Keynesian policy in the United States

july 4 washington

In Washington, and went to the Mall last night for the fireworks. The best fireworks display I have ever seen, the sky was at the end entirely covered with colour and sound. They were even able to send up in the middle of it a set of rockets that, when they burst, spelled out “USA”. But the very few chants of “USA” also died away as quickly as the fireworks. There’s too much reality around at the moment.

As to reality, there is, of course, this:

Even after another month of strong hiring in June and a sinking unemployment rate, the U.S. job market just isn’t what it used to be.

Pay is sluggish. Many part-timers can’t find full-time work. And a diminished share of Americans either have a job or are looking for one.

The rest of the article is fumbling idiocy as the journalist tries to explain away the actual reality of the American labour market. You need to contrast this great Keynesian disaster with the last time a classical policy was applied in the US.

Beginning in January 1920, something much worse than a recession blighted the world. The U.S. suffered the steepest plunge in wholesale prices in its history (not even eclipsed by the Great Depression), as well as a 31.6% drop in industrial production and a 46.6% fall in the Dow Jones Industrial Average. Unemployment spiked, and corporate profits plunged.

What to do? “Nothing” was the substantive response of the successive administrations of Woodrow Wilson and Warren G. Harding. Well, not quite nothing. Rather, they did what few 21st-century policy makers would have dared: They balanced the federal budget and—via the still wet-behind-the-ears Federal Reserve—raised interest rates rather than lowering them. Curiously, the depression ran its course. Eighteen months elapsed from business-cycle peak to business-cycle trough—following which the 1920s roared.

At the end of my Say’s Law presentation to the Keynesian symposium I attended at Dartmouth I was asked to explain why a classical policy works, which it does. And the fact is, the presuppositions are so different that it is almost impossible to latch onto the differences. If these things interest you – and I am all too aware how few actually, really are – go to my lead article at the Liberty Fund and carefully read the section that deals with the diagram I have there. There you will find macroeconomics before Keynes summarised in less than 1000 words. This is the theory that sat under the policies of the early 1920s. Hoover, and then Roosevelt in spades, a decade later would introduce “Keynesian” policies, the first of many such failures in a policy that has never had a success.

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