No, World War 2 Didn't End The Depression

There's a common myth out there that goes, "the Great Depression was finally ended by World War 2". It has some slight variations, such as "the Great Depression lasted 15 years" or even "the market didn't recover until govt spending stopped".

All of these are complete misunderstandings of history if not outright lies.

While there may not be as accepted a definition for depression as for recession, there's a good bit of consensus along the lines of these two criteria for an economic depression:

1. real GDP decline beyond 10%
2. period of decline lasting more than three years

Year	2005 Real GDP
1929	977,000
1930	892,800
1931	834,900
1932	725,800
1933	716,400
1934	794,400

Real GDP declined every year from 1929 through 1933. By 1934, the economy had been pushed back into growth again. There you have it: the end of the Great Depression. It was 1929-1933, far short of 15 years. One can not be in a depression and have real GDP growth because a depression is defined by GDP decline. One can note other factors peculiar to depression, such as deflation. But a depression only exists while there is a declining economy as measured by real GDP. One can debate what ended the Great Depression, whether it was a combination of monetary and fiscal policy, deficit spending alone, monetary policy alone, or some other set of factors. But there is no reasonable debate that the Great Depression ended years before World War 2 when the economy returned to growth.

Some effects of the Great Depression -- though mostly diminished -- did linger somewhat until World War 2. That much is true. Although unemployment had been drastically reduced before the war, it was still high until the war. Yet while it took quite a while to achieve full recovery, it did not take all that long to achieve renewed growth. Unemployment peaked in 1933. By 1936, the New Deal had kicked the economy into rolling again and -- though unemployment was still high -- the main economic indicators were back in gear. In early 1937, industrial production reached a level above that of 1929. But then pressure picked up to balance the budget, and FDR and Congress cut back spending. Although unemployment had been dramatically reduced from its peak, it was still too high for the economy to be self-sustaining. With the fiscal and monetary tightening of 1937, production dropped and unemployment went back up. Seeing the mistake, they stoked spending back up in 1938 and the recovery resumed.

Unemployment remained problematic throughout the 1930s and into the start of the 1940s. But even that measure declined every year that the New Deal was fully in force. The recession of 1937-1938 showed the effect of govt cutbacks pushed by Republicans overzealous to balance the budget at the wrong time. The cuts interrupted the full weight of the New Deal to push the economy forward. The unemployment rate continued to drop right up until the start of the war. We were already growing towards full recovery before the war. Admittedly, the massive increase of spending for the war -- far beyond that of the New Deal -- did push unemployment to very low levels far more rapidly than we would have achieved without the focus of a war effort. But the war boom runs quite the opposite of a case against spending. The extreme, focused spending for the war effort rocketed our economy higher. It was a finale to the New Deal, like a burst of fireworks at the end of a good 4th of July show. It couldn't be further from the truth to say that "the market didn't recover until govt spending stopped". When govt cut spending while the economy was still weak, the economy suffered. Except for the disastrous cut-backs that brought us the recession of 1937-1938, government didn't stop spending until the markets had recovered.

Cure For Economic Blindness: Why The Wealthy Should Want To Be Taxed

"No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable." - Adam Smith

To see poverty as good for the economy requires blindness to the effect on commerce if those starving citizens were to have even a few dollars to spend on food. If those dollars would otherwise have been idle, then ignoring the benefit of putting that money to use embodies the economic equivalent of sticking our fingers in our ears and screaming "Nyah, nyah, nyah, I don't hear you!" Rich and poor alike, all benefit from the poor having money to spend. How can anyone miss the benefit to the wealthy of more customers for their business? If it must come by filtering some larger portion from what's headed into the deep pockets of the wealthy, why worry for their pockets as long as they're still being filled? With thriving commerce, wealth grows. Expansion requires sufficient circulating money. Money sitting idly in stockpiles doesn't increase wealth but merely stores it. If the wealthy have smaller amounts after taxes to add to their stockpiles in the short term -- as long as they're left their assets and more than enough income to cover costs -- they'll gain even more by that money being put to use to generate ever more money down the road. After all, we're not talking about removing their accumulated assets that they use to reap money from the system. We're just talking about skimming a portion of what they'd be adding to the hoard (via higher marginal upper-bracket taxes) so that we can put it to active use.

