic months when the scab was ripped off the boil and Bush sent a panicked Paulsen scrambling to congress.
     
  9. Jan 30, 2009 #8
    Yes but we were in a relative period of economic stability at least in the UK, in fact we had never been more well off as a whole. Would the do nothing plan work in a crisis, and can we say to libertarians that their idea is crazy? At least the right wing ones. I'm not just talking about the US, but every system in the West, could it work?

    I saw a program a couple of days ago that said the stock market reminded a prominent economist of a pack of dogs, first they run one way, then another. That there is a certain pack mentality and a heard mentality in general, they highlighted this by showing bison crossing a river, first a few go then some of the more adventurous follow, then when they've overcome their natural fear of the water and or crocodiles they all go. This made me laugh but economists are revising their theories to take account of the inherent unreliability of social models and finance. Shouldn't we be thinking outside the envelope too?
     
    Last edited: Jan 30, 2009
  10. Jan 30, 2009 #9

    russ_watters

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    I don't know how you define a "do nothing plan", but what do you guys think of Reaganomics? It's probably the most lazzes faire we've been since before the new deal.
     
  11. Jan 30, 2009 #10
    That's a point maybe I should define it as let the banks and by extension everyone fend for themselves, with no input from government, kill or be killed, capitalism with no input from government in this case. Doing nothing when you're in the Reagan boom years, is just letting the freight train run, it's not particularly revolutionary.
     
  12. Jan 30, 2009 #11

    Gokul43201

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    But it clearly turned around in 33.

    Total employment numbers: http://en.wikipedia.org/wiki/New_Deal
    [​IMG]

    Unemployment in 1932 was over 20% and rising fast over the last 3 years (at about 5% per year). That it then began dropping at a rate of 2% a year from 1933 is to be considered a failure of the New Deal?
     
    Last edited: Jan 30, 2009
  13. Jan 30, 2009 #12

    Gokul43201

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    I think that the tax cuts spurred GDP growth over the short term, but being financed entirely by deficit spending, they may have been more detrimental than beneficial over the long term.
     
    Last edited: Jan 31, 2009
  14. Jan 31, 2009 #13
    Ok I'm going to assume that no one has a problem with the do nothing strategy because to be frank they have no idea what would happen in the middle of a recession.

    Let me ask another question then, in the UK we have bought shares in some banks in return for a bail out, so they are effectively part nationalised, the bank still has the control but we can influence its actions. In the US even the most left wing of Americans do not want to nationalise banks, so in essence they are throwing vast sums of money at them for nothing, with no provision in case it all goes pear shaped? Does anyone think there's something wrong with that?

    As to the poll and given your answers I'm going to vote yes, although I think maybe, but I forgot that poll option.
     
    Last edited: Jan 31, 2009
  15. Jan 31, 2009 #14
    I might have a problem with a do nothing strategy, but I don't think I know enough yet to choose one course of action over another even though I've been looking at all sorts of economic statistics since a bit before this thread was started.

    If there are problems with the current situation, then exactly what are they?

    The strategy one chooses would depend on one's goals. Do we want more freedom (greater buying power) for the majority of consumers, or do we want more freedom for owners, investors and corporations? Do we want stability or do we want to maximize GDP growth? Are these goals at odds with each other? (And, etc., etc.}

    You can stimulate mass consumption either directly (cash payments, raising minimum wage, price controls, etc.) or indirectly (tax cuts and various credits for investors and entrepreneurs, and government spending on large infrastructure projects, etc.). My guess is that some mix of free market- laissez faire and socialist approaches would produce a situation that everybody can be happy with, more or less. Of course, that's sort of what we have already -- maybe it just needs a bit of tweaking.
     
  16. Jan 31, 2009 #15

    Astronuc

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  17. Feb 1, 2009 #16
    The New Deal failed because it was a conglomeration of policies involving high taxes, price controls, rationing, and a high degree of government regulation over business. It unfortunately lengthened and deepened the Depression. FDR actually tried to give himself power over the U.S. economy equivalent to what Hitler and Mussolini had had over the German and Italian economies through his National Industrial Recovery Act, but this was declared unconstitutional by the Supreme Court.

    FDR had his cause and effect reversed; he believed that the Depression occurred because of falling prices due to excessive business competition, rather than the reverse which was prices having fallen because of the Depression. The "solution" was then to raise prices, which was to be done by creating artificial shortages, hence requiring cutting back on production by government fiat, and limiting competition between firms and competition between workers to stabilize prices; basically make each sector of the economy more monopolized and have each sector cut production so they can then raise their wages and prices, and supposedly the economy recovers.

