A lesson from the Weimar Republic about balancing the budget

Introduction:  This is another in a series of dashed off speculative opinions.  Normal procedure on the FM website for these topics would be 3 thousand word posts, supported by dozens of links.  I dont’ have the time to finish them, and too many of these outlines have accumulated in my drafts file.  Perhaps these will spark useful debate and research among this site’s readers. 

Contents

  1. Introduction
  2. Delong on the end of the Weimar Republic
  3. For more information and an Afterword

(1)  Introduction

If the economy does not recovery soon, I believe it will fall into another decline.  In the third year of this recession the reserves at all levels are drained — households, businesses, and governments — so another downturn might be worse than the first.  In this scenario the Democratic Party members of Congress will face a stark choice:  pass another large stimulus bill in  March or April or face electoral defeat in November.

Less obvious is the peril of the Republican Party.  Their strategy of “the worse, the bettter’ (see here for more) seems likely to win, riding on the “stimulus has not worked” platform.  But what do they do following success?  The Weimar Republic provides an example worth attention.  A balanced budget can destroy a nation.  Change does not necessarily mean better.  Hope is not enough.  As Weimar proved.

(3)  Delong on the end of the Weimar Republic

When economists speak of liquidationist economics, they usually mean the first two years of Hoover’s Administration.  Under the advice of Andrew Mellon, one of the foremost experts of that time, the government did little to arrest the unprecedented conflagration of what became the Great Depression.  While true, this is not the strongest example. 

The myth has become well-established that Germany’s hyper-inflation wrecked the Weimar Republic and brought Hitler to power.   While the hyper-inflation weakened its foundations, it was cured in November 1923 — the same month as the NAZI’s Beer Hall Putsch.  By 1928 it was a flyspeck party, getting 2.6% of the vote in the May elections (9th place).  The Depression and Weimar’s adoption of liquidationist economics gave Hitler his opportunity.

Excerpt from “Nazis and Soviets“, Chapter 15 of Slouching Towards Utopia?: The Economic History of the Twentieth Century, February 1997:

All this changed with the Great Depression. In the March 1930 election the Communists took 13.8% of the vote; the Nazis took 19.2% of the vote. Since neither Communist Ernest Thaelmann nor Nazi Adolf Hitler was interested in anything other than destroying the republic, a government could have the support of a parliamentary majority only with the active support and cooperation of the Social Democrats, the Center, and the “establishment” right wing parties.

And here the Great Depression made such a “grand coalition” impossible. The Social Democrats demanded an expansion of the welfare state: unemployment insurance, public works, and large budget deficits to reduce the impact of the Great Depression. The establishment parties demanded –wrongly–financial orthodoxy: balance the budget, cut spending, and restore confidence in non-socialist parties. Neither block thought that it could afford to compromise with the other and still survive as a political movement. So parliamentary government became impossible.

Subsequent elections in search of a viable parliamentary majority only made things worse. The Nazis took 38.4% of the vote in the elections of July 1932. The Communists and the Nazis together had a majority: no parliamentary majority was possible. The German constitution offered an out: if no parliamentary majority could be assembled, the Chancellor could ask the President–himself directly elected for a seven-year term–to rule by decree.

Heinrich Bruening, the leader of the Catholic Center party who became Chancellor when the Social Democrats and the establishment parties split in March 1930 under pressure from the Great Depression, was chosen Chancellor by the aging President of the Weimar Republic, the war hero Paul Hindenburg. Bruening sought to use this escape hatch to pass a policy of fiscal retrenchment and welfare state cutbacks. For as he promised Hindenburg, Bruening tried “at any price [to] make the government finances safe”: balancing the budget–reassuring investors that Germany was committed to financial orthodoxy–was Bruening’s first and nearly his only priority.

Thus Bruening spent the first months of his Chancellorship trying to balance the budget, only to find the economic situation outrunning him. The projected deficit tripled during his first three months as tax collections fell and social insurance spending rose.

On July 16, 1930 Bruening’s budget-balancing program was defeated in the Reichstag by 256 to 193. Bruening immediately reissued the entire program as a presidential emergency decree. By a very close vote, the Reichstag demanded that the decree be rescinded. In response Bruening dissolved the Reichstag, hoping that new elections would give him a mandate to continue purusing policies of fiscal austerity. The dissolution of the legislature blew up in his face: the Nazis gained 107 seats. The conservative establishment parties from which Bruening drew his base collapsed.

But Bruening still believed in the necessity of a balanced budget and the maintenance of the gold standard. Government expenditures were cut by one-third from 1928 to 1932. But fiscal retrenchment and welfare state cutbacks did no good, and some harm. The German economy slid further into the Great Depression.

