Why is America in debt and how can we fix it?

[mheslep]

The idea that free market failures caused the Great Depression and that the federal government only acted as a rescuing hero is a myth, a quite outdated myth at this time. The actions of the federal government via the Federal Reserve were the primary cause of the Depression, not the other way around. That is, the federal government turned a recession into the Depression by cutting off the money supply and thereby forced the banks out of business. In addition government enacted the 1930 tariff laws that destroyed trade, so that retaliation cut off US farmers from foreign markets, so that, so that ...

Fed Chair Ben Bernanke Regarding the Great Depression, 2002

As everyone here knows, in their Monetary History Friedman and Schwartz made the case that the economic collapse of 1929-33 was the product of the nation's monetary mechanism gone wrong. Contradicting the received wisdom at the time that they wrote, which held that money was a passive player in the events of the 1930s, Friedman and Schwartz argued that "the contraction is in fact a tragic testimonial to the importance of monetary forces"...
.
.. so that the Great Depression can reasonably be described as having been caused by monetary forces. ...

...You're right, we did it. We're very sorry. But thanks to you, we won't do it again.

Yes there was a stock market bubble and collapse in '29; there will inevitably be more in the future. But these are mere economic blips compared to what government malpractice has done the economy.

 

[BWV]

The idea that free market failures caused the Great Depression and that the federal government only acted as a rescuing hero is a myth, a quite outdated myth at this time. The actions of the Federal Reserve were the primary cause of the GD, not the other way around. That is, the federal government turned a recession into the Depression by cutting off the money supply and thereby forced the banks out of business. In addition government enacted the 1930 tariff laws that destroyed trade, so that retaliation cut off US farmers from foreign markets, etc, etc.

Fed Chair Ben Bernanke Regarding the Great Depression, 2002Yes there was a stock market bubble and collapse in '29; there will inevitably be more in the future. But these are mere economic blips compared to what government malpractice has done the economy.

While I don't disagree that government policies, both of the Fed and the Hoover and FDR administrations made the Great Depression worse than it needed to be, there was more than just a stock market bubble in the late 20s. The rapid expansion of private credit in the 20s and the subsequent bust were the real story, the stock market collapse being just one class of asset whose value was over-inflated by abundant credit. This is not a controversial issue, it was recognized at the time by Von Mises and the rest of the Austrian school along with Irving Fisher and Keynes. There were similar credit booms and busts in 1873 and 1907, both of which occurred without any intervention by the government.

 

[mheslep]

Agreed, though I'd not call the loose/leveraged credit the "real story" of the period. Yes certainly those excesses occurred. And as you say there have been several credit/financial driven busts in US history, not instigated by the government, nor was the stock market crash of 1929 (and credit bubble) instigated by the government. My point is that in all of these market bust cases, without exception, the downturn was relatively short lived and mild compared the Great Depression; the 1907 panic for instance was 13 months per the NBER. Even the Oct 1929 market collapse had recovered 50% of its Oct-Nov losses by the Spring of 1930. It was government that made that particular panic, that recession, into the generational catastrophe that it became. Markets are incapable of cutting off the money supply for any length of time, and thus destroying the value of otherwise stable, non-speculative assets (i.e a car, a horse, a gallon of milk) as opposed to lowering the value temporarily. Market-makers can't cut off trade across borders for long periods. Markets can not set wage and price controls across a nation. Government does, and did these things, where as markets eventually (in months) clear. To use your phrase, the government policy causes of the Depression, or perhaps, the conversion of the panic into a depression, these are no longer a controversial issue.

 

[PeterDonis]

the issuance of notes are not the money that matters - its the creation of money through credit.

If a bank issues more notes than they have deposits to back them, that effectively is creation of money through credit: credit being provided to the bank, unwittingly, by its depositors.

The only thing the Fed adds to the system is a lender of last resort to stem panics and bank runs.

Instead we get massive bailouts of those who were financially imprudent, at the expense of those of us who were financially prudent. I'm not sure that's an improvement.

 

[phyzguy]

Well, I'm not sure we're getting anywhere, other than to see that there is a lot of disagreement. It amazes me that on a topic so important to the human race, namely economics, that we don't even agree on the very basics. Some people say, as mhslep said, that the 2009 stimulus was unsuccessful because unemployment went higher than forecast. Others say (Paul Krugman for example) that the 2009 stimulus prevented things from being much worse, and that the reason it wasn't more successful was that it was too small. How do we get it to be a more quantitative science, so at least we can agree on the basics? With the computer power we have today, why can't we build a detailed model of the economy so we can run scenarios? It would be great to re-run the last 5 years with no stimulus, bigger stimulus, etc. Until we can do something like that, each of us will continue to revise history to adhere to whatever model we think is correct.

 

[PeterDonis]

It amazes me that on a topic so important to the human race, namely economics, that we don't even agree on the very basics.

That's because economics is not a hard science. (I'm tempted to say it's not a science at all, but that would be a bit uncharitable. Perhaps "proto-science" would be a better term.) Our knowledge of economics today is more or less at the stage our knowledge of chemistry was at when phlogiston theory was on the way out but there wasn't yet anything to replace it with.

With the computer power we have today, why can't we build a detailed model of the economy so we can run scenarios?

Because the computer power we have today is still many orders of magnitude too little to run such models. An economy is too complex. Roughly speaking, the complexity of an economy is exponential in the number of people (since that's a rough first-order estimate of the number of potential interactions). So an economy consisting of, say, 1000 people (a village) already has complexity of order $e^{1000}$, a number vastly larger than the number of elementary particles in the universe or the number of Planck intervals since the Big Bang.

Until we can do something like that, each of us will continue to revise history to adhere to whatever model we think is correct.

There is an alternative: admit that nobody knows how to run an economy, and therefore stop trying. Free markets don't need anyone to "run" them; nobody needs to understand how a free market works in order for it to work. That's why free markets work better than government regulation, since the latter does require somebody to know enough about how an economy works to regulate properly. (And to be able to process enough information to act on their knowledge--which is really the reason why centralized control doesn't work. Exponentials are a bummer.)

Note that I did not say free markets work well; I only said they work better than government regulation. I'm not sure there is any economic system that will work "well" in the sense that everybody living in it will be happy and not complain that they aren't getting what they want. An economy depends on cooperation, and large economic projects depend on cooperation among large numbers of people. The conditions for effective cooperation among large numbers of people are very hard to meet: everybody has to have the same, or at least compatible, goals; and everybody needs to have the same, or at least compatible, factual beliefs about how to achieve those goals. That combination of things is rare, which is why effective cooperation on any large scale is rare. Free markets, however, do not require effective cooperation on such a scale; they can benefit from it if it exists, but they don't require it in order to work, whereas government regulation does.

 

[Imager]

The conditions for effective cooperation among large numbers of people are very hard to meet

There is the Milron Friedman "Pencil" video, explaining how large numbers of people do cooperate:

 

[PeterDonis]

There is the Milron Friedman "Pencil" video, explaining how large numbers of people do cooperate:

Yes, but this is a much weaker sense of "cooperate". Most of the people involved in making a pencil never meet each other, and never even know the names of most of the other people involved. They just act on their own local incentives. They don't have to agree on anything except the individual transactions they engage in. They don't even have to agree on the overall objective in view; the people making the wood, for example, might not even know or care that it's going to end up in a pencil. To them, the objective is to supply wood.

The kind of cooperation government regulation tries to achieve is much, much more difficult, because it requires people to agree on a lot more, and treats failure to agree as a conflict, whereas a free market treats failure to agree as simply "no transaction".

 

[Evo]

Nasty posts deleted, thread is done.