About 100 intrepid readers completed a three-month group study of Murry Rothbard's "America's Great Depression" this weekend. As one reader commented, reading the classic Austrian economic study against the backdrop of the present crisis was like having a giant PowerPoint show offering illustrative examples in real time. (The 25 question final, in case you're interested, can be taken here. Throughout the course of the book, it became abundantly clear that there are a disturbing number of similarities between the situation in 1929-1931 and the present one in 2008-2010.
As George Bush did with the creation of the Troubled Asset Relief Program, Herbert Hoover oversaw the founding of an unaccountable organization making secret loans to banks and other failing institutions, the Reconstruction Finance Corporation. As President Barack Obama has done with his "stimulus" program of massive federal spending, Hoover convinced Congress to increase federal spending 30 percent in 1931 alone. In relative terms, this failed spending package was larger than Obama's incredible $775 billion "stimulus" plan, which would only amount to a 25 percent increase even if all of the spending were to take place in 2009.
But one of the more striking things was the way in which the politicians and professional economists almost uniformly expected recovery to take place in 1931, and their panic when their expectations were dashed. Depression set in despite a resort to extreme measures that are all too familiar to the modern observer. Interest rates were cut to historic lows. Millions of dollars were loaned to the states to finance a vast series of public works and stave off unemployment. Taxes were increased at both the state and federal levels, and the Federal Reserve made use of every tool at its disposal to prop up failing banks.
Advertisement - story continues below
While the stock market is on the verge of another breakdown, official GDP figures have finally reported an official recession. Job losses abounded in the fourth quarter, and both business executives as well as the mainstream economists who completely failed to predict the current contraction are forecasting that economic recovery will begin in the second half of 2009. One year ago, the American Enterprise Institute published the report "Fine in 2009 (Not So Great in 2008)," while just last month, Business Week reported:"The idea that the economy will start to recover in the middle of 2009 has really taken hold.
This isn't surprising, since Keynesians who subscribe to the notion of "animal spirits" being the foundation of the economy – or "confidence" as today's Neo-Keynesians describe it – believe that the election of Obama will create the missing sense of American optimism that is required to arrest the contraction and start the economy growing again. This is complete nonsense, of course, and while such childish faith in the unbounded power of magical negritude is touching, Obama himself appears to be perfectly aware that his Hooverian stimulus program is unlikely to succeed. His statement that economic recovery "will take years, not months" is not political hyperbole or an attempt to reduce expectations, it is probably the most intelligent and straightforward declaration he has ever made in public.
Even the wildly unreliable economic statistics reported by the Bureau of Economic Analysis, which recently have varied as much as 133 percent for the same quarter, show that the contraction is just beginning. The comparison of 2008 to 1930 is probably not correct, because the Advance report currently shows 1.3 percent growth for 2008 despite the two negative quarters in Q3 and Q4. While that 1.3 percent will probably be revised down in the preliminary, final and final revised reports, it's not comparable to the 12 percent contraction in 1930. But the crash of the Japanese and South Korean economies, which are expected to show double-digit annualized contraction rates in the next scheduled reports, not only means that the expected recovery will not begin in 2009, it probably won't begin in 2010 either. If the historical parallel holds, and there are a vast array of reasons to believe that it generally will, the contraction will not reach its nadir until 2012 despite the best efforts of the financial authorities to defy economic gravity.
Advertisement - story continues below
If Obama and Congress were wise, they would quit the King Canute act and let the long-suppressed market forces wash away the vast edifice of failed corporations and misallocated resources, which, after some horrific short-term economic dislocation, would permit the economy to begin growing again. Unfortunately, it is clear that this merry band of interventionists have elected to follow the Hoover/Roosevelt example, with all of the long-term economic destruction that implies.