… Even after the financial crises of 1931 made expansion possible — because Germany was no longer on the gold standard–Bruening continued to hope that balancing the budget would restore investor confidence. In the end he enforced deflation on the economy: a December 8, 1931 decree ordering the reduction of all fixed prices by ten percent, and a ten to fifteen percent cut in wages.

From our perspective such a fall in prices would not be expected to help the economy. Debts would be a larger burden on the lower-price economy, uncertainty about the stability of the financial system would be greater, and so investment would fall. Bruening’s deflationary and budget balancing measures did not help. British attempts to cancel the reparations burden came too late to restore confidence while Bruening was still in office. Unemployment rose. 

And as unemployment rose, the Nazi Party vote rose as well.  Why did higher unemployment raise the Nazi Party share of the vote? As the Great Depression deepened, old party allegiances were shaken and the formerly apathetic began to go to the polls. Voters were unlikely to move to the establishment parties: they had ruled the country and thus presumably bore some responsibility for the Depression.

Voters outside the industrial working class were unlikely to move to the Social Democrats: the Social Democrats were an explicitly “class” based party, their rhetoric and their form of organization making belonging somewhat uncomfortable for the middle class; and the Social Democrats carried the twin burdens in a strongly nationalist country of being officially “internationalist” and of having been the collaborators of the allies who had imposed the Versailles peace settlement. Indeed, Social Democratic voters tended to move to the Communists.

Disaffected voters were interested in a party that promised to do something about the Depression: that had a theory of who was responsible, a program, and a bias toward action rather than parliamentary talk. the Nazis had a theory of who was responsible: the Jews, the financiers, foreign capitalists, and the “November criminals”–the Social Democrats who had signed the Treaty of Versailles. They had a bias toward action. And they had a program, confused as it was: the overthrow of the Treaty of Versailles, German rearmament and national reassertion, and the drafting of industry into the service of the nation to provide unemployment.

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Afterword

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41 thoughts on “A lesson from the Weimar Republic about balancing the budget

  1. I found your blog very interesting. I am familiar with German History begining with the Weimar Republic through today. I am not happy about the current situation with the economy. I dread seeing history repeating itself if something isn’t done. I voted for Obama and don’t feel right about making any comparisons between him and Hitler, but, I feel like they both projected the same Robin Hood type image to gain popularity. In contrast though, Hitler robbed from other countries and jews to try to improve the economy and Obama is taking from his own people. Either way, something has to be done. I do not want to live in a Communist/Socialist Country and that is for sure. I want to still be able to believe in the American Dream.
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    FM reply: There is no meaningful basis for an analogy between Hitler and Obama. This post discusses the consequence of liquidationist economics, advocated by many conservatives, when applied during a severe downturn. Weimar’s experience shows how quickly the social fabric can unravel.

    “Hitler robbed from other countries and jews to try to improve the economy and Obama is taking from his own people”

    False. So far he’s cut taxes, substantially (a standard method of economic stimulus), not raised them. BTW, the largest tax increases in US history were signed by Reagan and Bush Sr. So now you can tell your friends that Reagan and Bush were just like Hitler.

  2. FM: “But what do they do following success?”

    That’s easy. Pursue policies that reward their financial supporters while whipping up hysteria on non-economic issues that drive the recession/depression off the front pages of the newspapers.

    The Republican party these days is all about control rather than policy and governing. Once they regain control (probably in 2012 with the Presidential elections) they will do ANYTHING to avoid losing control as they did in 2006 when the Democrats captured Congress.

    Here’s one hideous but plausible scenario:
    The Republicans play the Internal Terrorist game (there are evil-doers among us that hate us and seek to destroy us. They look just like us and are expert liars so don’t trust your friends, neighbors, or relatives. Only the Republican party is trustworthy. Report anybody you suspect of being untrustworthy to the Republican party and we’ll protect you). Then they’ll find some mentally ill person who harbored a well-known dislike for the government and haul him up on trumped up charges and planted evidence.

    At the trial he will blather endlessly (perhaps aided by a few injections) about being part of a much larger conspiracy and name important financial supporters of the Democratic party as the leaders. The Republicans will blame the deteriorating economy on the machinations of these so-called terrorist leaders rather than on bad policy decisions and give everybody another big fat tax cut or stimulus check to make us all feel better while they hunt down and imprison the people named in the trial. More showcase trials will, of course, follow after the defendants have been tortured into confession.