Should we just cut checks to the poor then? No, there are far more beneficial ways to put the money to active use. Bring back the WPA to build new roads, bridges, and parks. Perhaps invest in a few additional backhoes and such -- especially for the road and bridge work. But for the parks, skip as much of the modern machinery as possible and issue the workers a bunch of shovels, hammers & nails, and materials and build 'em the old-fashioned way. We have a shortage of decent paychecks. We can use investments in infrastructure to fix that. And when the economy picks up and unemployment lowers, we wind down projects to ordinary levels and gradually release those workers back into the ordinary system. The infrastructure improvements will remain and keep helping business. It's a win for everyone.

Reaganomics Author Sees The Light: Bruce Bartlett's Call For Higher Taxes On The Wealthy

That's not just anybody. Bruce Bartlett called for tax increases on the wealthy. Bruce Bartlett! Bruce Ron-Paul-Staffer Bartlett. Bruce Supply-Side-Author Bartlett. The man wrote one of the first books advocating Reaganomics. Advisor to President Reagan. Senior fellow at the Heritage Foundation. Treasury official under President Bush I. Worked at the Cato Institute. We're talking about a major figure in tax reduction efforts in the 80s and 90s, responsible for convincing many to support lower taxes.

But here we are now with the lowest taxes in 60 years. We've got lax demand. The supply-side approach clearly failed for the past decade that we've had tax cuts. As Mr. Bartlett put it in answer to the question "Are Taxes in the U.S. High or Low?", "The truth of the matter is that federal taxes in the United States are very low. There is no reason to believe that reducing them further will do anything to raise growth or reduce unemployment." With tax rates already low and the economy not doing as well as it was under higher rates, there's no reason to think it'll do any better with even lower tax rates.

But now he's gone even further and, like Warren Buffett, Mr. Bartlett called for tax increases on the wealthy. That's major. That's fresh facing of reality from one of those who sold us the lower taxes idea in the first place. Even Bruce Bartlett -- an architect of Reaganomics -- has apparently seen the light. Given enough such calls for rationality, maybe we can get past the "starve the beast" insanity and start doing what needs to be done. All those folks who bought Grover Norquist's bill of goods can take Mr. Bartlett's realization as a wake-up call. It's not too late to get a grip on our situation, fix up our ridiculously low tax rates, rebuild our infrastructure, and get the American economy back in gear.

The Wealthy Don't Create Jobs; Good Jobs Create The Wealthy

What came first, the wealthy or the building blocks of wealth? This is no idle "chicken or the egg" question. Major political players base real policies with serious impact on their own answer to the question. What if most of them are getting it wrong? What if getting it wrong could wreck the system and ransack wealth?

To get the answer, the GOP base are obviously looking at wealthy investors. Our tax-cutting crowd clearly thinks they're the starting point. They say that getting more money to them will mean more jobs. The idea runs that investors bet their capital on starting or expanding a company that can then hire folks, thus jobs. This seems to pass for unquestionable truth among the "starve the beast" set. They figure that the more money the wealthy have the more they'll put into creating jobs. Even leaving aside the question of whether they'd likely choose to invest their money elsewhere, the anti-tax set need to reconsider two questions: 1) Is that usually how jobs are made? and 2) Where'd the capital come from in the first place? These two questions are necessarily linked. You can't explain where the capital came from without considering ways to make jobs without capital.

So where'd the first capital come from? Unless you think it was somehow handed over to man by divine intervention -- capital raining down from heaven or appearing from nothing -- it had to come from work. We can set aside the factor of inherited wealth, since somebody had to collect it in order to pass it down to lucky heirs. That first capital accumulating work -- whatever it was -- was collecting and/or making something that could be sold or traded. In short, it was a job. It may not have been a modern job, but close enough for our question. Somebody did some work. It may have been all on his own. Or the work may have been getting others to do things for him. But whatever it was, somebody did some work that produced a surplus. Perhaps that surplus was then -- directly or through heirs -- reinvested by getting other folks to do more work to produce more surplus. At root, the workers involved still created the surplus. The worker-created surplus was then used to spur more work to create more surplus. The job came first. The assets produced were just a product of the job that lets that job contribute to even more jobs. Get together a lot of surplus produced from a lot of jobs, and you've got wealth. Even if you then use that wealth to spur more work that creates more wealth, the wealth still didn't create itself but rather came as the sum effect of the work ... the jobs.

