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Column needs history, economics lessons to contribute

Unfortunately, ignorance about political history and economics is all too common in the American public, but it is particularly tragic when we see it in those who disseminate information (that does not constitute a politically dishonest attempt to persuade; in that case it is not tragic but venial). Regrettably, longtime political journalist Jim Beam fell victim to this in a recent column.

Beam asserts that the recent difficulties in the credit markets that caused big selloffs in the equities markets make 2008 too uncomfortably close to 1929, considered the start of the Great Depression, raising the specter of another economic dislocation of that magnitude. This misunderstands that the precipitant of the two events, easy credit. In 1929, borrowing money to buy securities without any real collateral was the straw that broke the camel’s back, whereas in 2008 the borrowing comes with substantial real assets attached. Nor are the magnitudes of the events even closely comparable.

Perhaps he does not recognize the difference because he does not understand what caused the Great Depression in the first place. Too much credit was being extended, but that doesn’t answer why that happened. The answer: government intervention that distorts the marketplace (this summation of a larger academic work probably explains it most elegantly). In the 1920s it was because of government’s expansionary monetary policy obsessed with price stabilization and trade flows, coupled with a sufficiently immature central banking system. None of these conditions operate today; rather, a reason just as political has caused it: policy to push lending to individuals of dubious ability to manage that debt (which Beam doesn’t seem to grasp, either).

Instead, Beam relies on one of the most discredited pieces of boilerplate explanation for the Great Depression, income inequality causing underconsumption at the lower end of the wealth continuum. This view totally ignores that overproduction from easy credit causes a supply problem (too much) yet props up prices artificially so underconsumption occurs not because too many people have too little money, but that artificially low credit pricing encourages them to overextend and waste their resources on something they cannot afford. (During the 1920s, this caused wage stagnation even as prices barely crept up, not the case today.) Proportion of wealth held by various income classes has nothing to do economic performance (unless it is a matter of government policy to redistribute income for that very reason of perceived inequality, which then impedes economic performance and growth).

Not only does Beam not know what caused the Great Depression, neither does he know what ended it. While he believes it was Pres. Franklin Roosevelt’s New Deal policies, the historical record shows otherwise (this summarizes a good nonacademic and recent work on this point). It actually started with Roosevelt’s predecessor Pres. Herbert Hoover who began to ramp up government spending and planning but it was Roosevelt who started on direct cash payments. Either way, what could have been a relatively short if sharp downturn was prolonged by government interference in the marketplace. In fact, almost a decade later economic conditions hardly were any better than they had been at the beginning of 1929, years after New Deal implementation. Beam needs to understand there was little Roosevelt’s policies did that improved the situation in any way, while his optimistic rhetoric at least boosted confidence. What did end it was World War II, which demanded a massive efficient use of resources that government on its own could not and is institutionally incapable of engineering.

Properly understanding the past and how it relates to conditions today, this helps explain why Louisiana is less likely to be affected by the fallout of this retrenchment. Had Beam a surer knowledge of history and economics, he might have contributed meaningfully to this assessment.

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