Archive for December 8th, 2010

Confessions of a Recovering Economist

No one else will notice it, but we all now know what happened with the Depression and the New Deal.

To start with, everybody now agrees what caused the Depression. The money supply dropped a third . When the money supply is cut, especially to that disastrous extent, you have a depression. I could cause a full depression any time by simply cutting the money supply that much, and everybody knows it.

Roosevelt did increase the money supply by issuing debt. Federal debt is not as good as issuing money, but debt is partially money, it is kept on account so money can circulate.

Hitler just created new money.

But another thing we have learned is that high taxes bring the economy down. That side of the New Deal, raising the income tax to 91% and raising taxes massively, kept he Depression healthy for over a decade, and it might have been permanent without World War II.

That’s IT. That’s the whole mystery of the Great Depression solved.

Reagan showed the economy responds to tax cuts. It used to be “voodoo economics” but not any more.

Obama has proved that the classical New Deal solution to Depression does NOT work. No one is surprised that higher taxes and more regulation has stagnated the depressed economy’s recovery.

What no one notices is that pretty well everybody accepts these realities now.

Please note that the reason I can make this lesson clear is that I am a professional economist who is not writing like a professional economist. I explained that issuing debt is almost like issuing currency, but I could have dedicated a chapter to telling you why that is so.

I could have dedicated a chapter to explaining how the simple money supply is affected by issuing “instruments which increase total liquidity.”

But if I am an economist, I am also, as they say in Alcoholics Anonymous, a “recovering economist.”

I hope I am also a recovering historian and, in general, a Mommy Professor whose disease is in full remission.