"Labour was the first price, the original purchase - money that was paid for all things. It was not by gold or by silver, but by labour, that all wealth of the world was originally purchased." -- Adam Smith 

Ultimately, the idea that wealth comes from somebody investing in business is a myth. If I build a factory and hire 50 people to make widgets, I'm not going to get any return on my investment unless there are people who can be interested in widgets and have enough money to spend on my widgets. If my widgets aren't essentials, those people will only have enough money to spend if they're making a surplus beyond the cost of living. Even if the widgets are essential, folks who don't have an income aren't going to be buying many widgets. If I don't have enough potential customers to break even, I'm not going to be employing those 50 widget makers for long. But if I have enough customers to make a profit, I'll keep employing them. And if I have too many customers for them to keep up, I'll hire more. Then who really created the wealth I reap from my factory? Sure, I made the factory investment that allowed me to sell widgets. But without the customers, that investment would have just been a foolish building that couldn't support long term jobs. It's the customers who really make the difference.

Jobs further wealth in two ways. Obviously there's the surplus collected by the initial business owner. But there's also the circulation of resources wherein the worker's share of surplus is spent at other businesses. The worker's paycheck allows him to be a customer contributing to other jobs that yield other surpluses for other business owners. The paychecks from those other jobs may in turn be spent at yet further businesses or even end up winding back to the initial business. Jobs have no choice but to create wealth, even when they fail to do so directly for a specific employer. Unless they're inefficient jobs, they'll create a surplus. And even if they're inefficient jobs they'll mean money for workers to spend at efficient businesses yielding surplus. The job just can't hold itself back from contributing to the creation of wealth. Wealth, on the other hand, can sit idle. It can be stored in some valuable thing that'll sit collecting dust. Sure, wealth may be further invested in jobs and help yield more wealth. But it can also hang on the sidelines for years or even centuries and do nothing productive.

Clearly it's the job that creates the wealth. We can use that answer to figure out what to do to get our economy rolling again. We want wealth and jobs. We need to push the one that creates the other. If we change our tax structure to get more money to the wealthy, we're just tinkering with accelerating redistribution of income to the rich who may just sit on it. That risks having it grind to a halt if too much money is removed from the system to just sit idly in the stockpiles of the wealthy. I'm all for building wealth, but not at the cost of having all the money locked down to the point where it no longer flows from business to business through employees and customers. Since wealth ultimately comes from jobs, those of us who want both more jobs and more wealth need to focus on jobs in order to get both. With more wealth, there doesn't necessarily have to be more jobs. With more jobs, there will be more wealth.

Now we've got a situation where there isn't enough demand for products and services to spur widespread hiring. Too many people don't have enough money to spend. And unemployment causes much of that current lack. Private industry can't fix the situation because it won't make any sense for them to hire until there's demand for products and services. There's only one credible way out: govt must step in to fill the void. Govt must stop hiding their heads in the sand and pretending that we can count on the wealthy to hire out of the goodness of their hearts -- without enough demand causing it to make sense as an investment -- if we just help a bit more money stick in their accounts. Govt must stop laying off workers and start hiring so there will be more paychecks to spend on goods and services. And to do that, govt is going to have to start leveling with us and facing that we'll have to rack up a future bill in order to make things work here and now ... and for the future.

What Can We Really Learn From Estonia?

S&P Downgrade of U.S. and Upgrade of Estonia Inspires Misguided Admiration

In the wake of a few recent S&P decisions, fans of budget cuts are practically waving the Estonian flag. They point to Estonia's recent austerity measures and it's Q1 2011 growth as some sort of vindication. "Look, look ... we've got a positive example!" Ah, but if only it were that simple. There's more to Estonia's austerity and growth than meets the eye of the starve the beast crowd who would have us emulate their example. Estonia chose "internal devaluation," including wage cuts. So keep in mind what following the Estonian script would mean: big wage-cuts and a lower standard of living. Who really wants to sign up for that?