    Any legal challenges to the trials will be spun as members of the terrorists trying to protect their own. Any violence that results will feed the media monster that the Republicans will create. The Republicans may even spark a few incidents of their own just to keep the masses who are glued to their TV sets fearful. Whatever else you can say about this scenario, it will be much more entertaining than Reality TV and much less (financially) expensive.

    What happens after that is up to us and millions of financially-exhausted, media-manipulated, tea-baggers who will be watching for disloyalty to the Republican party.

    If things get to this stage, the next revolution will be much more French in nature than American and the Guillotine may well be placed in the National Mall.

  3. The Weimar Republic is certainly of historical value in the overall discussion.

    In sorting priorities, what the November victors need to do is recognize that the ruin has been brought about by centralization, and set about a program of unwinding these untenable Progressive artifacts like Entitlements and the Federal Reserve. Possibly we could gather all of the roaches and debris, and load up the bong for one more collective Keynesian hit, but that’s just kicking the problem across the mound of beer cans into the next room for another administration. We’ve been stoned near a century now, and we edge nearer to a) lethal dose, or b) supply exhaustion.
    The Tea Party has to show that it has done its homework. It will do this by blowing holes in the crayon-level explanations given for why public theft is somehow necessary and proper. Or the Tea Party shall stand revealed as the last gasp before some soft despotism to follow.

    Reify the debt. Hand me my dead horse to work off, and show me the systemic changes undertaken to preclude another century-long Madoffian waltz.
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    FM reply: Please go to your nearest retirement community and explain that we should start ” unwinding these untenable Progressive artifacts like Entitlements” — the biggest being social security and medicare. Report back on the results, if you live to tell about them.

  4. Link to an interesting article on the Hyperinflation of the Wiemar Republic. It appears the problem was caused by an organization similar to our privately owned Federal Reserve as opposed to government printing of money as is commomly believed.
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    FM reply: The link goes to a piece of faux history. I’ll mention just two of the countless errors.

    “What actually drove the wartime inflation into hyperinflation, said Schacht, was speculation by foreign investors, who would bet on the mark’s decreasing value by selling it short.”
    The mechanisms to do this on a national scale did not even exist then. They’re a result of financial liberalization and globalization starting in the 1970s with the collapse of Bretton-Woods. I suspect that if we trace back the “evidence” for this, it goes to anti-semites blaming Jewish bankers.

    “The Nazis came to power in Germany in 1933, at a time when its economy was in total collapse, with ruinous war-reparation obligations”
    This is false. A moritorium had been declared by the US, UK and France during the summer of 1931. Reparations ended following the Lausanne Conference of June 1932. See Wikipedia for details.

    Hyperinflation is almost always and everywhere a fiscal phenomena. Governments resort to it when they cannot pay their bills, most often as a result of war (during or after). Weimar fits this model perfectly. It ended when the government introduced a new currency, the Rentenmark, and stabilized its finances.

  5. Pluto’s comment is insane. Who since Joe McCarthy R or Woodrow Wilson D has told people to watch their neighbors? I could only see Beck or Limbaugh saying something like that. I really think a politician would be hounded out of town if the went McCarthy.

    FM, I do think spending is a problem, not just tax cuts. Yeah, you’re not likely to get rid of medicare or social security, and I don’t think we should. But we can be smarter about them. Like, the rich old people don’t need to recieve their checks even though they paid into them. It’s not fair, but something’s got to give. Their is an old John Stossel episode where he confronts a bunch of rich old people and some of them agreed in the end. So, who knows?

    Also, I don’t really believe in feverish tax cutting. But it does sound good. I was put into the 25% bracket this year and that really sucked. I got the same stop signs last year for 15%. But I wouldn’t care what percentage I paid so long as everybody paid it. Why can’t we just have a 20% tax on everybody no matter what? And then get rid of all the tax breaks or reductions like donating your car to NPR. Its not really charity if your not really giving.

    I also think a universal across the board tax would get every citizen on board, thinking about things critically.
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    FM reply: Perhaps I was not clear. I think spending is the question. Folks like to dream of tax cuts and cutting spending that helps other people. Best of all, cutting the trillions we spend on foreign aid. For more on this see A look at our government’s debt – rising because we like to spend.

    (1) “But it does sound good.”

    Of course it sounds good. Just like “chicks for free” (source). And just as likely. That we spend so much time discussing such an insane proposal shows how delusional and disconnected from reality America has become.

    (2) “I also think a universal across the board tax would get every citizen on board”

    Sure. Why not reduce them to zero? Or a negative tax of a zillion dollars to everybody, every day. The US government has run a deficit (in real terms, aka accrual accounting) every year for 40 years. And our massive liabilities are coming due. Advocting tax cuts under such conditions is insane.

