The Steady Hand

Government’s principal genius is crushing competition to the prevailing idea. Hmmm, doesn’t that sound something like what liberals say about corporate corruption?

In some instances this tendency is not all that bad. Entrepreneurial competition in the fighting of a war can lead to hopeless muddle.

On the other hand entrepreneurial competition in the vast reaches of the civilian economy is what makes it possible for the really good idea, whether it comes from a reliable well of good ideas or from some lone wolf who's never had another good idea in his life, to make a difference that benefits us all. Bob Higgs, writing that we would do better doing "nothing" in the Christian Science Monitor, describes how this senile steadyness of government has caused us great harm in the past.

The phenomenon he describes is not to say that the private economy is necessarily filled with people smarter than those in government. That may not be the case at all. The problem is that government can insist on and enforce adherance to policies made by the brilliant in error, while in the marketplace those policies collapse so they can be replaced by the good ideas of even the dumbest people on Earth. Government bad policies like the New Deal persist to cause great harm because they are the fruit of the finest minds and only some insolent boob could think a better idea could come from dull-witted civilians.

OK, count me as an isolent boob.

The reason capitalism works, and has made America into the country of which the rest of the world remains jealous to this day is, even though in any given room of a thousand people any of the president's advisors is likely to be the smartest one, on any given topic the best idea to come from the whole room in a quest for a good idea will probably not come from that advisor. Minimally manipulated market capitalism can shake that good idea to the top. It is a brilliantly democratic process.

People who hate the marketplace love to say that it is too corrupt for this shaking-up to occur, that corporate corruption crushes good ideas and leads to economic calamity. That is often true. However, their cure to the corruption is to substitute exactly the same sort of corruption under some noble banner and even more restrictive government genius control.

There! You're cured. Feel better or else.

This month we celebrate the 150th anniversary of Charles Darwin's Origin of Species. That wondrous tome described a process by which nature's dumb accidents could, step by step and marginal advantage by marginal advantage "design" all of the life forms in our world. This is a process very like market economics.

Oh, well, President Obama and congressional Democrats, being smarter than God, are embracing economic "Intelligent Design". Gee, Toto, I think we're back in Kansas again.

Posted by Lee Emmerich Jamison at February 9, 2009 9:58 AM
Comment #275267

Lee if the marketplace worked so well and had all the answers why are we in this mess to begin with?
Certainly the deregulation and lax enforcement spurred by the gods of the marketplace,the corporations, financing of elections this past 30 years has shown us that to much of a good thing does not equal a good thing. Have we not learned anything from this meltdown? When we have corporate interference in government which leads to government interference in the market how can we call it the “free market” and expect it to correct itself? What we are suffering Lee, which Mr.Higgs seems to not have noticed, is another speculative frenzy ran amok. This is not a normal business cycle recession but another unregulated speculative bubble that has imploded, as they all do, and we are left with picking up the pieces or suffering the ride to the bottom caused by the unbridled speculation. Much like the speculation that lead to the great depression.

Would you not think Lee that a level playing field would lead to a truer free market than the marketplace perpetrated upon us the past 30 years by the “free market” types?

Mr. Higgs article for the CSM is full of logical fallacies and revisionist history and has little merit other than to support the argument of the fascist wing of the republican party and conservative movement. It is time for all good and true conservatives to break away from this big business funded propaganda and realize the marketplace utopia they seek is not in unregulated speculation.

Your argument that the Federal government is as corrupt and/or more corrupt than the corruption of the corporations is interesting but when you follow the money and see who gains it seems to fall apart. It is the Federal government getting fleeced by the corporations not the other way around. It is corporate control of the politicians causing the corruption not the politicians control of the corporations isn’t it?

Posted by: j2t2 at February 9, 2009 12:17 PM
Comment #275274
Government’s principal genius is crushing competition to the prevailing idea. Hmmm, doesn’t that sound something like what liberals say about corporate corruption?

Thinking like that got the Republicans in the trouble they are in now. Maybe it’s true in some countries, but not ours.

We practice a kind of self government. The ideas of one or several, or a small minority pocket of people in the population do not become the prevailing ideas. You have to do so for more people.

The point of our government is to peacefully resolve competition for ideas of how to run the government, what policies to employ, legislation to write, so on and so forth, and then leave open the possibility, if those positions turn out wrong, to reverse things and go another way. In this country, we don’t have to crush others to prevail. Crushing is optional, and usually trying it backfires.

