Bob Higgs has used the concept of “regime uncertainty” to explain why the Great Depression lasted so long. In brief, the argument is that FDR’s escalatingly anti-capitalist rhetoric in the mid- to late-1930s spooked investors, who were uncertain whether they would be allowed to enjoy the future fruits of their investments. Therefore, investment declined, provoking a slump in 1938 and generally prolonging the Depression.
Some have argued that the prolonged period of high unemployment and anemic growth the United States has experienced in the wake of the 2007-9 “Great Recession” is also due to regime uncertainty. They blame the Obama Administration and Democrats in Congress for fostering a regulatory environment hostile to business.
But if that explanation of poor growth in 2009-10 is right, how can it explain poor growth in 2011-12, after Republicans took the House of Representatives? Under divided government, regime uncertainty is nil. The 2011-12 Congress is on pace to be the least productive since 1947 in terms of passing laws. Libertarians say gridlock is good — well, we definitely have gridlock, so where are all the benefits?
Here’s the evidence:
The chart shows inflation-corrected personal income, excluding transfers from the government. Real personal income today still stands below its level at the start of 2008. If these figures were divided by population, they would look worse still. There has been a very weak recovery.
Why should we not blame House Republicans as much as Democrats and Obama for the bad economy? (more…)
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QE2 is in the news – no, not the monarch of Britain, but the second round of “quantitative easing” apparently being contemplated by the Fed. So here’s a roundup of enlightened chatter on the topic… So far monetary policy has not been as aggressive as it might seem if we looked only at nominal interest rates, Beckworth and Ruger argue, because inflation expectations are low. They argue for more monetary stimulus. Hugh makes the case that QE2 in one country can’t work, because it would threaten economic recoveries in Germany, Japan, and elsewhere. Those countries can’t undertake their own QE programs without risking inflation, he says (I’m not convinced on this point). R.A. at The Economist nevertheless sees recovery in the U.S. as particularly critical to reversing the protectionist tide.
From my vantage point, the threat of currency wars is overstated. The US and EU complained about the renminbi before the recession, and China has been grudgingly, gradually reforming it. Moreover, the economic advantages of depreciation (and disadvantages of appreciation) are easy to overstate. What matters is real, not nominal depreciation. If inflation expectations rise concomitantly (which is precisely the point of QE), the knock-on benefit to the trade balance doesn’t obtain. These considerations seem to allay some of the concern that might otherwise surround more aggressive monetary stimulus in the U.S.
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Whenever I’m at a loss for blog material, I can just check out the latest Krugman column. This Sunday’s pleasure was entitled “1938 in 2010,” and I’ll just quote the silliest bit:
From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise… But guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity.
But the GDP figures during World War II were essentially made up, being based substantially on administratively determined “prices.” It turns out that Americans’ living standards were at best flat during the war (and that’s not counting the soldiers, of course). Someone, please let Dr. Krugman know about Robert Higgs’ research (here and here).
UPDATE: The myth of World War 2′s economic benefits is of course bipartisan, as evidenced in today’s vituperative post on rightist site Redstate.com.
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Well, the new jobs numbers were released today: nonfarm payroll employment fell by 125,000 in June. At the same time, the unemployment rate fell from 9.7 to 9.5 percent.
Before the celebrations begin (“Recovery Summer is underway! The unemployment rate fell!”) recall that the rate only reflects those who are in the labor force. According to the Bureau of Labor Statistics, the workforce shrunk by 652,000 between May and June. In other words, 652,000 were sufficiently discouraged to stop searching for a job (to simplify a bit: the denominator is shrinking faster than the numerator).
If the overall picture is grim, it is particularly dismal for African Americans (15.4 percent unemployment) and Hispanics (12.4 percent unemployment).
Senate Republicans have become born again fiscal conservatives on the issue of unemployment, refusing to support an extension of benefits as they depart Washington for an extended July 4th holiday. One wonders if this is a strategic blunder. See Megan McArdle’s recent post on this and the lively comments it generated.
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