Economics for Politicians Chapter 4: You Don’t Create Jobs – It’s Time to Get Over FDR! [Reader Post]

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Welcome back, class! I took some time away for some brief diversions regarding leftist intolerance, and with last week’s natural disaster I probably didn’t have your attention anyway. So now we’re back, and congratulations on staying awake through my two lectures on economic theory, but it’s going to pay off! Now we start to look at how the theory I’ve taught relates to the real world, and your learning has progressed to the point where we can explain to you why you don’t create jobs! If you need a refresher, links to the first three lessons are at the bottom of this post. Now, onto the next chapter of your enlightenment!

On weekends I lead tour groups here in the nation’s capitol, and when I take my charges to the second room of the FDR Memorial I dispel the mythology that the New Deal created jobs. Here is the example I use for my group to better illustrate:

I suggest a scenario where my tour group and I decide to run off to a remote island and form our own country, Bobylvania. We all have our own jobs that contribute to the country, but one day I lose my job. The good citizens decide that they want Bobylvania to be a leader in green energy, so they give me a government job creating windmills and solar panels to provide our energy, and they pay me a decent wage of $50,000 (or about $24 / hour) per year. This is great for me, but that money has to come from somewhere. If there are ten people in my tour group the easiest way to gather our revenue enhancements (or as we non-politicians call them, “taxes”) is for each of them to pay $5,000 per year to fund my job. For simplicity we’ll leave out my generous health benefits to which I don’t contribute or the unfunded liability known as my pension that the children and grandchildren of Bobylvania will have to pay (The Association of Federated Bobs local 101 chapter are good negotiators).

Going back to the Great Depression as well as our current economic woes we need a brief aside on a school of thought that has paralyzed the left from taking constructive action known as Keynsianism. What the Keynesians (thinking modeled after the British economist John Maynard Keynes) believe is that an economy needs to be stimulated from time to time if there is not great enough aggregate demand (generally speaking – not enough money) for the economy’s goods to be brought. Without the private sector to do this the task then falls onto the government to spend, or “stimulate” the economy. The government spends this money, puts it in people’s hands, and they then spend it elsewhere, and that third party spends it elsewhere, creating what is called a “multiplier” effect. It is this exact thinking that enables Nancy Pelosi to make statements like food stamps being a stimulus. The government has pushed money into people’s hands and the economy gets moving again. So why haven’t the various stimulus programs worked? If the New Deal was such a triumph in creating jobs why, save for two brief periods, did unemployment never drop below 15% before the start of World War II? How come Japan hasn’t fully recovered from its “Lost Decade” of the 1990’s? And why does unemployment continue to remain “unexpectedly” high?

Here is where we introduce you to another piece of economic theory known as the”Broken Window Theory”, which originated with the French Economist Frederic Bastiat. Wealth cannot be created from nothing, nor can it be created via destruction. If you have a few minutes Declaration Entertainment’s Bill Whittle does a great job of explaining how wealth is only created by producing something of value. The example that Bastiat uses to illustrate his theory is of a boy walking down the street who throws a brick through the local baker shop’s window. When the baker comes out to express his unhappiness with what the boy has done the boy responds that he had helped the town. By breaking the window the boy has created a stimulus for the economy. The new window that the shop keeper buys will put money in the hands of the glazier, who might then use it to buy a new pair of shoes. The extra money in the cobbler’s hands may help him to buy a new wagon, giving more money to the wagon maker to spend, and you get the idea. Lost in all of this is the baker. What Keynesians miss is all of the unseen activity that does not take place as a result of the wealth that they displace. The money that the baker is forced to spend on a new window might have been used in all of the places that the boy mentioned, or maybe the baker chooses to buy a better oven to produce more bread, which will force the baker to hire more employees to sell all of the extra bread that he sells (or as this private investment is called outside of DC, “Job creation”). Maybe the baker’s store becomes successful enough that he believes he can earn more profits by taking the risk of opening more stores. In turn, he puts to work the people who build his shops or renovates an otherwise vacant space, and hires more employees, and maybe becomes successful enough to go public, and his bakery becomes one of the stocks that fuels the mutual funds that help to fund various pension plans and he makes enough money to build a bigger home, reinvest in other ventures, and put more people to work in our economy.