You Republicans should know. “Permanent Majority”: famous last words.

On the subject of Higgs, This is a simple way to refute his claims. Under Hoover, the GDP and other economic measures steadily declined. Under FDR, They rebound, until FDR gives into budget crunching concerns. where the spending cuts and the tax hikes serve to rebound us into another negative growth period.

The Great Depression didn’t last as long as it did because FDR failed, it lasted that long because regardless of what FDR did, this country had to recover from the economic devastation that the four years of Hoover inflicted.

Republicans, used to thinking about the economy in pscyhological terms, forget that the economy is a contingent exercise, and necessarily so.

Contingent, as in people making decisions based on what they have or don’t have. If nobody lends money, it doesn’t matter whether people are willing to buy houses. Similarly, it doesn’t matter whether you want to keep a business in business. If you can’t get loans, or customers for that matter, your choices are thereby constrained.

Already, we’re set to take a hell of a lot of economic damage for what’s gone on. Entrepreneurs can’t bail us out if the banks can’t or won’t lend to new businesses, and they’ll find their rates of survival creeping, or worse plunging, lower.

We’d be in a hell of a lot worse shape, too, if it weren’t for the FDIC. It’s taking over banks left and right, so that customers don’t lose too much money. Consider what might have otherwise happened.

As for Darwin? What survives in natural selection isn’t a universal optimal, but a local one, and the nature of the environment determins what the local optimal is. We haven’t exactly been encouraging the best from people in the Business world we can’t afford to be this naive about just how screwed up the business world has gotten.

The Corruption was mutual, but it wasn’t in our favor.

Higgs, by the way, should also recall

a) what a big government economic control program WWII was, and

b) The fact that the debt and the economic burden of it are part of the reason the economy didn’t recover until 1946.

Neither of these argues against big government spending or regulation to fight an deflationary economic crisis.

Posted by: Stephen Daugherty at February 9, 2009 1:19 PM
Comment #275277

“The Great Depression didn’t last as long as it did because FDR failed, it lasted that long because regardless of what FDR did, this country had to recover from the economic devastation that the four years of Hoover inflicted.”

Stephen, Hoover was in office for only 8 months when stock market crashed. It was his thinking that if we did nothing the market place would correct itself that earned him the blame for the depression. But it was his predecessors Harding (who won by a landslide and was going to set government straight)and Coolidge , small government conservatives, in office during the ’20s that set the stage for the greed and speculation that started the great depression. Sounds familiar doesn’t it?

Posted by: j2t2 at February 9, 2009 2:02 PM
Comment #275280


Lee if the marketplace worked so well and had all the answers why are we in this mess to begin with?
Simple. It takes time for answers to shake out in real time. Large corporations behave in exactly the same way government does. They sweep away competition. Hence it was not Xerox that took advantage of the G.U.I. one of their own had invented to launch the real revolution in computing. They could more easily see how it would hurt their own enterprizes. They sold it to Apple because the tiny company didn’t seem to be a threat. Now Apple is bigger than Xerox. The good idea prevailed.

So, when big companies have painted themselves and the economy in a corner it takes a while for the good ideas to make their way into the consciousness of the market.

Now, during the New Deal government stifled the most important area of the economy. Not banking, not farming, not public works, (Remember the federal highway system, now older roads with the official looking black shields on the numbered signs, was built during this period.), not “shovel-ready” state projects, but the renovation of the means of production along with research and development stagnated until W.W.II. The best and the brightest set their priorities, enacted their programs, and failed.

That is not revisionist history. It is the tale of the numbers. For example here’s a set of reports on employment from the 1940 census. Go down to page 170 as listed on the original papers (154 on the PDF). These are sample figures of 5% of the total census..
Male , farm, rural- 1,417,640 heads of households 79,940 report no work in 1939. There’s a recovery for you.

Look up one page for more urban reports. Still not good.

Look over the whole report. It’s pretty dense, and it’s also pretty grim.

It’s not revisionism to say the New Deal was a miserable failure.

Posted by: Lee Jamison at February 9, 2009 2:46 PM
Comment #275281


Woah, Hoover didn’t do “nothing”! He raised all kinds of government spending and invested heavily in public works! He also raised taxes (on te “rich”) to pay for it all.

Posted by: Lee Jamison at February 9, 2009 2:51 PM
Comment #275286

Lee so for the next decade the umemployed should do what while the corporations sort out the mess? This is exactly why government intervention is needed. You see the conservative approach of letting the marketplace take care of itself may have worked when we were all down on the farm prior to the industrial revolution but in today’s economy it is just asking for trouble.

