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I will say again this is not a good point in our children's lives.

And, didn't Pete L. say on this blog several weeks back that things are much better than everyone has made them out to be?

I think the only voice that will convince President Obama to change course at this point is the voice of public opinion, but it will have to be extremely loud and clear. As the truth continues to come out that this current "fail-out" will not turn around the economy - the public seems to be getting it and so do some of our elected officials.

The real barrier to changing direction for the president is, I believe, the real agenda here is the buying and cementing-in of political power for the liberal elite.

Thomas Sowell did a great job on nailing this point, in his column on Thursday, January 29th, published in The Washington Times, stating, "In the name of protecting the taxpayers' investment, they are buying the power to tell General Motors how to make cars, banks how to bank and, before it is all over with, all sorts of other people how to do the work they specialize in, and for which members of Congress have no competence, much less expertise.

He continues, "This administration and Congress are now in a position to do what Franklin D. Roosevelt did during the Great Depression of the 1930s - use a crisis of the times to create new institutions that will last for generations."

I am not yet persuaded that Obama is willing to give-up this grand plan. This is what they have been hoping "change" would really look like.

I posted this on another blog, and think this might be relevant here. I enjoy the people and the debates on this blog and would love to hear any comments on my thoughts. Whether or not I get the details right, it seems to me that there needs to be a in-depth comparison between the market and policy response of the 1921 depression and the Great Depression and what it means for the current crisis. Here it is:

Someone should really point to the 1921 depression for President Obama to study rather than the Great Depression of 1929-1933.

According to J.R. Vernon in "The 1920-21 Deflation: The Role of Aggregate Supply," the one-year deflation of this time is the largest ever recorded: “This is true whether the Department of Commerce [ 1986 ] estimates or the recently provided Balke and Gordon [ 1989 ] or Romer [ 1989 ] estimates are used. These estimates produce one-year deflation figures of 18 percent, 13.0 percent, and 14.8 percent, respectively. The closest competitor is the 11.5 percent deflation recorded for 1931-32, the third year of the Great Depression.” Furthermore, the "ratio of the percentage decline in the GNP deflator for 1920-21 to the percentage decline in real GNP is 2.6 using the Department of Commerce figures, 3.7 using the Balke and Gordon data, and 6.3 using the Romer data." But "the ratios of the percentage decline in GNP prices to the percentage decline in real GNP for 1930-31, 1931-32, 1932-33, and 1937-38, the other Great Depression years in which real GNP declined, were 1.0, 0.9, 1.2, and 0.3, respectively, all well below the 1920-21 figures."

According to the monetarist story, the sharp deflation of the Great Depression is the dis-equilibrating factor which the Fed did not fix by counteracting with aggressive money supply inflation. The Austrians, however, saw the sharp deflation as the equilibrating factor to the great inflation of the 1920s.

Whatever the take on whether the deflation was "good" or "bad," both schools seemed to agree that what really mattered was how prices reacted to the change in the money supply. Monetarists (and Keynesians) seemed to believe that prices were "sticky" downward, especially wage rates. Therefore, in a sharp deflation, a monetarist wouldn't trust the market to adjust nominal wages down fast enough to keep up with the deflation, so the policy response should be to "reflate" the money supply back up to the pre-deflation levels to avoid massive unemployment.

For example, using the figures for the 1921 deflation, real wages would be in the range of being 15%-22% higher after one year if the nominal wage rates didn't decline at all. The sudden increase in the real wage would not be a product of higher productivity, so therefore would not be sustainable, and for such a large amount in a short period of time, firms would have to lay off workers quickly to remain profitable.

Austrians also recognize this fact about deflations and wage rates, but instead argue that wage rates will fall to reflect the fall in the money supply. There will be unemployment for a time because a worker's wage is not like the price of wheat, meaning there is some stickiness downward, but not enough to be economically destructive. Furthermore, since Austrians believe that the inflation is the dis-equilibrating factor, reflation will just sow the seeds for the next bust in the economy, so it is better to swallow the bitter pill of temporary unemployment and move forward on a sustainable path after that rather than endure chronic boom-bust cycles caused by the inflation-deflation-reflation-inflation-etc. cycle.