Or he can use that money to pay for a broken window instead, and – HEY! I see some of your eyes are glazing over thinking about how the baker is accumulating wealth that he doesn’t need and how his taxes should be raised to pay for programs that the groups who funded your election campaign are calling for. Go back and re-read chapter 1, and you are not allowed to read any further until you understand it. Go ahead and bookmark this page – I’ll be here when you get back.

For the rest of the class, this was the same effect with FDR’s New Deal policy and with Obama’s today. FDR kept passing ever more regulations that left businesses reluctant to expand because they were afraid of what he would do next. And many of FDR’s programs caused more harm than good. His price supports for farmers guaranteed them minimum prices for their crops, while increasing the price of food. Since poor people pay a greater percentage of their incomes to buy food they were disproportionately punished by the president. FDR was big on having business collude to stay in business, but less competition leads to higher prices and fewer goods sold. Creating minimum wages, the 40 hour work week, and helping employees gain the right to unionize are not necessarily bad things on their own, but each of these makes hiring more expensive, which naturally leads to higher unemployment.

Lefties love to argue that in 1937 when unemployment surged to 25% that it was because FDR tried to rein in spending. In 1936 the exact words of his Treasury Secretary, Henry Morgenthau were, “We have tried spending money. We are spending more than we have ever spent before and it does not work.” Sound familiar? FDR viewed his re-election in 1936 as a mandate to become more aggressive in his New Deal policies. We saw increased taxes on the wealthy as well as the Wagner Act which gave greater power to organized labor. The spending “cuts” weren’t enough to cause the surge in unemployment on their own, and even if the cuts themselves could have caused the increase in unemployment, the timelines are wrong.

One of the few things that economists of all stripes agree on is that unemployment is a lagging indicator, meaning that unemployment actually reflects how the economy was doing, and not necessarily where it is now. Think about the general timeline using generic examples. Say in a period of time we see sweeping legislation that will “improve” our economy. We see laws passed designed to nationalize health insurance, allowing the NLRB to force companies to shut down new factories, prevent any offshore drilling in the US, bankrupt coal companies, and even put an end to that ever present and corrupt example of big business at its worst, lemonade stands. As these industries find themselves becoming less profitable, they end up doing less business. As they do less business they find that they need fewer employees. As the companies realize they need fewer employees layoffs start to happen, assuming that the company doesn’t simply decide to close its doors and as its remaining contracts expire everyone loses their jobs. These steps don’t happen overnight, and only after these occur do the unemployment claims start to be filed and counted in the statistics. The point is that it takes time for the true impacts of any policy to reflect in the unemployment numbers – just right for the Second New Deal of 1936, but far too short for the “austerity” of 1937.

Some economists argue that what finally took us out of the Great Depression was the onset of World War II and how it ramped up our industry and agriculture, leaving the US as the only major industrialized country at the end of that was mostly untouched by the fighting. But if Keynesian theory held true, why didn’t this surge of returning GI’s leaving their jobs in the military (government) suddenly cause a surge in unemployment? How did government spending dropping as a percentage of GDP at the end of the war not take money out of people’s hands and cause an economic downturn? How did America get mobilized and employed and lead to unprecedented growth and prosperity? This is not a kind thing to say (and I stop just short of this on my tours unless someone asks me to elaborate), but the biggest factor in finally getting us out of the depression was the death of FDR. Without this powerfully charismatic figure to champion his various innovation-strangling policies, the Republicans who had taken control of Congress in the 1946 election were able to push back on President Truman and get America back to work. Needless to say, these views are none too popular here in DC. In fact, on two occasions I’ve had elderly ladies who were passing by stop to yell at me for speaking unkindly about this president for whom they had such fond memories of and all of the jobs they saw him “create” firsthand. I’ve tried to explain The Broken Window Theory to them, but to no avail. To quote FDR’s successor Harry S. Truman, “I never gave them Hell. I told them the truth and they took it as Hell.”