Lee about Hoover- from a couple of places without a revisionist’s axe to grind-

“As the economy quickly deteriorated in the early years of the Great Depression, Hoover declined to pursue legislative relief, believing that it would make people dependent on the federal government. Instead, he organized a number of voluntary measures with businesses, encouraged state and local government responses, and accelerated federal building projects. Only toward the end of his term did he support a series of legislative solutions.”

The Hoover administration, equipped with belief that the cycles of prosperity and contraction were a natural phenomenon, could not have anticipated the seriousness of the Great Depression. The change in the structure of the American economy was its natural evolution. Even the courts prevented most attempts of policy makers to engage in regulation that may have prevented collapse, or at least kept the problem from becoming so pervasive.

Sorry but Mr. Higgs is a revisionist, his article was sloppy and full of fallacies and not worthy of reading IMHO Lee.

Posted by: j2t2 at February 9, 2009 3:52 PM
Comment #275287

“Hoover declined to pursue legislative relief, believing that it would make people dependent on the federal government”

He nailed that on the head. Sadly, its probably turned out worse than even he thought it would be. And its only going to get worse.

Posted by: kctim at February 9, 2009 4:01 PM
Comment #275301

Here’s an interesting read from the London Times.

“What the Prime Minister and the Chancellor must do, assuming that they really are determined to implement the financial support package announced last week, is to explain much more clearly why their policies to increase bank lending to homeowners and non-financial companies will work and why it is perfectly compatible with further reduction in the risks and leverage within the banks and other financial institutions. To do this, the Government must dispel the widespread notion that the UK’s companies and homeowners have vastly increased their debt burdens — and must, therefore, accept painful deleveraging for many years to come.

This is simply not true. As I have explained repeatedly in this column, the really dramatic increase in debt burdens has taken place within the financial sector, among banks and hedge funds, not among homeowners and non-financial businesses. In fact roughly 70 per cent of the increase in debt to GDP ratios since 1992 in both America and Britain has been in the financial sector. The difference between financial and non-financial debts - crucial in implementing the Treasury’s new bank-lending contracts — can be seen in a theoretical example. Suppose a manufacturer such as GKN wants to buy a £1 million machine tool. In the old world of traditional bank finance, GKN would have borrowed £1 million from HSBC and that would be the end of the matter. But since the 1990s, the brave new world of securitised hyper-finance has managed such a transaction in a very different way. GKN would sign a £1 million lease with General Electric Credit. GE would then sell £1 million of bonds to a special purpose vehicle, which would fund itself by selling £1 million of commercial paper to a hedge fund.

This hedge fund would borrow £1 million from its prime broker, which would borrow £1 million from Barclays Capital, which would turn around and borrow £1 million through the inter-bank market from HSBC. The net result is still that GKN’s investment is financed by £1 million of deposits at HSBC. But in the process, £6 million of debt has been created instead of £1 million of debt. Give or take a few trillion dollars, this was essentially the story of the credit boom. And it has a hugely important policy implication that almost nobody in Britain seems to recognise.

In principle, the necessary deleveraging in the British financial system could be achieved simply by netting out the transactions among financial institutions, with very little impact on the non-financial economy (apart from significant but limited second-order effects of bankers losing bonuses and jobs). Of course, such an orderly netting-out of financial debts became much more difficult after the collapse of Lehman.

But a proper understanding of the difference between financial and non-financial leverage still offers hope of protecting the non-financial economy from the worst effects of a credit collapse. Yet to my surprise, British policymakers and investors have ignored the distinction between financial and non-financial leverage — at least until last week.

Now for the good news. Last week, Mervyn King and Lord Turner of Ecchinswell, the new head of the FSA, gave speeches emphasising this distinction between financial and non-financial debt and drawing the right conclusions. The Governor pointed out that “much of the increase in debt occurred within the financial sector [and this] means the necessary unwinding of balance sheets could and should take place primarily within the financial sector without restricting lending to the ‘real’ economy … And the lending agreements which will be negotiated between Government and individual banks will focus on lending to those non-financial sectors”. Lord Turner, in what was probably the deepest and most perceptive analysis of the entire financial crisis published so far, made the same point: “The huge growth of intra-financial system leverage has a relevance to the urgent issue of short-term macro economic management. The more that we can ensure that bank deleveraging takes the form of the stripping out of inter-trader complexity, and the less it takes the form of leveraging vis-à-vis the non-bank real economy, the better.”

