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12.11.2003, 18:41

Economics and Propaganda / must read!

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http://www.mises.org/fullstory.asp?control=1367
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Economics and Propaganda
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By Morgan Reynolds

[Posted November 12, 2003]

This talk was delivered at the
Ludwig von Mises Institute's 2003 Supporters Summit, October 24, 2003.
Listen to an MP3 of his talk here.

<img alt src="http://www.mises.org/images3/sheep.gif" align="right" border="0" width="245" height="184">Yes,
it's true, I recently worked in a Bush administration for some 16 months as
chief economist in the United States Department of Labor. I took a walk on the
dark side, you might say, eager to sip from the cup of power. How could I do
that? Let's just chalk it up to frustration over governmental policy,
although it may have been more sinister. As Samuel Johnson observed in 1773
about human weakness:"Wickedness is always easier than virtue; for it
takes the shortcut to everything." 

Condemn me if you must, yet I saw
economic policy and propaganda being made in close relief. My conclusion? The
low opinion I held of government before I went to Washington was not elevated
by participation in it. I saw a complete disconnect between reality—the
economics of the business slump—politics, and proper policy. I repeat: there
was a complete and total disconnect between economics and politics.

The more cynical of you here today
will be nonplused by my observation. After all, FDR ridiculed the sign on his
Treasury Secretary Henry Morgenthau's desk,"Does It Contribute to
Recovery," with the rejoinder,"This is politics." The
devious Mr. Roosevelt meant that the New Deal"was not about economic
recovery, but about displacing business as the nation's predominant elite,"
according to Wall Street Journal columnist Robert L. Bartley (October
20, 2003). On the other hand, the more earnest among you realize that the
continuing disconnect between intervention and our scientific knowledge of
recessions is a disaster because"The main issues of present-day politics
are essentially economic," as Mises observed.

Let us put this latest recession in
context. (If we need definitions, a recession means a widespread, sustained
decline in business output and employment while politics is the art of gaining,
retaining and wielding governmental force in our representative democracy).
When the Bush administration took office in January, 2001, a downturn was
already underway. The president and his coterie said so and blamed Clinton but
hushed up when accused of"talking down the economy." 

That was a mistake—a dose of truth
about the economy along the lines of the early '80s Reagan model would have
worked better—but they learned an early lesson about psychology and
confidence in Washington, D.C. Politics is all about (the) confidence (game)
and prestige in the nation's capital. I was immediately struck by how Bush
appointees greeted economic news with pompoms waving. Of course,"The
people are most credulous when they are most happy," as economist Walter
Bagehot (1826-77) put it.

Politicos and mainstream economists
believe our fragile"capitalist" economy depends critically on
sustaining"confidence." This month Martin Feldstein, once President
Reagan's chief economic adviser, wrote in The Wall Street Journal (October
13, 2003):"Because confidence is so important for spending decisions,
the declining number of jobs until September created the risk of a
self-fulfilling prophecy of low demand and weaker employment. That's why the
recent upturn in employment is particularly good news."  Wall Street
or Washington, D.C., these economists are all Keynesians now—they believe
that spending and keeping it pumped up are the keys to prosperity. They know a
lot that just ain't so, but they know enough is amiss in our"fundamentally
sound economy" to have just named a"strong crisis manager,"
Timothy F. Geithner, as president of the New York Federal Reserve Bank.

Also, since September 11, 2001, a
new war (or is it a portfolio of wars?) replaced the late, lamented end of the
cold war and pushed the recession into a distant second place. So the public
has cut the administration plenty of slack, though it may be exhausted come
November 2004.

FDR did not invent"countercyclical"
policy to"fix" a business slump. No, for that we can thank a
Republican president, Herbert Hoover. The last so-called free-market recession
was sharp but brief in 1920-1. The Harding administration followed federal
tradition and stood by and did nothing because"everything was too
high" after the world war and depression was something that"ran its
course, like measles."  There was political pressure to intervene,
but the favored theory of earlier business crises carried the day one last
time:"Businessmen got themselves into this mess, so let them get
themselves out of it."