Now that the severity of the 1921 deflation has been shown to be greater than the Great Depression deflation and that a severe deflation forces markets and policymakers to adjust quickly to reassert a sustainable economic path, let’s compare how the market and the government reacted to the 1921 depression and to the Great Depression. In any account that I have seen of the 1921 depression, even though the deflation was the sharpest ever seen, wage rates fell to accomadate the deflation and the depression was over before the government could even do anything. In fact, it is noted that under the Harding administration, the response was to lower taxes and government expenditures and to not hector businesses into keeping wages high, against the “wisdom” of then-Commerce secretary Herbert Hoover. Hoover laid the groundwork for such meddling by having many conferences and committees study how to get out of the depression (the President's Conference on Unemployment being the lead conference). Unfortunately for Hoover (and fortunately for the economy), all his hard work was for naught because the economy had fixed itself too quickly.

But as President, Hoover would be able enact the policies for the Great Depression that he dreamt up for the 1921 depression. Chapters 7-12 of Murray Rothbard’s “America’s Great Depression” detail his numerous interventions to keep nominal (and thus, real) wages high during a sharp deflation as well as prices in general for crops and other products. And the bite of government steadily increased during his term, as reflected on page 347 of the book:

1929 – 14.3% of gross private product, 15.7% of net private product
1930 – 16.4% of gross private product, 18.2% of net private product
1931 – 21.5% of gross private product, 24.3% of net private product
1932 – 24.8% of gross private product, 28.9% of net private product

Lots have said that the Hoover administration was a repudiation of the laissez-faire approach to dealing with an economic downturn, particularly one of the size of the Great Depression. By reading the chapters noted above and looking at the increasing burden of government during the Hoover administration, it is safe to say that laissez-faire wasn’t found wanting because it isn’t anywhere to be found at all. Hoover, “the Great Engineer,” had by his words in 1921 and his actions in his presidency was the antithesis of laissez-faire. In fact, Rexford Tugwell, leading advisor to Franklin Roosevelt, said "The ideas embodied in the New Deal legislation were a compilation of those which had come to maturity under Hoover's aegis... We all of us owed much to Hoover."

But, there are some who might look at the data and say that, yes, Hoover was a proto-New Dealer, but that he didn’t do enough. But by looking at the 1921 depression, we can see that the laissez-faire reaction did not lead to chronically high unemployment, unlike the Great Depression years of 1929-1940, when unemployment hit 24.9% in 1933 and the best unemployment numbers afterwards were at about 14% for 1937 and 1940. If “doing something” is better than “doing nothing,” then the “Hoover-didn’t-do-enough” crowd would have to explain why the “do-nothing” policy of Harding was a success (at least in the relative sense, but also in the absolute sense) and Hoover’s “did-something-but-not-enough” policy was a complete failure, rather than the reverse. I do not see how a completely unrestrained Keynesian prescription could have solved the 1921 depression in substantially less time than the laissez-faire policy.

If President Obama wishes to come out of this recession as quickly as the 1921 depression, he should adopt the policies of Harding and not those of Hoover-Roosevelt. But we know that he won’t because he, like 99.99% of Americans, has no knowledge of the 1921 depression, its wise remedy, and its good results. Unfortunately, he will choose the policies of persistent stagnation/depression that should have been discredited long ago by doing a simple comparison case study.

Dr. Boettke,

This is one of those times I have say, in relation to hoping for a change in direction from Obama or the Congress, don't hold your breath.

There is a new post over at Cafe Hayek today on how misguided the plans coming out of government are; tax rebates for buying new cars, American-made only clause in the bailout bill, government cash for turning in your old car and the Fed involved in the mortgage business.

It should be clear by now that our political leaders have no knowledge or understanding of history, economics or science. To expect them to act wisely, given that ignorance, is to believe in magic.