So how does all of this tie together to suggest that only the private sector can create jobs and spur an economy? There is more to tell here but this lesson has already gone on longer than I had intended.

A logical next lesson would be to go into the chapter on unintended consequences, but I don’t think you’re quite ready for that yet. So we’ll take a side trip for our next lesson and kick off next time with:

Chapter 5: Businesses are Greedy – This is not Necessarily a Bad Thing!

Previous Chapters:

Lesson One: It’s Not Your Money

Lesson Two: Intro to Microeconomics, or Why Prices Matter

Lesson Three: Intro to Macroeconomics. or So that’s Where Government Fits In!

Cross Posted at Brother Bob’s Blog

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@anticsrocks: The Constitution is not strictly speaking a legal contract. Furthermore, contracts are renegotiated all the time (and constitutions are amended too.) Lastly, for the love of God, learn what the term “socialist” means! You might as well call me a Rotarian.

@AJ Hill:

You foks and the Constitution slay me. It’s an eighteenth century document written by eighteenth century thinkers using an eighteenth century worldview. As such it’s totally unsuited to guide social policy in a huge segment of contemporary life: global trade, information technology, healthcare, communications, biotech, … even the damned stock market.

You show your lack of understanding of what the Constitution IS by your insistence that it’s “totally unsuited to guide social policy”. It was never meant to be an instrument in those endeavors.

The Constitution was written to form the framework of the Federal government, and to establish the rules by which the Federal government operates. To do so, the STATES, and, by extension, the people, had to extend, or give up, certain powers to the Federal government.

The Constitution sets forth the limitations upon the Federal government by which it can, or cannot, enact the laws passed by Congress and signed by the President. When such laws run afoul of the rules by which the Federal government is authorized to operate, it is not a failure of the Constitution, as you imply that it is. No, it is, in fact, a failure of the elected representation in the Federal government itself, the states, and the people.

You mention the Commerce clause. That clause was instituted, as Madison has stated, to ensure that the playing field between the states, within the boundaries of commerce, were even and fair, so that one state could not punish another, or extract punishing tolls, taxes, or other monetary powers over another states commercial interests. It was never designed, nor intended, to be an instrument by which the Federal government could oversee all phases of particular industries, whether from environmental, or financial, or other, influence.

The Commerce clause, as written and intended, is as perfectly viable a power today as it was when the Constitution was adopted. It wasn’t until the progressive expansion of it’s meaning beyond original intent, that it became seen as “outdated”, thus requiring the ever expanding definition, through court rulings and pure tyranny, in order to envelope the changing commercial landscape.

The power to govern the commercial interests within the states was still reserved by the states themselves. The states had the power to do all the actions our Federal government does today. Unfortunately, we, the people, allowed the power grab by the Federal government, and effectively neutered the states of that power. So, your other insistence, that “we’d live in a world that was totally out of control, a runaway nightmare”, is false and misguided. But, it represents the real crux of the argument on the Constitution. That is, whether the Federal government should be the all-powerful entity it has become, or, whether the Federal government should be constrained to the powers extended to it at the time of adoption of the Constitution.

Your claim of ” It’s an eighteenth century document written by eighteenth century thinkers using an eighteenth century worldview” notwithstanding, the Constitution is a solid framework with timeless ideas on government limitations, and is just as valid now as it was when written.

