Sunday, June 27, 2010

The Fallacy of History

Like most people of liberal bent, which may be an oversimplification, I have long liked and admired Paul Krugman. He is, however, beginning to wear a bit thin on me as his writing strikes me more and more as taking a tone of certainty that suggests that his theories are not theories but are facts, and that anyone who disagrees with him is on the same order as people who believe that the Earth is flat.

His main point of contention is that the government needs to spend large amounts of money to “restart the economy,” and that doing so will replicate the results of FDR’s “New Deal” which, Krugman maintains, brought the country out of the Great Depression.

I don’t have a Nobel and am not really qualified to dispute his theories, but he supports his theories more with history rather than logic, and I can read history every bit as well as he can. In using history to support his assertion, he bases his argument on the assumption that because two things happened in sequence then one of those things necessarily caused the other. I don’t buy that assumption, and in any case if one looks closely the two things that he juxtaposes, they did not really happen in quite the precise manner that he claims.

The “New Deal” certainly reduced unemployment, but did it “restart the economy” as Krugman claims? The reduction of unemployment consisted of the make-work jobs provided by the WPA projects and the CCC camp projects, which provided a way for workers to feed their families and get off of the “dole.” But was this nation experiencing any king of surge in manufacturing, or production of any kind, prior to World War Two? If so it doesn’t show up in any of the history books that I read, and that doesn’t look like a “restarted economy” to me.

World War Two certainly didn’t “restart the economy” in any meaningful way. The economic energy of the nation was entirely devoted to the war and from a consumer standpoint the economy got, if anything and in some ways, worse. There was something approaching full employment, of course, but nothing much to buy with the proceeds of that employment.

The phenomenal recovery and growth that Krugman cites, and the period that he uses as evidence that national debt is not problematic since the economy can grow at a pace that renders it irrelevant, is post-war 1950’s.

To suggest that we can replicate that today requires thinking that is on the order of delusional. That was a time when the entire industrial world was in rubble with the exception of The United States. The world needed to rebuild and was hungry for goods, and we were the only nation which had the means of producing those goods. We had an unlimited market demand and absolutely no competition. Of course we experienced phenomenal growth.

Today we are faced with a world saturated with both goods and the means of producing them. We are faced with almost no present market demand and enormous competition. Our competitors are eager and aggressive to secure the gain of filling what little demand there is remaining, and they have the wherewithal to do it.

So I see Krugman’s historical evidence coming unhinged on two grounds.

It was not the “New Deal” that “restarted our economy,” but rather the need to rebuild a world shattered by war. It seems to me that the “New Deal” was nothing more than a holding action which allowed the country to manage its affairs until other causes turned the tide in our favor. Such a holding action may be needed now, providing temporary jobs to allow presently unemployed workers to feed their families until other factors change the economy, but in terms of that spending “restarting our economy” I do not think that history proves it.

The other fallacy is that history proves anything when conditions are so vastly different. What we were able to do in a war-shattered world as the sole producing nation is by no means illustrative of what we can expect of our economy in today’s environment, and to suggest that the times do not change the theory borders on idiotic.

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