But more importantly, one should take a closer look at the impact on the Estonian economy before declaring them a model that everyone should copy. I'd swallow some short-term pain if it made the overall situation better for my country in the long run. But in the case of Estonia, the trouble didn't entirely end with the turn-around from the -13.9% plummeting GDP in 2009 to the 1.8% growth in 2010 and varying more-or-less positive growth forecasts for their future. While Estonia has returned to GDP growth, they're doing so on the backs of their neighbors. The one bright-spot in their economy is exports, which were up 43% from a year earlier in June. (Although June's figures showed a drop from the previous month.) Their unemployment remains high. Their retail sales and non-govt construction are both still down significantly. The domestic market isn't looking so good there. But in Sweden, Russia, and Finland demand is rising. All three of Estonia's biggest foreign markets saw significantly higher GDP growth in 2010 than Estonia. The strong growth continues in Sweden in particular ... plenty to explain why Estonian producers have still had a market in the face of lower internal demand. Having growing trading partners is great. But in the long run it's a poor substitute for steady internal demand. Estonia's internal devaluation has made them even more dependent on their neighbors. Should the growth in Sweden, Finland, and Russia cease or even slow down significantly, Estonia could find itself in deep trouble with no fuel for its economy. That sort of dependence on -- and vulnerability to -- foreign trade partners has lots of drawbacks. Sacrificing domestic demand to gain foreign demand means a weakened domestic economy.

So what can we really learn from Estonia? Mainly that it's good to have trading partners who have money to spend on what you're making. That's not a lever we (or anyone else) can control. It's up to our trading partners to keep their economies moving. Aside from maybe lending the occasional wrench, we can only look to get our own engine revving again. But we can also learn that worrying too much about increasing our exports can cause a nation to become export dependent -- at the mercy of the whims of foreign markets. While that may be nice when those markets are thriving, do we really want to count on them completely and make ourselves export dependent? Wouldn't you rather we fixed our domestic shortage of demand instead of sacrificing what's left of it in the vague hope for an uncertain boost to exports?

Tax Me!

I want patent protections for my business to keep an advantage from its inventions. Patent registration and enforcement costs money. Tax me!

I want my company to be able to hire qualified workers. That means education can't put students in such debt that education isn't a worthwhile investment. Subsidizing education costs money. Tax me!

I want quality schools for my business to have competent workers. That costs money. Tax me!

I want quality schools for MY CHILDREN to be able to compete in the global market. That costs money. Tax me!

I want safe foods. Maybe most farmers mean well, but agribusiness has demonstrated time and again that it does not always do a good enough job of safeguarding food without govt oversight. That costs money. Tax me!

I want safe cars. Reputation helps motivate good engineering, but not enough. Govt standards have made a huge difference. Developing and enforcing good standards costs money. Tax me!

I want good roads on which I don't have to pay per trip. Private industry won't give me that. Roads cost money. Tax me!

The same goes for bridges and tunnels. Tax me!

I want to be able to breath clean air. Developing and enforcing air pollution controls costs money. Tax me!

I want to be able to drink clean water. Developing and enforcing air pollution controls costs money. Tax me!

I want at least basic flood control measures built around rivers. Private industry has no profit motive to give me that. Tax me!

I want police protection, both for my company's assets and my own personal assets. Tax me!

I want military protection so that I have no worry that some despotism beyond the reach of my vote might try to mess with us. Tax me!

I want military protection so that pirates -- who are quite active in parts of the world these days -- will expect that attacking our ships would mean that massive naval force would be breathing down their necks. I want them to expect that attacking American citizens in any waters anywhere would soon result in Navy Seals jumping up out of the water into their boats -- after the Seals finished snacking on great white sharks -- to teach 'em a lesson about picking on innocent folks. Training Seals costs money. Tax me!

I want veterans who risked their life & limb to defend my country to be well care for, medically and otherwise. Tax me!

I want to be able to say my govt was largely responsible for finding the cure(s) for cancer. Tax me!

I want to be able to say my govt was largely responsible for finding the cure for AIDS. Tax me!

I want to be able to say my govt was largely responsible for finding the cure for anything else horrible. Tax me!

I want there to be no hunger from poverty in my nation. Private charities haven't managed to cover that alone. And private industry isn't either. Tax me!

I want there to be nobody in my nation who can't find shelter when they need it. It doesn't have to be nice, but it has to keep 'em dry and not too cold. Tax me!

I don't want monopolies eliminating all competition, driving up prices, and reducing my product/service choices. I particularly don't want my company to have no chance to compete on the quality of our output just because some other company has 99.9% of the market. Anti-trust efforts cost money. Tax me!

I don't want various industries dumping dangerous chemicals into my drinking water, crop land, playgrounds, parks, etc. And by the way, without govt interference, lots of industries do that. Tax me!

I want violent crimes to be investigated and the criminals to be prosecuted. Tax me!