One of the activists urging
intervention in 1921 was the Harding administration's"progressive"
Secretary of Commerce, Herbert Hoover. When the roaring '20s ended with the
stock market crash of October, 1929, the"Great Engineer" was in a
much better position to administer his remedies. The"forward-looking"
Hoover would take on the business cycle and stomp it flat with all the
resources of government. The Wonder Boy recalled,"No President before
had ever believed there was a governmental responsibility in such cases...
therefore, we had to pioneer a new field" (Rothbard, p. 186).

The parallels between the Hoover and
current Bush-Greenspan policies are remarkable:

<ul>
~ Hoover inflated credit and bullied banks into
inflating.
~ Signed the Agricultural Marketing Act to subsidize
farming.
~ Pursued a"high-wage" policy, including
corporate pledges to avoid cuts in wage rates and signed the
Norris-LaGuardia Anti-injunction Act to empower labor unions.
~ Cut taxes heavily.
~ Pushed federal expenditures up by 42 percent in one
year (!), driving the burden of total government up from 16.4 percent in
1930 to 21.5 percent of the gross private product.
~ Deliberately ran a huge deficit.
~ Started more major public works in four years than
in the previous thirty.
~ Attacked the stock exchanges and urged the public
to"invest on the basis of the future of the United States"
rather than judging stocks according to earnings.
~ Signed the punitive Smoot-Hawley Tariff Act.
~ Lost the confidence of foreigners in the dollar,
who began to pull out their gold.</li>
</ul>

 

After four years, the result of Hoover's"frenzied
interventionism," was there for all to see: utter ruin, a ruin"unprecedented
in length and intensity" (Rothbard, p. 295). At least he didn't resort to
a shooting war. And what did our leaders in Washington, DC, learn? 
Hoover bragged:"We might have done nothing. That would have been utter
ruin. Instead we met the situation with proposals to private business and to
Congress of the most gigantic program of economic defense and counterattack
ever involved in the history of the Republic."  Rexford Tugwell, one
of FDR's"impudent nobodies," finally conceded in an interview forty
years after the event (1974): 'We didn't admit it at the time, but practically
the whole New Deal was extrapolated from programs that Hoover had started." 

We know how counterproductive these interventions are.
"Whenever government intervenes in the market, it aggravates rather than
settles the problems it has set out to solve," remarks Murray Rothbard
(p. 204)."This is a general economic law of government intervention." 
Rothbard concludes his book on America's Great Depression: "Bravely
[Hoover] used every modern economic 'tool,' every device of progressive and 'enlightened'
economics, every facet of government planning, to combat the depression. For
the first time, laissez-faire was boldly thrown overboard and every
governmental weapon thrown into the breach." 

At least Hoover had to refute a then-respectable,
rival laissez-faire theory of the"reactionary liquidationists." 
Today, reputable economists on Wall Street and inside the beltway do not
advocate laissez-faire as the right corrective, though their economic
understanding is hardly more respectable than that of the"monetary
cranks."

What they know in Washington is"smart politics." 
Policies consist of happy talk, reassurance that all is well, it's all under
government control, and extravagant use of the Hoover-FDR tools."All
governments are firmly committed to the policy of low interest rates, credit
expansion, and inflation," wrote Ludwig von Mises."When the
unavoidable aftermath of these short-term policies appears, they know only of
one remedy—to go on in inflationary ventures."  But explaining
this tragic situation goes beyond the direct policymakers. Two additional
groups outside of Washington, D.C., deserve mention too: economists and the
public.

First, economists have treated monetary problems in a
superficial way, failing to integrate money into their theory of markets. They
naively embraced the neutral theory of money, failing to appreciate how
monetary manipulation necessarily distorts markets and causes booms followed
by corrective busts.

Hence, Benjamin Strong, governor of the New York
Federal Reserve Bank in the 1920s, could say ignorantly and without guilt,
"I will give a little shot of whiskey to the Stock Market," just as
our revered Dr. Alan Greenspan ("Sureprintsalot") or Larry Kudlow
can today. No misunderstanding in economic science has done more harm than the
role of money and credit in business boom and bust.

Second, the myopic public disposition for lower
interest rates by allegedly costless credit expansion creates an irresistible
temptation for politicians, bureaucrats and economists to comply. H.L.
Mencken's theory of democracy surely applies all-too-well here: the public
gets what it wants, good and hard.   

______________________

Morgan Reynolds is an independent
economist in Arkansas. econrn@cox-internet.com.
You can read his AEN
interview now. 
You may listen to an MP3 of his talk here.