@johngalt: I respect your right to hold your opinions about the Constitution and federal vs. state government; but you’re just wrong. The basic assumption of the Constitution, made explicit in the 10th Amendment is that only powers explicitly granted to the federal branch are permitted to it; but how could the Framers have granted powers whose necessity, whose very area of application, were unknown to them? I’m well aware that the Commerce Clause is not well suited to the uses to which it has been put. I said as much. That’s as good an indication as any that the document as a whole is outdated and inadequate. Do you contend that every potential aspect of governance, every regulatory need that might ever exist was somehow manifest to the Framers? That seems like a terribly naive argument. Your judgment in this is obviously subservient to your ideology. Libertarians dislike government and want categorically to minimize it, regardless of consequence (See, I can generalize too.) I’d say that makes your judgment faulty. The Constitution may be “timeless”, as you say, but the real world is not!
By the way, the federal government isn’t “all powerful” and we don’t live under “tyranny”.. This kind of hyperbole seems to be irresistable to those on the right, but to those of us who prefer rationality, it’s just another indication of extremism.

@AJ Hill: If I did have a problem understanding what a socialist is, then just a few paragraphs traded back and forth with you would alleviate me of that lack of knowledge.

@anticsrocks:

You cannot change the Constitution for political expediency, for if you do, then where do you draw the line? Such absurdity shows you as a socialist, AJ.

That’s precisely why we should change the Constitution, why we do change it from time to time, so that it fulfills its purpose better. This “timeless” document, as johngalt enthuses, has been amended 27 times, the last in 1992. The Framers evidently never intended it to be set in stone. Where do we “draw the line”? When it works as we want it to. Government’s a tool, not a religion. As for your understanding of socialism, if you think my willingness to change the Constitution makes me a socialist, then you’re clueless after all. If you think that calling me one insults me, then you’re also hopeless. You can’t insult someone, when you manifestly don’t know what you’re talking about; and besides, I’d much rather admit to being a socialist, if I were one, than a libertarian.

@AJ Hill: I am not trying to insult you, AJ. I usually try not to stoop to the level of name calling that you so willingly brandish.

I called you a Statist; read Alexis de Tocqueville if you are at a loss as to what a Statist is.

It is odd how you pick and choose from what I say to reply to. That is very telling on your part, AJ. If you are so intent on the Constitution being changed, then put your money where your mouth is.

Let’s hear it, what changes do you propose making to the United States Constitution?

When I asked where you draw the line [on changing the Constitution], you replied, “When it works as we want it to.”

Who is this “we?”

How did this “we” get to decide when the Constitution works?

Surely you aren’t referring to the “we” as being the States, which get to participate in amending the Constitution. But maybe you were. I would guess though that by “we” you mean those of you on the left.

Sorry, it doesn’t work that way.
.
.

anticsrocks, don’t be fooled by generalities. No Constitutional amendments implemented since our founding has altered the foundation of a Republic vs a Democracy. Indeed some of them were correcting ill thought State laws (i.e. voting rights for minorities and women) since they ran contrary to the founding principles’ intents. No where in the Constitution was slavery advocated, nor voting rights restricted … denying that to blacks, women or immigrants…. something many seem not to realize. That was a choice always left to the States. For the most part, it was tied to property ownership in the States, and not to race, nationality or gender. Nor does our deplorable public education system wish to impart that there were black owners of property in the early years of our nation, as well as black professionals in business, involved in local government.

Others were more onerous – deliberate expansion of Congressional powers not originally delegated… the progressive taxation, prohibition/no prohibition etc. When they started playing games by adding non-enumerated powers, the original base principles started going downhill.

You may want to listen to a repeat of Hill’o’bean’s Constitutional improvement suggestions. I certainly don’t need to, but to each his own. But @he already did so in comment #56… where he called for the abolition of the Electoral College, a reduction or elimination of States rights, an increased authority for a central government using the Commerce Clause, and implementation of a national health care system. All this amidst the cries of foul, being (supposedly unfairly and inaccurately) labeled a socialist/Marxist/communist or any degree in between. And yes… I understand the differences well. So do the Marxists, socialists and communists. And so does Hill’o’bean’s hero, the Congressional token socialist (self-professed), Bernie Sanders.

