Paul Krugman -- who shares the distinction of being a Nobel Laureate with Al Gore, aka the "crazed sex poodle," and President "Plug" Obama -- is warning us of the dangers of a third great depression.
Third? Do you wonder when we had the second?
That was my reaction, too.
To show off the erudition that so amazed the judges in Stockholm, the Joseph Stalin professor of economics at Princeton University counts the Panic of 1873 as the start of an earlier depression. But why stop there? Why not include the Panic of 1857? Or the still more severe Panic of 1837? Most of all, why not include the most devastating depression of them all -- the one that wiped out 80% of first two waves of settlers at Jamestown, mostly from famine, despite fertile soil, plenty of game and an abundance of seafood? Now there was a real depression -- like the Great Depression of the 1930s -- that tells us a lot about the disastrous consequences of collectivism.
Krugman fears that an outbreak of common sense will lead to the downfall of Western civilization. It pains him to think that people are losing their faith in funny money and the time-tested (i.e. repeatedly falsified) idea that the best way to get out of an economic mess created by excessive government spending is to spend your way out with more government spending. This is Krugman's heart-rending lament in the New York Times:
Unemployment -- especially long-term unemployment -- remains at levels that would have been considered catastrophic not long ago, and shows no signs of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.
In the face of this grim picture, you might have expected policy makers to realize they haven't done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.
If Krugman is right -- and let's hope he is this once -- the western world is now prepared to stop believing in the tooth fairy. Or perhaps that is too gentle an image. Substitute riots, fire-bombings and other strong-armed tactics for the tooth fairy. It's getting hard even for people in "old Europe" to see how any amount of violence and agitation by public sector unions in Athens and other cities is going to produce the wealth that is needed to give people more and more pay for less and less work.
If Krugman is right (somehow the wild improbability of this construction makes me want to repeat it), then the Age of Obama is already toast. Says Krugman:
As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence.
In fact, in all essentials, Hoover, like Krugman himself, was a Keynesian. It was Hoover, not Franklin D. Roosevelt, who initiated the practice of piling up big federal deficits to support huge public-works projects intended to create jobs and reflate the economy. After declining or holding steady through most of the 1920s, federal spending soared between 1929 and 1932 -- increasing by more than 50%, the largest increase in federal spending ever recorded during peacetime. In a memo to Britain's Labour Prime Minister Ramsay MacDonald, John Maynard Keynes himself praised Hoover for jawboning the business sector to maintain high wages. He also described Hoover's credit-expansion policy as "thoroughly satisfactory."
Again, in what might be called Keynesian style, Hoover began by cutting taxes -- quite deeply -- even though, later on, he was obliged to increase taxes in order to pay for some of the huge run-up in federal spending. In just the same way, the Obama administration has cranked up federal spending to a degree that will require new taxes -- and plenty of them -- to enable the government to keep the federal deficit (already up threefold from the Bush years) from spiraling totally out of control. Hence the talk of European-style value-added tax; hence the cap-and-tax legislation; hence a raft of smaller taxes; and hence the way the Obama administration is now backing away from its pledge of no new income taxes for people earning less than $250,000. And all that is not even including the hidden taxes that will come in the form of rapidly rising health insurance premiums to pick up the cost of new mandates and a vast new system of subsidies under Obamacare.
For those who want to know more about what happened that almost caused the total extermination of the Pilgrims at Jamestown, I recommend Thomas J. DiLorenzo's How Capitalism Saved America: The Untold History of Our Country, From the Pilgrims to the Present. No fewer than 486 out of the 604 settlers who came in 1607 and 1609 died within a year of so setting foot in Jamestown, despite the bounty of their surroundings. As DiLorenzo explains, the problem was a lack of motivation:
How could there be a lack of "industrie." After all, the Virginia Company had not chosen a group of indolent and lazy people to settle the Virginia colony. The problem was that all of the men were indentured servants who had no financial stake in the fruits of their own labor. For seven years, all that they produced was to go into a common pool to be used, supposedly, to support the colony and to generate profits for the Virginia Company. Working harder or longer was of no benefit to them, and they responded as anyone would, by shirking. Having been given free passage to the new world, these settlers were supposed to compensate the Virginia Company through their labor, so they were effectively reneging on their contracts.
In 1611, the British government sent a new administrator to Jamestown who quickly identified the problem as the system of communal ownership. "He determined, therefore, that each man in the colony would be given three acres of land and be required to work no more than one month per year, and not at planting or at harvest time, to contribute to the treasury of the colony. The farmers would be required to pay the colony a lump-sum tax of two and a half barrels of corn."
And so it was that capitalism saved the Pilgrims.
And so, it is to be hoped, it will save us again in our own time.
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