    With a huge amount of unemployed workers wanting a limited supply of jobs, wages should have fallen naturally from competition among workers, yet wages instead increased (due to New Deal policies). Meanwhile, production was cut back, meaning fewer jobs. Not a good thing.

    Things like violation of the Sherman Antitrust Act were also permitted, along with a whole host of oddball policies.

    After all, if the economy is in recession or depression, you fix it by getting job creation going again. You can have government programs to alleviate the pain, but actual business growth is needed to create jobs to stimulate and grow the economy.

    The notion that one could recover the economy by limiting production and competition was incredibly wrongheaded.

    Then what happens is when the infrastructure programs run out, there are no new jobs to go to. The infrastructure is done, but the economy wasn't able to create any new jobs because of limiting production and competition and creating more monopoly. Thus the U.S. economy didn't really recover until the U.S. entry into WWII.

    Here is an interesting paper on the subject:

    http://www.economics.hawaii.edu/research/seminars/02-03/02-21.pdf

    Some good things did come out of the New Deal however, such as the FDIC and the SEC, for example.
     
  18. Feb 1, 2009 #17

    mheslep

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    The primary cause of the great depression was the contraction of the money supply as a direct result of the actions of the federal reserve. There was a power struggle between NY and Washington Feds in '28/29; Washington won with the death of Fed banker Benjamin Strong. The Washington Fed then thought they needed to restrict money; to hold funds until there was a 'real emergency'. By '33 this policy had cut the US money supply by 1/3. There's wide agreement on the cause side of the argument now thanks to the work of Friedman and Schwartz, recently re-recognized by Bernanke.
    The causes of the recovery from '33 on are still in heated debate: New Deal, WWII, restoration of confidence, _your theory here_. The timing of the New Deal programs roughly tract the recovering employment figures. However, the money supply was allowed to grow again in '33, and some of the Smoot Hawley tariffs began to be reversed.
    http://www.nowandfutures.com/images/m3_plus_credit_and_debt1920-40.png
    So New Deal fiscal programs or other causes? Given statements like the one from Roosevelt's T. Sec Morganthau:
    My money goes the reversal of the crazed Fed contraction policies starting in '33.
     
  19. Feb 2, 2009 #18

    mheslep

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    Cole and Ohanian, authors of a 2003 published article critical of some New Deal policies had an Op Ed today that briefly summarizes their arguments on the New Deal:
    Good: Deposit Insurance, SEC, unemployment benefits.
    Bad: Suppression of competition, setting artificially high prices and wages via the National Industrial Recovery Act (NIRA).
    In sum they argue that by 1933 productivity was high and increasing, the gold standard was dropped allowing money to flow, and that the economy should have been able to return to full (normal) employment. It did not do so because of the federal policies via NIRA. A normal business cycle should have seen falling wages which eventually leads to increases in employment. The New Deal caused the opposite to occur, driving wages up through government mandates with the consequence that the depression was extended by several years. Critics of Cole and Ohanian point to the overturn of NIRA by the Supreme Court in '35, saying that it could not have matter, but C&O counter that the Roosevelt administration took no action until years later to stop the cartel behaviour it had set up.

    Government spending as stimulus in the Depression is still an open question; seems to be hard to get a handle on it as Roosevelt wasn't consistent on spending - running high deficits in '32-'36 and then cutting back in '37 to balance the budget.

    I plotted all the tabulated employment and wage data from Cole to illustrate the rising wages concurrent with low employment, especially manufacturing employment where NIRA operated.
    New Deal Policies and the Persistence of the Great Depression
    WSJ Op Ed
    http://www.minneapolisfed.org/research/QR/QR2311.pdf View attachment 17393
     

    Attached Files:

    Last edited: Feb 2, 2009
  20. Feb 2, 2009 #19

    Gokul43201

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    Note: I did not say that the New Deal spending was what reversed the employment numbers. I merely said that it looked pretty hard to find support in the unemployment trends, for an assertion that New Deal spending did not help the economy out of the GD.
     
  21. Feb 2, 2009 #20

    mheslep

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    I'd call it ambiguous, hence the debate. The wiki chart includes population growth so it's esp. hard to tell there. UNemployment peaked at ~25% in '33, dropped to 14.3% in '37, but was still at 17% in '39.
    http://www.bls.gov/opub/cwc/cm20030124ar03p1.htm
     
    Last edited: Feb 2, 2009
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