Man I wish they would've just proposed spending it all on building pyramids out west, to call forth the chariots of the gods. Then we'd learn, boy would we learn.

I know Naomi Klein is very disliked and I do not believe much of what she spouts, but I believe the bail-out fits her framework.

Her general premise that after a catostrophe or disaster, the political leadership can institute radical new policies. The financial crisis left Bush treading water with a 500lb. weight tied to his feet and now has enabled the left install a new system would never be accepted by the general public in quieter times.


Great post! Do you have a blog yourself?

Pete, Obama spent his life reading socialist literature, going to socialist conferences, socializing exclusively with left of center and far left friends, peers, and mentors.

Obama has _nothing_ to go on but this sort of stuff. It's the only thing in his head.

To pretend otherwise is just another case of people wanting to find in Obama whatever is in their own thoughts and dreams.

Thank you, and no blog for me. I'm not the fastest writer and I do not have as much time as I'd like to be able to contribute to ongoing comment threads, let alone be a blog host/contributor. If I was one of those people who could just log a post and stand on the sidelines while other people tear up my argument, then I might blog. But it's hard for me not to comment back, so I'd rather not post on a regular basis because then I'd be regularly rebutting or clarifying. But on posts that I do take the time to write, I will contribute further until they run their course. And I usually only post if I think some major point is being overlooked, because for the most part, there are more than enough commenters in a thread that already ask the same questions or make the same point I would have written about.


You can guest-blog on my blog if you want; you won't have to worry about commenting to replies much, since there aren't very many visitors at present :-/ but it would give you a link for showing people your thoughts.

I encourage you to write that up into a paper! Really, why don't we make that comparison more? I don't know enough about 1920-21 to know if they are comparable, but we should certainly be asking that question.


Klein's premise is not original. It has been applied in detail to American economic history by Robert Higgs in Crisis and Leviathan and other works (worth reading - see - the difference is Higgs unearths cases disaster socialism rather than Klein's claims of disaster capitalism.


That's very kind, and I might take you up on that. As for a paper, I really don't have the time or resources for that. I'm more of a layperson who's well conditioned in the economic way of thinking, but far from professional grade.

I would hope that an economic historian or liberty-focused historian would do the leg work, if they thought there really was a comparison to be made (Robert Higgs and Burton Folsom come to mind). Higgs has already done great work on the Depression, so it would seem that he is specially positioned to jump from "The Depression-era policies didn't work" to "Is there anything that did work?" And since the 1921 depression was a post-Fed, deeply deflationary period like the Great Depression, we should be asking about the similarities and differences. It could be that they were two entirely different phenomena, but the research has to be done.

Dave P. wrote: "And, didn't Pete L. say on this blog several weeks back that things are much better than everyone has made them out to be?"

That was in October. He said basically: "Nothing will change for most people as a result of the financial crisis." And I think the position I took in our little skirmish back then has been vindicated. I would just like to have that noted for the record. :) And unfortunately, I have a feeling my position will continue to be vindicated more and more as time passes. As I said back then, do you really think that the Obama administration will engage in *less* intervention? The interventions of the past year and the ones coming up this year will inevitably have serious and long-term repercussions for the economy.

I hate to tell you this, but Michigan was having problems long before the downturn started. Our problems aren't primarily cyclical, they're structural; both economically and politically. All I can say is: it's about time all ya'll caught up with us. It was getting lonely down at the bottom.

I would imagine that Prof. Prychitko could comment extensively on this as well.

That's right, Jeff. Misery loves company.

This seems an odd argument to make. I'm going to guess that whatever remedy you would prefer would work in the next 6 months - does that mean that if we changed course today, and it didn't work for 6 months, you'd be calling for us to try something else? Far better, I think, to point out the flaws in the current system and the advantages of your preferred solution without erecting deadlines that no system could likely meet.

Actually the first interventions from the government date from before the big meltdown, in 2007. Interventions such as lowering the Federal Funds Rate, programs like FHASecure and HOPE NOW. (See Economic Report of the President 2008, chapter 2). This ain't working, indeed.

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