Sound Familiar?

What decade was this???

• During the war, federal spending grows three times larger than tax collections. When the government cuts back spending to balance the budget, a severe recession results. However, the war economy invested heavily in the manufacturing sector, and the next decade will see an explosion of productivity... although only for certain sectors of the economy.

• An average of 600 banks fail each year.

• Organized labor declines throughout the decade. The United Mine Workers Union will see its membership fall from 500,000 in 1920 to 75,000 in 1928. The American Federation of Labor would fall from 5.1 million in 1920 to 3.4 million in 1929.

• "Technological unemployment" enters the nation's vocabulary; as many as 200,000 workers a year are replaced by automatic or semi-automatic machinery.

• Over the decade, about 1,200 mergers will swallow up more than 6,000 previously independent companies;
  

• By the end of the decade, the bottom 80 percent of all income-earners will be removed from the tax rolls completely. Taxes on the rich will fall throughout the decade.

• The richest 1 percent will own 40 percent of the nation's wealth. The bottom 93 percent will have experienced a 4 percent drop in real disposable per-capita income.

• The middle class comprises only 15 to 20 percent of all Americans.

This was the 1920's - the build up to the Great Depression. The same kind of economic policies that brought us to disaster in 1932 are being brought to bear today. Interest rates have been cut dramatically, government spending is out of control and that is BEFORE they decide to "bail out" failing banking institutions, unemployment is rising and Congress (and the President) plan for a massive redistribution of wealth. Is it any wonder that some are calling for a return to FDR's post WWI policies?

How bad is the economic outlook? Worse than almost anyone imagined.

The economic growth of the Bush years, such as it was, was fueled by an explosion of private debt; now credit markets are in disarray, businesses and consumers are pulling back and the economy is in free-fall. What we're facing, in essence, is a yawning job gap. The U.S. economy needs to add more than a million jobs a year just to keep up with a growing population. Even before the crisis, job growth under Bush averaged only 800,000 a year — and over the past year, instead of gaining a million-plus jobs, we lost 2 million. Today we're continuing to lose jobs at the rate of a half million a month.

There's nothing in either the data or the underlying situation to suggest that the plunge in employment will slow anytime soon, which means that by late this year we could be 10 million or more jobs short of where we should be. This, in turn, would mean an unemployment rate of more than nine percent. Add in those who aren't counted in the standard rate because they've given up looking for work, plus those forced to take part-time jobs when they want to work full-time, and we're probably looking at a real-world unemployment rate of around 15 percent — more than 20 million Americans frustrated in their efforts to find work.

A couple of facts to put Krugman's hyperbole into perspective. First, the "population growth" that Krugman fears so much is actually is based on more than a few assumptions. The first assumption is that immigration (legal or illegal) will stay the same. As we started seeing when the economy started to tank, illegal immigrants are leaving the US in droves. In addition to that, US population growth is slowing AND growing older. As the Baby Boomers age and leave the workforce, their jobs will fall to younger workers.

Krugman then goes on to mention the age of Reagan...

Remember the economic boom of 1984, which let Ronald Reagan run on the slogan "It's morning again in America"? Well, Reagan had absolutely nothing to do with that boom. It was, instead, the work of Paul Volcker, whom Jimmy Carter appointed as chairman of the Federal Reserve Board in 1979 (and who's now the head of your economic advisory panel). First Volcker broke the back of inflation, at the cost of a recession that probably doomed Carter's re-election chances in 1980. Then Volcker engineered an economic bounce-back. In effect, Reagan dressed up in a flight suit and pretended to be a hotshot economic pilot, but Volcker was the guy who actually flew the plane and landed it safely.

Well, not everyone agrees with Krugman that Volcker was the man who "flew the plane and landed it safely".

A Carter appointee, Volcker’s attempts to use interest-rate increases to slay inflation in the late ‘70s were met with a great deal more inflation. By February of 1980, with the Fed funds rate at 14 percent, gold hit an all-time high of $875/ounce.

The dollar’s aforementioned fall was of course sped along by another major mistake carried out by Volcker just a few months prior. Correctly recognizing the futility of interest-rate targeting, Volcker shed the latter only to make a fateful decision that would drive the U.S. economy even further into the ditch. Put simply, in October of 1979 Volcker began a three year experiment with Milton Friedman’s monetarism.

Instead of targeting the Fed funds rate, Volcker attempted to target the quantity of money with disastrous consequences. Though inflation is surely a monetary phenomenon as Friedman long noted, with the majority of physical dollars outside these fifty states, attempts to control the quantity of dollars within these fifty states were bound to fail. To the extent that the Fed targeted various aggregates of U.S. money supply lower, this merely meant that dollars in other markets (eurodollars for instance) would fill the shortfall.

Worse, given the Fed’s efforts to control money quantity rather than rates, the Fed funds rate bounced around on a daily basis such that businesses faced an impossible task of raising capital owing to uncertainty about the rate at which they could raise capital. As Charles Kadlec and Arthur Laffer wrote at the time, “the Fed’s action reduced the viability and attractiveness of the dollar,” and as a result its policies “increased the prospects of inflation” in spite of the fact that monetarist targets “resulted in a slower growth in the measured quantity of money.” What the economy needed according to Laffer and Kadlec were “policies that lead to an excess demand for dollars relative to their supply.”

Those policies did materialize, but no thanks to Paul Volcker.

The crux of Krugman's column is if the Fed prints a boat load of money and nationalizes the bank and if the federal government creates a whole slew of temporary government jobs then the economy will bounce back. Banks can not be forced to lend money to people who don't want to borrow! Right now, the people who can best "rescue" the economy don't have faith in it. That faith was killed, in some part by the very politicians that now want to rescue it from certain disaster! The consumers are the ones who can best rescue the economy and right now they are not spending money out of fear of higher taxes, higher fuel costs, an over higher cost of living and a stock market in free fall. The job creators of the country are not creating jobs out of fears of high taxes, higher fuel costs, an overall higher cost of doing business and a stock market in free fall! We simply can not spend our way out of this mess. Responsible spending mixed with tax cuts, permanent job creation and ceasing to live well beyond our means are all parts of the solution to this problem. There is no single cure and anyone who proposes that is just selling you snake oil.