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March 30, 2008

Doomsday Prediction: A Depression is Coming

For the past three days ABC News has been pushing this story at the top of their business section and on the front page. Apparently, "right-wing ideology" is going to cause the U.S. government to "fail to ward off a major depression." So says Professor of Finance Robert Parks, who thinks there is a 60 percent chance that we are headed for a "Bush depression."

The Fed, under Chairman Ben Bernanke, has taken several orthodox and unorthodox monetary actions to prevent the credit freeze-up from spreading and damaging further the basic economy.


Mr. Parks, however, doubts the cuts will do much to boost the economy. Rather, he sees a further steep fall in housing prices, continued major deficits in the federal budget and in the international trade balance, a tumbling dollar, and a weak stock market leading to a genuine depression with 30 to 35 percent unemployment, greater poverty, more loss of homes, plunging bond and stock prices, even some starvation.

This is just a happy continuation of the Democrats' election strategy. They desperately want to convince people that Bush is Hoover and that we very much need a savior like FDR. If Park's reference to "right-wing ideology" wasn't too much of a giveaway, his proposed solutions to the impending economic disaster should make this clear.

Parks would like the federal government to step up outlays to fix rickety bridges, repair pot-holed roads, improve schools, and more to provide more jobs, more income, and thus more spending to cure any economic downturn.

This is a Keynesian pipe-dream. What Parks is missing is that measures like the RFC and the WPA worked when unemployment rates were already higher than 16% in the case of the RFC and almost 25% in the case of the WPA. The financial industry had already collapsed and world-wide trade had slumped to a third of its previous high. There were plenty of unemployed and desperate people who were willing to build roads and bridges and libraries. In other words, FDR's policies contributed to pulling the U.S. out of a depression, not to preventing one in the first place. It is the sloppiest kind of thinking to assume that what worked to end a depression will also work to avoid it.

Parks and ABC News leave untouched the question of how the government is going to pay for these projects, which is especially telling since the Democrats have made such a ruckus about federal deficits and the national debt. Perhaps it bears mentioning that during the Great Depression, the top tax rate was 63% (later raised to 91% at the end of WWII). It wouldn't surprise me if the Democrats want to resurrect that FDR policy along with the rest.

In the end, we should all be deeply suspicious of a Keynesian finance professor who thinks about economics in terms of political ideologies and who seems devoted to reliving the FDR years. I estimate that there is a 60 percent chance that he's just trying to get his name in the headlines.

Thanks to genghis for the tip.

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posted by Gabriel Malor at 03:26 PM

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