These statements, in conjunction with the Treasury’s new bank guarantees and lending agreements, could mean that the necessary de-leveraging of the British financial system will at last be sensibly managed. Regulators will force banks gradually to cut their lending to financial institutions, while increasing credit to non-financial business and households. If this happens, the worst of the collateral damage to the non-financial economy inflicted by the credit crisis could soon be over.”

Posted by: Jim M at February 9, 2009 7:16 PM
Comment #275317

Dead man walking. Dead economy walking. Everyone knows it’s already over. The sheer size of the failure is stupendous. The financial sector failed, and we’re waiting to finish the job. We are going to nationalize it. The nationalization has already happened to some extent. Much more needs to happen, but it’s too much for the system to handle. It’s the same old story- privatize the profits, socialize the losses. This time, the conservative philosophy of limited government, deregulation, and privatization resulted in a failure so catastrophic, there’s not enough government to socialize the whole loss. There’s too much to absorb. Welcome to the Depression, twenty-first century style. It’s not your Grandpa’s Depression.

Special thanks are in order to George Bush. Way to nail it, Mr MBA.

Posted by: phx8 at February 9, 2009 11:43 PM
Comment #275320

Jim M.,
Thanks for the good explanation of the problem facing Americas’ Bankers. And why I feel for the Stockholders of such buinesses as Management has to explain itself, I do have a question that you may be able to answer.

Would it be in the Inherent Best Interest of “We the People” to hold the Speculative Funds ran up by the financial sector or put them up for a Fire Sale knowing that these pieces of paper would be sold for pennies on the dollar never repaid.

For didn’t our fathers in the 70’s use the Spirit of the Local and Regional Banks (Community Reinvestment Act 1974)to extend credit to the American Small Business Owners and Consumers? Because why I know you and others could generate A List of the Screw Ups, hoping that My Peers have learned from Their Elders on what not to do, could President Obama and Congress put in Americas’ Recovery and Reinvestment Plan a National Reinvestment Act of 2009 that would promote and aid in Community based Financial Institutes administrating a new Community Investment Program.

Posted by: Henry Schlatman at February 10, 2009 1:05 AM
Comment #275327

Jim M,

In your explanation above the key problem is the proliferation of people involved in what should be a simple process. All of those people were added to the process in an effort to minimise the effect of risk on any one party, but what they really do is magnify the calamity when the market shrinks to the point it can’t support all the additional people any more. There is no more foundation on which the risk stands, but there are six times as many people who could lose their shirts when the guy at the bottom fails.

Posted by: Lee Jamison at February 10, 2009 11:10 AM
Comment #275331

Lee Jamison-
It’s not revisionism, it’s completely wrong. By 1940, nearly all of the damage in GDP was made up. If you measure with allowances for inflation and all that, you’ll find that the GDP far surpassed where it was before.

It’s just difficult to rebuild an economy from scratch. What WWII did wasn’t end the Depression when nothing else could. It just ended the depression dramatically with an economic upturn in the other direction. Without it, we might have seen our economy gradually recover, with America one among a number of economic giants, instead of the economic superpower.

We’re not going to have that opportunity this time.

Hoover’s policies were the failures. During FDR’s adminstration, spending and GDP maintained a steady relationship. Under Hoover, the proportions increased. The Republicans claim that if taxes remained cut, then everything would have been fine. I think it’s useful to point out that until 1932, Hoover’s first response to the Great Depression was to maintain tax cuts in the face of economic distress!

Nobody should argue that he was a free-market fundamentalist, not in the least, but nobody should argue that his policies didn’t also share strong similarities with today’s Republicans. Hell, you can even find folks from the right calling for tax hikes.

Ironically enough, FDR ran against Hoover, criticizing him for being a socialist, criticizing his extravagant spending. But what history requires of us and what we talk about when we’re all talk are two different things. Hoover failed to grasp the nature. He raised protectionist tariffs, trying to encourage the production of American goods, but only managed to start a trade war that meant they were bought less often. He spent some money into the economy, but took it right back out with this tax increases. He started some reforms, but failed to put in place reforms that would prevent runs on the banks, which also helped make things worse.

Though his views had significantly greater progressive flavor to them, Hoover was no different than the modern Republican in that he was a prisoner of a philosophy.