INRE the suggestion that freedoms were being assailed via the new Info Age technology, what becomes ironic is that such privacy was always originally protected under the Constitution and Bill of Rights, but has become thoroughly distorted by an ever encroaching Congress over the decades.

As @johngalt said“…the Constitution is a solid framework with timeless ideas on government limitations, and is just as valid now as it was when written”. It is not the Constitution that has been rendered outdated and useless. It is the abuse caused by ignoring it’s limitation over the decades that create “living Constitution” types, who believe that it’s very base and limited principles do not apply in a world where [they believe] central government needs to be the deciding factor in every individual’s back yard. They blame the Constitution for the federal elected officials’ unConstitutionally flawed actions, which were aided by an agenda driven and scared Judicial system.

There was a reason why the Founders and Framers wanted to keep most of the power localized with State and local governments. Because each area has unique needs that are best decided by local denizens, and not a bunch of elitists in the beltway.

@MataHarley: As usual, you provide a great point of view in an eloquent, concise manner.

The irony never fails to make me laugh just a bit when I hear about the Constitution being antiquated, living and breathing, etc… I imagine the liberal/statist sitting there in shock because their bank decided that the mortgage they signed was living and breathing and with the economy doing poorly, they need their money, NOW. LOL

As usual with the liberals, it is do as I say, but don’t apply it to me.

@anticsrocks: Under American law (that is, under virtually all State law, since the States individually regulate contracts) these agreements (including mortgages) are routinely modified by mutual consent of the parties. Sometimes, depending on the terms of the contract, modifications can be unilateral.
If the Constitution is viewed as a contract, then there’s nothing unusual or illegal about the process specified in Aricle V for its modification.
So basically, what the hell is your point?

@AJ Hill:

I respect your right to hold your opinions about the Constitution and federal vs. state government; but you’re just wrong.

That opinion of mine happens to be the same on held by the very people who authored the Constitution, and who wrote the Federalist Papers in order to convince others to support it. What do you have, other than your opinion, that I’m wrong. Nothing.

I’m well aware that the Commerce Clause is not well suited to the uses to which it has been put.

And here is where you show your lack of understanding about the Constitution. It’s not that that clause is “not well suited” for those uses, it’s that the uses, or powers, it has been applied to are NOT given over to Congress in the first place. Congress has usurped powers from the states that was never intended for it.

Do you contend that every potential aspect of governance, every regulatory need that might ever exist was somehow manifest to the Framers?

I never said that, nor implied it. And the fact that you could ask that question shows that you understood nothing within my post, and that being the case, have understood nothing of the Constitution and it’s purpose, or intent.

By the way, the federal government isn’t “all powerful” and we don’t live under “tyranny”.. This kind of hyperbole seems to be irresistable to those on the right, but to those of us who prefer rationality, it’s just another indication of extremism.

It’s not hyperbole, AJ. It’s the view of one who holds the Constitution in high regard. You think the government doesn’t act tyrannical? Just what do you call it when a government can order you to purchase something that you might not otherwise purchase? Just what do you call it when the government can change the rules AFTER the fact, and award the favored and punish those who are not?

You are right about one thing. You certainly can make a generalization.

@AJ Hill: You asked:

So basically, what the hell is your point?

Wow, getting testy are we?

Calm down and relax, this is a discussion.

My point is that I revere the Constitution as a solid framework for our governing system that should be followed in its original intent. Doing anything else weakens it. Our Founding Fathers knew that in future generations disputes about the Constitution would arise. Therefore they engineered amending processes into the Constitution that would reflect the will of the people while maintaining the integrity of what they had achieved.

