Where are we going economically. One pessimists view

"I determined that it was my duty, even without precedent, to call upon the business of the country for coordinated and constructive action to resist the forces of disintegration. The business community, the bankers, labor, and the government have cooperated in wider spread measures of mitigation than have ever been attempted before... Our leading business concerns have sustained wages, have distributed employment, have expedited heavy construction. The Government has expanded public works, assisted in credit to agriculture, and has restricted immigration. These measures have maintained a higher degree of consumption than would otherwise have been the case. They have thus prevented a large measure of unemployment... Our present experience in relief should form the basis of even more amplified plans in the future."

That's a big old quote.

Does it sound familiar? Sounds exactly like something our dear leader, the Fairy Ruddfather would say.

But it isn't.

Instead it's from US president Herbert Hoover's address to the American Bankers' Association in October 1930.

You know Herbert Hoover, he's the president that's been accused of doing nothing while the US economy sank into depression in the 1930s. Maybe he's talking up his own book, but it doesn't sound like he did nothing.

It actually sounds as though he did exactly what the current bunch of hapless 'leaders' are doing now. He stuck his oar in and tried to 'fix up' the economy.

Does that mean we can expect a repeat of the Great Depression?

If we use those events as a guide for today then, yes.

But look, any attempt to compare two different periods and show a 100% correlation is fraught with danger. It's not as simple as that.

However, you can rely on history as a reasonable guide. The simple fact - that's right, fact - is that bubbles are caused when markets are manipulated. The problem is, the bubbles only become dangerous to the wider economy when attempts are made to stop the bubble from popping.

In a free market, participants (including you and I) would recognize the imbalance and prices would correct. If prices were too high we'd stop buying.

Of course it would mean some would win and some would lose. But the consequences would be relatively short lived.

Yet, when attempts are made by a government to prop up a bubble there are still winners and losers but the winners are decided upon by the government. And because it has made that decision without thought to the functioning of a free market it creates more imbalances.

It means that not only has the bubble not popped, but that it is still expanding. In the end everyone loses.

Look at the quote from Hoover again. I've picked out the key phrases and reprinted it below:

"... [A]ction to resist the forces of disintegration... business community, the bankers, labor, and the government have cooperated in wider spread measures of mitigation than have ever been attempted before... leading business concerns have sustained wages, have distributed employment, have expedited heavy construction... Government has expanded public works, assisted in credit to agriculture, and has restricted immigration... These measures have maintained a higher degree of consumption than would otherwise have been the case... prevented a large measure of unemployment... even more amplified plans in the future."

I'll state it again. Doesn't that all sound very familiar?

Compare it to this paragraph from the Fairy Ruddfather's recent essay:

"With unemployment rising, the strategy has been to reduce the unemployment impact by, on the one hand, direct stimulatory measures and, on the other hand, deploying 712,000 productivity training places to support those who have lost their jobs or cannot enter the labour market.

"The Government has done this with what it describes as a Jobs and Training Compact with Australia: a compact with young Australians so that anyone under the age of 25 must be earning or learning; a compact with retrenched Australians that provides them with training places in preparation for the recovery; and a compact with local communities, driven by a $650 million local jobs fund and priority employment coordinators in the 20 most acute unemployment regions. These measures are aimed at reducing job losses to an absolute minimum while doing everything possible to avoid the 'lost generation' of Australians who failed to re-enter the labour market after previous recessions."

Do the words 'control freak' come to mind. Looks as though conscription has been reintroduced for anyone under 25. You've either got to have a job or you've got to learn something. Whatever happened to freedom of choice?

Anyway, as the Ruddfather's essay shows, you can't get a single politician or mainstream economist or mainstream commentator to admit that government interference made the Great Depression of the 1930s worse.

Even worse they'll pin the entire blame on the free market. Or as the Fairy Ruddfather puts it in his egotistical and tyrannical essay:

"As I have argued elsewhere, the boom-and-bust economic cycle of the past decade has been an unavoidable consequence of a decade of neo-liberal free market fundamentalism..."