Though Republicans like to paint liberals as innately socialist, most of us are kind of flexible. We can accept free-market and social welfare oriented economic approaches with equal equanimity. We’re not purists when it comes to economics, but pragmatists.

The Republicans used to be pragmatists, too. Their loss of that ability to simply do what’s necessary, with the philosophy as an influence, but not as carved-in-stone creed, is what’s lead us to this point. Even St. Reagan of the Supply Side and his disciple Bishop Bush I were willing to compromise on philosophical purity to keep the economy going well. The Republicans, though, over the next thirty years, felt a greater and greater need to vindicate their philosophy, and as such, tested, literally, to destruction.

I wouldn’t ask Republicans to stop valuing private sector over government intervention, or to not consider market solutions the more preferable solutions to regulatory goverment solutions. But I would ask them to do their best to figure out the best real world solutions, and cast aside the philosophy if it gets in the way of that.

Posted by: Stephen Daugherty at February 10, 2009 11:57 AM
Comment #275336

Reagan wouldn’t recognize this GOP, I don’t Thanks SD.,0,3344794.story You all get back to Being what he was and I might take a second Look.

Posted by: Rodney Brown at February 10, 2009 1:44 PM
Comment #275340

Lee writes of the example given in the London Times,

“There is no more foundation on which the risk stands, but there are six times as many people who could lose their shirts when the guy at the bottom fails.”

Lee, If I borrow $1 from a bank who then passes that debt successively, to 5 other investors, all taking a cut out of the profit on the loan (or, a commission) with the final funder of that obligation still being the original bank $1 still remains the amount borrowed. All the middle-man debt buyers also sold the debt so their debt position is actually zero.

#1 owes #2 owes #3 owes #4 owes #5 owes #1. Only $1 borrowed and yet $6 is owed. Now then, could #5 pay #4 pay #3 pay #2 pay #1 and the original debtor pay off their loan? Perhaps, if all these middle-men still had the $1 loaned and repaid. Let’s take a look at that. Suppose the original borrower couldn’t repay any part of the $1. Do all the involved parties loose a collective amount of $6 with a $1 default? Think of it this way. Suppose my mom needs a dollar and I lend it to her. Later, I need a dollar and borrow it from my sister and she in turn borrows from another sibling and so forth five times with five different siblings. Mom can’t pay back the buck. So…did the family loose $6 or $1.

As the article suggests, “the necessary deleveraging in the British financial system could be achieved simply by netting out the transactions among financial institutions, with very little impact on the non-financial economy”

Posted by: Jim M at February 10, 2009 2:50 PM
Comment #275343

“Look up one page for more urban reports. Still not good.
Look over the whole report. It’s pretty dense, and it’s also pretty grim.
It’s not revisionism to say the New Deal was a miserable failure.”

Lee we should also take into account the drought and subsequent “dust bowl” that occurred through out the ’30s. The migration to California from the midwest which uprooted many families may have also impacted this data. I also noticed that this data did not include people employed on public emergency work, which I would assume to be the new deal work. Seems this would invalidate the census figures to a certain degree especially when it comes to criticizing the new deal. I think we need to be a little fairer to FDR and others of the time in light of the burden they were working under.
When we watch the political positioning today with just 2 political parties we can only imagine what it was like politically with strong socialist and fascist movements to be dealt with as well. What we know for sure is inaction is not the answer. That is what got Hoover a reputation he did not fully deserve.
We must also remember that we got what we paid for, we being average Americans not the elite wealthy of the day, and when they decided to balance the budget in time for the ‘36 elections things went back into depression. That is why it is important,today, for both parties to support the president of the USA not their particular party on this issue. Rush is 10 years to late in his power grab and should be treated accordingly. Start by throwing out that rep from Georgia who apologized to Rush for speaking truth to power, I mean really what an embarrassment.

Posted by: j2t2 at February 10, 2009 3:39 PM
Comment #275374

Jim M.,
I would say the Family lost a dollar and why stance my be wrong in the eyes of some of my Democratic and Republican Citizens may disagree. Does the Family have any control over the Bankers who was speculating by borrowing money against something that they did not have full control over.

No, if forecloser was the only opition due to Mom not being able to pay than I think the only fair thing to do is make the 4 Bankers/Investors split the lose and pay off in full the last company/person who loaned the money based on a real piece of property minus its sell at auction.

Posted by: Henry Schlatman at February 11, 2009 3:01 AM
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