Saturday, April 18, 2009

The forgotten man

I finished the first book that I bought for my new kindle, it was
The Forgotten Man by Amity Shales. It was a really fantastic book and
even though it was written from 2001-2006, it seems like the author
wrote the story with the events of the past year in mind.

The main theory of the book is that most of the new deal ideas didn't
shorten the depression and in some cases prolonged it and led to the
even deeper recession within the depression of 1937. Much of the problems
of the depression were caused by the uncertainty and experimentation of
the Roosevelt administration.

Many of the problems from the thirties are being echoed now, the false starts and various Tarp plans would seem to me to be the worst thing we can do. The treasury needs to make a plan and clearly outline what it is, then implement it in a transparent way so that businesses can predict
what is going to happen. This whole idea of get the evil rich people is counterproductive.
Say what you like about the rich, maybe wealth does trickle down or maybe not, but I know
that poor people don't create any jobs.

As seen during the new deal if you raise taxes so that the government will get the rewards
of any positive result while the "rich" pay for any downsides, the rich will sit on their ass
and buy government bonds.

Here's a good quote from the Kindles text highlight feature:

"New Deal was causing the country to forgo prosperity, if not recovery. The wealthy, after all, were in a position to take risks with new ventures precisely because they were wealthy—they could invest in several projects at once. Under the new 1935 law, a very wealthy man would see more than three-quarters of any profits from new ventures taken by income tax. Any loss, however, would be the same man’s to bear. This man would try to hoard his capital and wait—thus coming to fit the very stereotype of the idle rich man the New Dealers were hoping to propagate."

And here is why engorging the government with a stimulus probably won't help much:

"The problem in 1937 and 1938 was not that the New Deal was mismanaging or helping or punishing one sector of the economy over the other. It was, just as even Democrats now knew, that it was competing with the private sector, and frightening it. The solution to the depression within the Depression was not anything either of the two squabbling sides in the administration was contemplating. If Roosevelt wanted the economy to thrive in peacetime, he had to call off the competition."

On the other hand, it's easy to see that Bernanke studied the depression, continuously dumping
money into the economy is an effort to prevent the deflation that led to such misery as money
dried up, leading to barter and a scrip economy. A similar scenario would be much worse now,
because we have nothing to barter. A good percentage of the people still lived on farms in the
'30's, our over-extended "flat" suburbian economy where we are importing peaches from panama won't last 2 weeks without actual money.

I highly recommend the book.

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