Saturday, October 25, 2008

What Greg Mankiw Is Teaching Our Kids

Harvard economist, and super best selling author of economic texts, Greg Mankiw writes in his NYT column this week about the Great Depression and the possibilities of such occurring now.

Curiously, although he is writing about the Great Depression, he does not once mention the business cycle.

This is as close as he gets:

The Depression began, to a large extent, as a garden-variety downturn.

His reason for the start of the Great Depression:

The 1920s were a boom decade, and as it came to a close the Federal Reserve tried to rein in what might have been called the irrational exuberance of the era.

That's it, a playful use of words first used by the now discredited Alan "I have found a flaw" Greenspan. And, this man, thorough his texts, is teaching our kids!

Of course, there is a business cycle theory and it teaches that the business cycle is caused by money being misdirected by central banks into the capital goods sector during the boom period and then readjusting during the bust part of the cycle.

Indeed, Mankiw describes the facts of this shift away from the capital goods sector during the depression, but somehow does not point out that this is what business cycle theory teaches would occur:

In 1928, the Fed maneuvered to drive up interest rates. So interest-sensitive sectors like construction slowed.

Maybe Mankiw has been reading too much of Paul Krugman's wacky theory that the business cycle is a religion.

From there, Mankiw's article disintegrates even furthee, he writes:

Less successful were various market interventions. According to a study by the economists Harold L. Cole and Lee E. Ohanian, both of the University of California, Los Angeles, and the Federal Reserve Bank of Minneapolis, President Roosevelt made things worse when he encouraged the formation of cartels through the National Industrial Recovery Act of 1933. Similarly, they argue, the National Labor Relations Act of 1935 strengthened organized labor but weakened the recovery by impeding market forces.

This is all very true, but should have been explained in much greater detail, since it is at the heart of understanding how to keep us from experiencing another Great Depression.

Cole and Ohanian contend that without the FDR's economic programs, such as the National Industrial Recovery Act (NIRA) the National Labor Relations Board, the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943!

NIRA's labor provisions were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor's bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. LABOR STRIKES IN THE MIDDLE OF A DEPRESSION! By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted because of these artificially high wages. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still very high.

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."

Mankiw after failing to make clear the details of the Cole and Ohanian research, in other than the most superficial fashion, then goes on with nonsense talk about the failures of the economic profession:

In other words, even if another Depression were around the corner, you shouldn’t expect much advance warning from the economics profession.

Well, I guess this is true if you don't understand the business cycle. But, if you do understand the business cycle and watch money supply, the problems in the economy are not that difficult to spot. See here, here, here, here, here, here, here and here. Or to get the full picture years in advance, see here.

As for the future, David Sirota sounds the warning, without realizing it :

..if Obama wins, he will have as powerful an economic mandate as FDR received in the 1932 landslide election, because the voting public will be expecting - no, demanding - far-reaching economic change.

Economist Paul H. Rubin explains what this means:

Unlike FDR, Mr. Obama will not have to create the mechanisms government uses to interfere with the economy before imposing his policies. FDR had to get the Supreme Court to overturn a century's worth of precedents limiting the power of government before he could use the Constitution's commerce clause, among other things, to increase government control of the economy. Mr. Obama will have no such problem.

FDR also had to create agencies to implement regulations. Today, the Securities and Exchange Commission and the National Labor Relations Board (both created in the 1930s) as well as the Environmental Protection Agency and others created later are in place. Increasing their power will be easier than creating them from scratch...

Democrats draw their political power from trial lawyers, unions, government bureaucrats, environmentalists, and, perhaps, my liberal colleagues in academia. All of these voting blocs seem to favor a larger, more intrusive government. If things proceed as they now appear likely to, we can expect major changes in policies that benefit these groups.

And, Mankiw, plays subtle with this danger, at best, in his NYT column. He does not mention an Obama presidency instituting "economic change" that could very well cause the next Great Depression.

The next time I run into a college student, or college graduate that tells me economics was boring in class, I'm going to tell them that the professor that writes those college texts can't even predict a recession or depression, and any professor that uses his textbooks is drinking mainstream kool aid that hides the true facts of what is going on. They want to keep you bored and uninformed, and Mankiw is the best at doing it, I'm going to tell them. And then, I am going to direct them to EPJ which does discuss the business cycle and is obviously not boring.

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