Let me turn to the Father of the Constitution, James Madison in 1854 [emphasis mine]:

“I entirely concur in the propriety of resorting to the sense in which the Constitution was accepted and ratified by the nation. In that sense alone it is the legitimate Constitution. And if that is not the guide in expounding it, there may be no security for a consistent and stable, more than for a faithful exercise of its powers. If the meaning of the text be sought in the changeable meaning of the words composing it, it is evident that the shape and attributes of the Government must partake of the changes to which the words and phrases of all living languages are constantly subject. What a metamorphosis would be produced in the code of law if all its ancient phraseology were to be taken in its modern sense. And that the language of our Constitution is already undergoing interpretations unknown to its founder, will I believe appear to all unbiased Enquirers into the history of its origin and adoption. ”

If one views the Constitution as a “living and breathing” document this attitude then gives rise to arbitrary and even lawless activism for the sake of political expediency.

Or as Thomas Jefferson wrote in a letter to Senator Wilson Nicholas in 1803 about the Louisiana Purchase [emphasis mine]:

“Our peculiar security is in possession of a written Constitution. Let us not make it a blank paper by construction. I say the same as to the opinion of those who consider the grant of the treaty making power as boundless. If it is, then we have no Constitution. If it has bounds, they can be no others than the definitions of the powers which that instrument gives. It specifies & delineates the operations permitted to the federal government, and gives all the powers necessary to carry these into execution. Whatever of these enumerated objects is proper for a law, Congress may make the law; whatever is proper to be executed by way of a treaty, the President & Senate may enter into the treaty; whatever is to be done by a judicial sentence, the judges may pass the sentence.”

The very idea that this is lost on you, AJ just goes to show that you are indeed a socialist, or at the very least a Statist.

We must preserve the integrity of our Constitution in order that the Republic we receive from our predecessors is as sound as the Republic we pass down to our children and grand children.

@johngalt:

You show your lack of understanding of what the Constitution IS by your insistence that it’s “totally unsuited to guide social policy”. It was never meant to be an instrument in those endeavors.

You should have quoted my statement in its entirety:

[The Constitution] is totally unsuited to guide social policy in a huge segment of contemporary life: global trade, information technology, healthcare, communications, biotech, … even the damned stock market.

You then go on to say of the Commerce Clause,

It was never designed, nor intended, to be an instrument by which the Federal government could oversee all phases of particular industries, whether from environmental, or financial, or other, influence.

That’s a fairly close paraphrase of what I said, which makes your repeated assertions that I don’t “understand” the Constitution hard to justify. You portray the Constitution as a combination of rocket science and holy writ, but it’s actually a straightforward document; the Framers took pains to make it so. Creating an obscure blueprint for the new nation would have been senseless and self-defeating and they were neither.

They weren’t clairvoyant either, which explains the fact that the Constitution, as written, is an inadequate outline for governance today. We live in a continent spanning nation of 300 million people and more than two centuries have passed. Whole segments of our society, our economy, and our technology didn’t exist, when the Constitution was created; some weren’t even conceivable then, as I pointed out in a previous post. To demand strict and literal adherence to the 10th Amendment under these circumstances would be the height of folly.

Thoughtful people in both the legislature and the judiciary have recognized this fact. Rather than allow the country to slide back into the eighteenth century, they’ve chosen to stretch the limits set forth in the Constitution in order to provide adequate oversight and control, where these were necessary. A better alternative would have been to rewrite the Constitution periodically, although perhaps not every twenty years, as Jefferson suggested; but even this would be impracticable. Mechanisms for formal modification of the Constitution are too cumbersome (mostly by design). Considering the risks involved, this may be just as well.

So far proponents of a rational approach to governance have prevailed. Your side has been unable to win the public debate and you’ve been overruled at the ballot box, where it counts. This may explain the continual reliance on hyperbole and name calling on this website. To your credit, jg, you largely avoid ad hominems; but you still resort to rhetorical devices like false dichotomy in trying to advance your argument. The choice we face is not between an “all powerful” federal government and one constrained by the Constitution. We need to find a balanced intermediate approach that conforms to the spirit of the Constitution, while fulfilling the needs of a twenti-first century society.

@AJ Hill: @anticsrocks: *crickets*