Economic Myths and Irrelevancy – by Walter Williams

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Steve H. Hanke is a Professor of Applied Economics at Johns Hopkins University in Baltimore and Senior Fellow at the Cato Institute in Washington, D.C., and writes frequently for Globe Asia and Forbes magazine. Professor Hanke starts off his “Hu versus Sarkozy” article (Globe Asia, November 2009) with a warning. There is no more reliable rule than the 95 percent rule: 95 percent of what you read about economics and finance is either wrong or irrelevant. The article contrasts the Chinese versus the French responses to the financial crisis but the major focus is on economic myths.

Hanke says that the most repeated statement about the cause of the U.S. Great Depression is that it was caused by the October 1929 stock market crash. How could that be? By April 1930, the stock market had recovered to its pre-crash level. What is not taught in history books is the Great Depression was caused by a massive government failure. The most important part of that failure were the actions by the Federal Reserve Bank that led to the contraction of the money supply by 25 percent. Then, the name of saving jobs, Congress enacted the Smoot-Hawley Act in June 1930, which increased U.S. tariffs by more than 50 percent. Other nations retaliated and world trade collapsed. U.S. unemployment rose from 8 percent in 1930 to 25 percent in 1933. In 1932, the Herbert Hoover administration and a Democratic Congress imposed the largest tax increase in U.S. history, raising the top tax rate on income from 25 percent to 63 percent. The Roosevelt administration followed these destructive policies with New Deal legislation that massively regulated the economy and extended the Great Depression to after World War II.

Have today’s politicians and their economic advisers learned anything from yesteryear’s policy that turned what would have been a short, sharp downturn in the economy into a 16-year affair? The answer is very little.

Professor Hanke argues that the chief enabler of both the Great Depression and our latest economic downturn is the Federal Reserve Bank, who sees itself as America’s systemic risk regulator. This is the world upside down, Hanke explains: The Federal Reserve is the systemic risk.

How about a bit of history? Between 1787 and 1930, our nation has seen both mild and severe economic downturns, sometimes called Panics, that have ranged from one to seven years. During that interval, there was no thought that Congress or the president should intervene in the economy to enact stimulus packages, jobs programs or massive corporate handouts. Probably, the reason that no one thought to do so was that there was no constitutional authority to do so. It took the Herbert Hoover and Franklin Roosevelt administrations to massively and unconstitutionally intervene in the economy and, with the help of a frightened, derelict U.S. Supreme Court, turn what might have been a two- or three-year sharp downturn into our longest depression.

Professor Hanke says that the lesson to be drawn from business cycle history is that, if left to run their natural course, severe downturns are followed by rapid snapbacks. The 1921 recession is a good example where wholesale prices, industrial production and manufacturing employment fell by 30 percent or more and reached their low in mid-1921. There was little government intervention, at least by today’s standards, and the economy recovered naturally; and by early 1922, it had fully recovered and the nation was off to the Roaring Twenties.

The bottom line is that the idea that government bureaucrats have enough knowledge to manage an economy well is the height of conceit — what Nobel Laureate Friedrich Hayek called the “fatal conceit.”

  • Proxywar

    Friedrich Hayek correctly argued: “Socialists are wrong because they disregard the fact that modern civilization naturally evolved and was not planned.”

    What I don't understand is why are there christian-conservatives?
    It makes no sense for conservatives to be christians. The reason
    why it makes no sense is because christian-conservatives believe
    in intelligent design, but as Hayek correctly argues civilization
    NATURALLY EVOLVED it was not PLANNED. Thus, no creator.
    So when christian-conservatives argue CREATION they are by
    de facto contradicting their belief in the free market.

    We should be NATURALIST-CONSERVATIVES not RELIGIOUS FREE WILLERS.

  • Huffer

    Proxywar, Friedrich Hatec was wrong…
    'Civilization' was in the master plan when God created Adam and Eve. If not, why create them in the first place?
    (Most) of his other statements are true.

  • The_Inquisitor

    “The 1921 recession is a good example where wholesale prices, industrial production and manufacturing employment fell by 30 percent or more and reached their low in mid-1921. There was little government intervention, at least by today’s standards, and the economy recovered naturally; …”

    The only intervention at that time was an anti-intervention. The federal government cut taxes.

  • thinker1

    If Great Depression had 25% unemployment, WE ARE IN A DEEP SH…EEP!!!!!
    Blue collar jobs and people without work for more than a year (no, they did not stop looking; they cannot find jobs. That lie was created to lower the unempl. stats.)
    are our of official statistics…
    Todays unemployment is above 25%! Ask your friends, neighbors and strangers.
    Look around. Peek inside stores and visit shopping malls. Think.
    Get some real conclusions.