I want the innocent to be protected from unreasonable prosecution, even if they don't have the money to defend themselves. Tax me!

I want diplomats on the task of making sure American companies can compete fairly abroad. Tax me!

I want consular services making sure that when I travel abroad -- whether for business or pleasure -- I can expect my govt to be looking out for my interests even there. Tax me!

When I take a domestic flight, I want to be able to expect the air traffic to be well coordinated. Tax me!

I want investment in research and development that will grow American business. Tax me!

I want to be able to say my govt recently built things as impressive as the Hoover Dam, the federal highway system, and all those other great things of the past. No -- strike that -- I want to be able to say we built and did things far better than anything done before. Tax me!

The Keynesian Home-owner vs the Austrian School Home-owner

The Austrian School of economics would have us leave our hands off the economy. Get govt out of the picture, they say, and everything will tend to itself better. Let's explore what that would mean from the perspective of a home-owner's lawn.

Under laissez-fair lawn care, no amendments could be applied to the lawn, no fertilizer and not even water. Should there be a drought, the grass will be left to brown. There would certainly be some benefit to this in areas with a water supply shortage, but it could lead to soil erosion if the grass is not replaced quickly enough. If the Austrian School home-owner had pets that left "presents" on the lawn, that raw manure would be left to sit and create patches of dead grass. Through natural secondary succession, soon most of the grass will be replaced by shrubs and trees. Eventually it will become a forest instead of a lawn. While that's great for harvesting timber and for woodland habitat, it's not much good for having space for kids to play in the grass, for a place to set up your grill for the 4th of July (as overhanging trees would be dangerous), or for much else of what most of us want to have and do right outside our houses.

The Keynesian neighbor, on the other hand, does not share the Austrian's faith that a hands off approach is always best no matter what's going on with the lawn. Instead, the Keynesian will consider whether there's some way to help the lawn stay a nice, green area in which to grill, read, work, or play. Depending on his experience -- or means -- the Keynesian will start with some test to determine the health of the lawn. It might be just looking at whether the grass is green and the soil is dark. Or it might involve testing pH and nitrogen levels. When the soil lacks nutrients, opinions will vary among such home-owners whether it is best to use organic fertilizer or manufactured amendments. But most will have studied the options at least enough to know to avoid raw manure, as that will tend to burn the grass. Some will find that all they need to do is spread some extra seed -- perhaps drought resistant varieties -- where the grass is looking a little thin. Some will worry about every little weed, while others will be content to enjoy the dandelion blooms as long as the lawn is more grass than weed. While the occasional such home-owner will experience setbacks, extremely few end up doing their lawn more harm than good. Most will end up with a lush, enjoyable, robust lawn on which their kids may play and they may eat their hot-dogs and hamburgers in satisfaction. Some will even improve their landscape enough to raise the market value of their house.

"But wait,", you might say, "what's this have to do with economics? After all the economy isn't just a lawn." Yes, and there have been metaphors that shot and missed at capturing economic truth. But consider: life lacks perfection. If the base, natural state of humanity were a perfectly functioning economy without government, governments would never have been able to compete with the raw anarchy before that first tiny government. That first bumbling govt meant the group that formed it obviously out-competed neighboring anarchism. Govt is our means to seek the greener economy in which we wish to see our children play. We develop rules that help us succeed.

Beyond that, aside from its competitive ability, govt is our means to push our economy to look the way we want. Without govt, what happens? Some industries left on their own will do the right thing because they're run by someone with a sound moral compass. Others are run by those who care only about wealth. And these -- absent govt -- will do things like Sinclair described in The Jungle and others have recorded elsewhere of the dark days of unfettered industry. Absent child-labor laws, there would again be five year old girls working 12+ hour days in sweat shops. Absent work-safety laws, those same kids would once again very rarely make it to adulthood without being mangled in a workplace accident. Absent food and drug regulation, we would once again have reason to expect not just the occasional problem but rather frequent death and debilitation from our food and the snake-oil that would pass for medicine. These are the dark and dangerous plants that would invade our lawn if it were not for govt regulation and oversight. Were the Austrian School to fully succeed in their nightmarish dream of entirely unfettered markets, we would likely soon see our economic lawn overwhelmed by poison ivy and thorny trees. If we're to have a place to grill safely and for our children to play on fields of grass, we need to tend our lawns.

And as a bonus, it may well increase our property value.