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The Government’s Policies And Our Economic Crisis

Engineers review past evidence and build from there; they try not to reinvent the wheel. As mentioned previously, there is ample historical evidence that indicates recessions/depressions — although they can be severe — typically last no longer than about a year, provided the government does not implement anti-business legislation and regulations.

Image: Dali’s “The Average Bureaucrat”

This last statement above is considered by some to be controversial, but to the best of my knowledge it really isn’t: the data are there for everyone to review. The doubters point to the Great Depression (the last one, not this one) and claim that President Roosevelt helped guide the country through the extraordinarily long 10-year downturn. The evidence, however, says that President Roosevelt’s “New Deal” was actually the villain in the story, because his anti-business policies helped extend what would have been a typical downturn of a year or so into ten long years of economic agony.

For an example of this thesis, see “FDR’s policies prolonged Depression by 7 years, UCLA economists calculate,” by Meg Sullivan, 10 Aug 2004. Excerpt: “The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes,” Cole said. “Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”

So what’s the prognosis? Based on the historical record — and also on analysis that strongly indicates that governmental attempts to manage the economy are destined to be highly ineffective or even counterproductive — we can expect a lousy economy (high unemployment, sluggish or no growth, an erratic stock market) until the Obama administration reverses its anti-business policies, or until we have a new pro-business administration in 2012, whichever comes first.

The good news is that, once new policies are in place, the economy can recover quickly. If we persist with the present policies, however, be prepared for many more years of economic turmoil.

-Ed Walker

 

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The Government’s Policies And Our Economic Crisis (Part 1)

An important engineering principle is empirical validation, or proving that something is correct by test and measurement. Theories are great, but a theory isn’t worth two cents if it doesn’t match the real world.

Let’s see how the principle of empirical validation affects an engineering team’s deliberations, as they investigate the root cause of economic downturns.

Charlie (team leader): The purpose of today’s meeting is to review the results of our research on the causes of economic meltdowns in the United States. Nigel, we’ll start with you.

Nigel: In reviewing over a dozen recessions and depressions in the U.S. economy that occurred during the last hundred years, I found that most of them were normal business cycles that lasted about one year on average. The Great Depression that started in 1929 was an exception, because it persisted for several years.

Charlie: Why was the Great Depression so much longer than the other downturns?

Nigel: By doing a sensitivity analysis of major variables, I found that the length of the downturns was strongly correlated with the degree of governmental involvement in the economy. For example, a severe depression occurred in 1920 during which the government did very little, yet the depression only lasted about eighteen months. By comparison, the government intervened massively during the ten years of the Great Depression.

Charlie: Okay, but we all know that correlation is not proof of causation; maybe the government was coincidentally involved when the economy got worse. Any other thoughts? Marcy?

Marcy: Based on Nigel’s results I searched for a prototypical experiment that would support or refute his hypothesis. Fortunately, such an experiment was conducted over several decades wherein massive governmental control of an economy was performed. The experiment was carried out by the Soviet Union during the years 1922 to 1991.

Charlie: Good; there’s nothing better than empirical evidence. And the results?

Marcy: Economic performance was persistently poor. One could easily conclude that the experiment was a striking failure.

Charlie: Could the failure be explained by some variables other than the government’s involvement?

Marcy: In my view, no. The Soviet citizens were of high intelligence, and despite the single-minded — even brutal —  management of the economy by the government, the results were dismal. In fact, considering the intensity and duration of the experiment, had it been a success the Soviet Union today would likely be the world’s dominant economic superpower.

Sam: Some economists today are saying the opposite of what Nigel and Marcy report. They’re saying that the Great Depression lasted so long because the government didn’t intervene enough; that the government should have spent even more money than it did.

Charlie: Do those economists have any empirical data to support their claims?

Sam: Um, well, they cite the fact that the depression ended following World War Two, during which the government spent a lot more money.

Charlie: A correlation, yes, but not necessarily a cause. How do they explain all of the instances where the government did little, and yet, as Nigel found, the economy quickly recovered? How do they explain the fact that the economy worsened when government spending was massively increased prior to the world war? How do they discount the very convincing experiment performed by the Soviet Union? It seems that their theory does not match the empirical evidence.

Sam: Um, well, I guess I don’t have the answer to that.

Charlie: Okay, if those economists have no empirical data to back up their theory, then we should discount it. It appears then that the best hypothesis for the root cause of extended economic meltdowns is governmental interference. All agreed? Good; meeting adjourned.

Next Post:

A Trip To The Government Store

-Ed Walker

 

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