  • thinker1

    ..because Hayek says so, it does not has to be true…..So there was a big bang which created Universe? Ever seen a big bang (even in the movies) creating anything good, advanced, logical and smoothly working?
    And what was there before that “Big Bang”? Nothing?
    Creating something from nothing is impossible, as physics teach us….

  • answer4everything

    Fundamentalist Christians make the mistake of seperating God and science as if they were mutually exclusive. If God created the universe, and I believe he did, then he had to create all that scientists observe. Including the rate of decay of carbon-14. So if a scientist tells me that something is 10-20 million years old based on carbon dating I believe them. There is no disconnect or dichotomy between God's design and scientific observation because scientists ARE observing God's design.

    To put it another way, I am convinced that the Big Bang Theory best matches the scientific observations to date. I'm also convinced that someone or something had to light the fuse. What I'm NOT convinced of is that God gives a rat's patootie about what happens to us measly humans on a day to day basis.

  • navigator

    If the government could plan an economy as well as God planned galaxies and gladiolas, perhaps I would not be a fiscal conservative.

    One good reason for a Christian to be a conservative is the teaching of Jesus Christ as recorded in the Bible. In the parable of the talents, the servants who work, invest and earn a profit are commended. In the parable of the vineyard, the vineyard owner pays exactly what he has contracted with his workers, and also asks, “Is it not lawful for me to do what I will with that which is mine own?”

    Thus, the Bible does not support avarice, but does espouse hard work, investment, profit, contract law, and private ownership of property.

  • ClayBarham

    What we need back are the 19th century Democrats who are the libertarians who followed Jefferson, Madison to Cleveland, instead of the 20th century Democrats who follow Rousseau and Marx, as cited in THE CHANGING FACE OF DEMOCRATS on Amazon and http://www.claysamerica.com. Obama has given us the culmination of Democrat idealism, that the interests of community are more important than are the interests of the individual. Individual freedom is what made America prosperous and so different in the world. Why dump it?

  • amywombwell

    Desire not envy is what runs capitalism. Envy is not just the desire for something, but also the desire that others not have it. Capitalists desire goods and services for their enjoyment. Socialists desire that others not have more than them, because that wouldn't be “fair”. Christianity says that envy is wrong, as is socialism.

  • Proxywar

    There wasn't nothing. The Universe expanded from an extremely dense and hot state and continues to expand today. A common analogy explains that space itself is expanding, carrying galaxies with it, like raisins in a rising loaf of bread. We live in a flat Universe. Which means gases and particals were floating about before hand. The Chaos theory explains the nature of us.
    Things are not always good, logical, nor work smoothly in our Universe.
    The Universe is Chaotic. Creating something from nothing is impossible
    which explains why God makes no logical sense. Who created the creator?

  • Proxywar

    No he wasn't wrong.

    To believe God created Adam and Eve you would have to believe 1.) humans came before dinosaurs and/or dinosaurs don't exist. 2.) that the earth is only 5,000 to 6,000 years old. You can't pick and choose what is true and what is not. That was the main basis for his thesis.

  • Proxywar

    So you are deist? You can't just believe God created us you must scentifically or metaphysically prove it. There is no such thing as free will.

  • Proxywar

    These are not ideas from the bible.

  • etyetydfghfghdfg

    There wasn't nothing? Then what was before that? There is our Universe and many others. Where it ends? And what is behind that “end”?
    The laws of physics do not apply to God….He always was and is and will be.
    To explain this is to explain Judaism (Old Testament) and Christianism (Old and New Testament) from ground zero.
    I am not that good.

  • etyetydfghfghdfg

    AND Bible support HONESTY in all its forms – be good to others, do not steal, do not kill, tell the truth, etc.
    Those “teachings” (credos of an honest person) emanate from Bible!

  • Huffer

    We'll see….

    Don't know where you got your info, but it sure does not make sense.

    Point #1) That is ludicrous. In the study of genetics, there is no crossing
    of species. Two entities that have skin, for instance, does not mean they
    are the same species. They just have similar protective devises.

    Point #2) Truth is just that: 'Truth' also the same as 'Fact'! What can
    vary is, the measurement method, and conclusion that the method arrives. A
    persons perception of facts is in the amount of information a person has on
    the subject. Since all information is incomplete, it is hard to accept
    something unless the part of the info you are seeking proves to be fact. A
    fact' only means it can not be proven untrue.

    Sorry, but your generalizations do not hold up to closer scrutiny.

    He was correct in saying “You can't pick what is true and what is not.” One
    can choose what they have seen to be shown (by every method known to man) to
    fit factual guidelines.

    I do know that the methods of dating items scientifically is very flawed.
    Most of it is reverse engineered to make appear to fit a former hypothesis
    some one is looking to prove. Closer examination usually blow holes in these
    methods.

    Like you say, you can't have it both ways.

    I suggest a well written book to help understand some of these flaws:

    “Shocked by the Bible” Try Amazon.com