Marriner Eccles

[stone]

This link has a fascinating excerpt from the 1933 testimony of Marriner Eccles. It really chimes with the situation today.
http://londonbanker.blogspot.com/

Craigr has recounted fascinating first hand recollections from his aunt about how many of the FDR policies were destructive (farmers ploughing crops into the ground to destroy them etc). I guess we have to look as best we can at all history tries to tell us.

[Storm]

Great article, stone.  The parallels between today and then are striking.  Just like then, we have corporations flush with cash, as he calls them, the creditor sections of our economy, and we have the debtor sections of the economy struggling with unemployment and debt servicing costs.

It seems that the general argument is that since every corporation and wealthy businessman acts in their own self interest, by laying off employees, closing factories, and cutting costs in an effort of self-preservation due to a drop in general demand, the government must counteract this instinct towards self-preservation in order to increase the demand side of the economy and in the long run, to increase the wealth of everyone, including the creditor section.  They do this through tax increases and spending increases.

We are seeing some concerning parallels.  Sales tax in my state has raised from 6.0% to 6.35% just recently.  I think a lot of other states are raising sales tax to close shortfalls.  Sales tax disproportionately hits the debtor sections, as poor people live on subsistence wages and it is a direct hit to everything they purchase, while wealthy people just save their money and don't buy much.  He talks about how increased sales taxes in the early 1930s just made the economy worse, by discouraging spending and consumption.

It seems like the extremely unpopular choice, but the only way out of a debt trap like this, is to tax the corporations and upper tax brackets significantly, causing a redistribution of wealth and boost public spending to create jobs and in effect, migrate capital from the creditor section of the economy back to the debtor section of the economy, where it can be spent and increase the velocity of money.

Great quote from the article:

It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they can not save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying. It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”?; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.

With the current Republican leadership in congress, I see about 0% chance of this happening, so we are destined to make the same mistakes and spend the next decade digging ourselves deeper and deeper into financial hell, until there is a societal change and the people revolt.

[stone]

Storm, Bernanke is a  scholar of the great depression so I guess he must know about all of this stuff inside out. The most fascinating thing about that 1930's testimony is that it was stressed over and over that it was not the amount of money that was the problem but the distribution of purchasing power. Marriner Eccles seemed fully behind the gold standard. Clearly when it came down to actual policy, the government ignored that bit of his advice and used monetary expansion rather than relying just on tax. Bernanke can only effect monetary policy and that is what that 1930s testimony was saying was NOT what was needed. I wonder whether Bernanke actually believes that his monetary policy can help much or whether he agrees with Marriner Eccles that fiscal policy is the only hope? I'd love to see an MMT rebuttal of that Marriner Eccles advice. They are unlikely to bother to try but I guess they would say that it is more politically expedient to expand money as a way out and then to deny all the obvious pitfalls that throws up.

Basically that advice from the 1930s is the first time I've come accross anything that makes sense to me for our present situation.

[Storm]

I agree, it does make sense, stone.  Bernanke has just increased the money supply but he has no tools to increase the demand side of the equation so it does little to help the economy.  As he has stated, only policy decisions can increase the demand side of the equation.

You know what would increase the demand side of the equation?  Another world war and hiring millions of unemployed to build bombs that are then dropped on foreign countries.  That's the popular way to do it.  Of course digging ditches and filling them back in again accomplishes the same exact thing without the loss of life and bloodshed.  It's funny to me how wars are popular with politicians in this country but digging ditches and filling them back in again - not so much... 

[moda0306]

Storm,

Does the ditch-digging accomplish anything besides giving our men a nicer physique and glowing tan?

Why don't we just send out checks?

It seems to me if we truly are going to be "honest Keynesians," we should 1) do productive things that actually need or will need to be done once a recovery ensues, then simply mail out stimulus checks until we have somewhere near full employment.

Why does a ditch need to be dug?

[Storm]

Why does a ditch need to be dug?

It really doesn't, moda, and I agree with you that we could do a lot more productive things with our money.  I was merely pointing out the logical fallacy that paying people to build bombs and then blow them up is just about as productive economically as paying people to dig ditches and fill them back in again, yet one is preferred much more by our elected officials than the other.

[moda0306]

I agree with the distribution point.  I often look as the distribution of wealth as an unfortunate side effect of the free market (and some crony capitalism), but I guess it's also a systemic risk as well.

If 25% of society is living paycheck to paycheck or close enough to it, and their consumption makes up a large portion of the economic activity, it's easy to spot the systemic issue there.  There's very little "cushion" between the point of losing some jobs and having to significantly reduce the aggregate demand a society is generating... lather rinse repeat.

I'm more and more in favor of some sort of citizen's dividend, because 1) it acknowledges the vast amount of wealth that is inherant to the resources in our earth, not a result of the creativity of an individual, 2) is free of the inefficiencies of gov't trying to pick the winners and losers or administer something it's not good at administering, and 3) eliminates both some of the inequality and systemic risk within our economic system in terms of demand (needed by businesses) and employment (supplied by businesses).