The Ruddfather's essay runs to some 6,000 words, yet it can be summed up in that single sentence.

As I stated above, booms-and-busts of the scale we have witnessed in the last ten years only occur because of government meddling. Without the government trying to manipulate the market, distortions would be quickly corrected and a dangerous bubble avoided.

But even those that favour government intervention and manipulation can't make their argument without contradicting themselves. Remember their argument, the government needs to step in to help the free market. And also remember that supposedly in the 1930s, governments everywhere just stood back and did nothing.

So how can we explain this example from Erik Eklund, professor of history at Monash University?

"Faced with the emerging crisis from the late 1920s, and overwhelmed by the scale and complexity of the problem, governments tried a range of responses. Tariff barriers were raised, levels of migration were monitored and reduced. Customs excise, the main form of taxation income, was increased. Some governments sought alternative sources of loan monies while others moved to guarantee farm income by setting a guaranteed minimum price on commodities such as wheat. Such strategies were actually grounded in the 1920s, implemented in the desperate hope that somehow the world had not changed as dramatically as it had."

After those disastrous policies by Australian governments which obviously skewed the economy in one harmful direction, what did the politicians do? Did they realize it's impossible for them to micro-manage an entire economy and back off?

Did they heck. Instead they tried to skew the economy in a different direction. As Professor Eklund explains:

"The Premiers' Plan clamped down on wages and pensions. There was a 10 per cent wage cut for some workers... On the coalfields of NSW and Victoria workers lost between 10 and 20 per cent of their wages. Award rates for single women in industrial employment, already about half of the male basic wage declined from £2 per week in 1923 to £1.17s by 1933..."

In other words they meddled again. Mainstream and Keynesian economists can't claim the governments of the 1930s did nothing when it is plain to see they do something.

They interfered. In any government distorted economy it is rarely one single act of meddling that causes a problem, it is typically a series of events.

Of course, in typical academic fashion, Professor Eklund claims that the failure of the government to spend lots of money is the reason why the Depression became great:

"The traditional government response to unemployment in times of economic downturn was to increase public works and thereby absorb many of the underemployed. Instead, the federal government, which had spent over £2 million on public works in 1930, withdrew nearly all of this funding in 1931."

We can only hope that Eklund sticks to history and doesn't venture into economics.

The naïve belief among many in the mainstream is that spending - especially government spending - drives an economy. That is clearly false. It may appear that government spending is good for an economy at face value, however it fails to acknowledge the consequences.

Even in basic terms, $1 stolen from an individual through taxation is $1 less that the individual has to spend or save for themselves. The fact that businesses and individuals stopped spending - or tried to stop spending - in the 1930s and recently should indicate to anyone that there is an imbalance or distortion in the economy.

These distortions need to be worked out. If it means that a company has to hold a 'fire-sale' to unload at below cost, or for a lower profit, excess stock then so be it. It is the falling prices that will encourage the consumer and other businesses to re-enter the market.

Merely giving people and businesses free money in an attempt to prop up prices means that money will be misallocated to where it isn't needed, and further, propping up prices ensures the consumer will have to pay more and therefore misses the opportunity to buy goods at a cheaper price.

Building a road, school, hospital or bridge does not provide an economic stimulus to the economy. It merely takes money and resources from one area of the economy and arbitrarily hands it to another.

The $43 billion the government is spending on various measures as part of its stimulus package merely means there is $43 billion being spent on housing insulation and free handouts that could otherwise have been spent or saved elsewhere.

Like any debt, it must be repaid. And it will be repaid through either inflation or higher taxation.

Therefore $5 billion spent on housing insulation by the government today, means $5 billion that can't be allocated by the economy to something individuals and businesses really want.

Of course, the Great Depression is a massive topic, and the further away in time we move from it the more argument there will be about its causes.

However, one thing is clear, at any point in time politicians have an insatiable desire to interfere with and control people's lives. They did so in the 1930s and they do so today.

Thanks to Kris Sayce
Money Morning