Neanderthal economics afflicts Nation’s Capital: the Return of Herbert Hoover

Whatever the outcome of the last minute, too late by several weeks, negotiations that are underway in Washington considerable damage has already been imposed on what is supposed to the leader of the free world. The biggest damage is the massive erosion in confidence about the political viability of the American system of government and its ability to govern effectively without gridlock and damaging log rolling. But not far behind is the regression in leading circles in both parties back to a form of financial orthodoxy that appears to show that many politicians have learned little or nothing from the catastrophic events of the great depression .Most of these are in the Republican party, particularly the extreme tea party wing that it must be said appears to be partly bankrolled by wealthy industrialists who have cynically helped create a frankly extreme right of centre movement that poses as defenders of the people.

One of things that should be carefully checked out in the coming weeks is who speculated in credit default swaps against American debt and what political links, if any, they might have.

But Republicans alone are not the sole culprits. On the Democratic side blame must be assigned to those Democrats who cynically believed that there was political advantage to be gained with independent voters  by out manoeuvering the Republicans on fiscal ”responsibility” by foolishly embarking upon deficit reduction negotiations at a time when unemployment is still over 9 % and budgetary cuts or even talk of cuts in the near future are bound to cost jobs and prolong the pain. If you want to talk about balancing the budget, first lower unemployment to acceptable levels 5 % or below, repair all the damaged infrastructure and ensure people have access to health care and education and retraining and then but only then address the issues surrounding the medium and long term future of various ”entitlement” programs. Otherwise you risk what has happened and putting back the cause of social progress both in the U.S. and abroad for years to come.

There are certain statistical facts that also need to be publicized. In 1946 the Federal Reserve held 10.7 % of the American debt which was then in gross terms 121.7 % of the GDP or in net terms 98% of the GDP. In 2010 the Gross debt to GDP ratio was 93.2 % and the net debt 56.6 % and the Fed held 5.6 % of the debt. The perilous state of America’s debt situation has been grotesquely exaggerated. The Fed has plenty of additional room to help out, particularly in wartime, and contrary to the assertions of the Tea Party, once we strip out the effects of the OPEC cartel, despite the Fed’s increased holding of U.S. debt since 2008 there has been virtually no increase in prices. The economy remains far too weak for that to happen. Their assertions are simply wrong and totally driven by ideology. It is a great shame to see otherwise progressive Democrats embrace blindly some of their assertions in an effort to win votes.

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About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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5 Responses to Neanderthal economics afflicts Nation’s Capital: the Return of Herbert Hoover

  1. Kevin Nelson says:

    You have a rather lengthy list of conditions that must be met before even talking about balancing the budget. My fear is that these sorts of preconditions could all too easily turn into excuses for NEVER taking action on our long-term budgetary problems. In view of Washington’s track record, no one should be surprised if that’s exactly what happens. And it doesn’t exactly inspire confidence that the debt is even comparable to what it was in the aftermath of the biggest war of the twentieth century–if it keeps growing at its current rate, it might very well surpass that level before long.

    • It is important to bear in mind that in 1946 when the net debt to GDP ratio was 98 % (the gross debt to GDP ratio was 121.7 %) the U.S had a population of about 100 million people and its GDP per capita was much smaller than today. Today after the worst recession since the great depression its net debt to GDP ratio is 56.6 %( the gross debt to GDP ratio is 93 %) and the U.S has a population of over 300 million and a much higher GDP per capita in real terms. In other words it is a much richer society with a much better capacity to manage its debt load. The debt crisis though difficult is grotesquely exaggerated by the media who ignore these facts. In macroeconomics we are taught to understand the role of aggregate demand (although the monetarists and supply-siders for the last 30 years have downplayed its importance) It is clear that we are now in a situation where budget cutting will damage aggregate demand without any likelihood that large corporations and financial firms who are sitting on more than a trillion dollars of cash from profits are going to invest it in hiring more employees. They will only do so when there is enough aggregate demand to sell the additional production. So deficit finance is an economic tool to transfer this idle cash through the bond market into productive investment. Without this happening there is a strong possibility that the economy will simply settle into a high unemployment equilibrium that can last for years. As I argued above balancing the books can occur sensibly with a proper debate over the extent of entitlement benefits once normal revenue and expenditure flows are restored in a low unemployment environment. Now is not the time to do this unless you believe that 9.2 % unemployment is somehow normal low unemployment.

      Thank you for your comment.

  2. Effectively put from an awesome blogger

  3. Jannika says:

    Essays like this are so important to broadening people’s horizons.

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