    I misread this as “across the board tax cut.” We already have a flat tax system, in that the top 80% all pay (roughly) the same tax rate — including taxes on income, property, sales, estates, etc. The rate drops for the very rich, aprox $10 million + of income. I don’t see why tinkering with this system would “get every citizen on board.”

  6. Obviously there is an push by those alarmed about our unsustainable finances to “do the opposite.” But I think FM assumes a bit much in concluding this will lead to unavoidable political pressure to adopt liquidationist policies. The opposite of “unsustainable deficits” isn’t necessarily, “no deficit.” It might just be “sustainable deficits.”

    Such nuances, can, of course, get lost when alarm reaches those who haven’t a real understanding of macroeconomics. Or any economics. But it gives to little credit, in my opinion, to those sounding the alarm. In my experience they are not obsessed about whether the budget balances so much as they are stunned by the apparently sudden realization that the financial situation of the U.S., as it stands, cannot continue indefinitely. Most of these people, I find, understand the concept that some level of deficit is useful especially in hard times. All they really want, and what they are not getting, is a true acknowledgment of the problem and some vision as to how to fix it that is consistent with American principles and values. If there is panic, it is because there is increasing doubts as to whether fixing it is possible at all.
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    FM reply: You have totally missed the point. If we have a second leg down, then massive increases in the deficit might be the only alternative to a depression. Harsh choices, not the pleasant little choices you describe.

  7. FM reply: “Please go to your nearest retirement community and explain that we should start “unwinding these untenable Progressive artifacts like Entitlements” — the biggest being social security and medicare. Report back on the results, if you live to tell about them.

    Well, Fabius, there is leadership, and there is cowardice. A common sense read of Amendment 10 precludes social security and medicare, yet they have the weight and financial cratering of decades of addiction to support them. Maybe the analogy of narcotics addiction offers ideas. Consider a three-way, age-based segmentation:
    a) The elderly are protected.
    b) A middle group can choose to pay a lot now and collect their dope.
    c) A younger group, mine, can be told: “Look, it was a Ponzi scheme, understand you’re paying X dollars for Y years, tapering off as group a) retires from this mortal plane, and getting squat.”
    I submit that the craving for honesty, maturity, and Constitutional answers to Progressive problems is such that the notion can and will gain traction. The Progressive Perpetual Perfidy machine runs low on lubricant.
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    FM reply: You totally missed the point. I am speaking of real people and their expectations. You spout theory and dreams. As I said, a visit to your local retirement community will educate you.

  8. FM reply: “Please go to your nearest retirement community and explain that we should start ” unwinding these untenable Progressive artifacts like Entitlements” — the biggest being social security and medicare. Report back on the results, if you live to tell about them.

    Or we could stop being selfish jerks and take care of our parents in their old age. IMO we are at this crisis point because for far too long, we have dumped our responsibilities off on society, expecting the government to take care of it, funded with borrowed money.

    Protecting your property and neighborhood might involve knowing your neighbors, organizing a neighborhood watch and knowing how to safely handle a firearm. That sounds like a lot of work and I don’t want to miss American Idol! So instead we clamor for more police and more prisons – only now states and municipalities are going bankrupt in the face of prison costs and exploding pension liabilities. I know for a fact that the California Department of Corrections will stop tracking many parolees (dumping the problem on mental health services) because of the budget deficit.

    Same thing goes for taking care of our family. Putting up with a cranky nana sounds like a lot of work! So instead we ship her off to Florida, confident that she can live off SSI, and Medicare will take care of her unlimited medical needs.

    Our problem as a people isn’t just that we have become apathetic in the political arena; we’re apathetic in everything (except for working 10 hour days). It will change not only when we have taken back responsibility for our government, but when we have assumed responsibility for our neighborhoods, families and ourselves as well.
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    FM reply: Another person disconnected from reality, seeing it only through conservative propaganda. As I said, go to your local retirement community and preach these ideas. They’re probably polite people, and will only jeer and shout. Perhaps toss vegitables. Probably not string you from the nearest tree, however much they’d like to do so.

  9. I am 24 years old. I would agree to pay SS taxes and not receive any benefits down the road from them if that will help. I think a lot of my generation would.
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    FM reply: Perhaps, because most of you don’t vote and have no idea what that would mean in terms of your lifetime earnings. People 30-35 do understand, and probably would riot.

  10. From #10 — “Or we could stop being selfish jerks and take care of our parents in their old age. IMO we are at this crisis point because for far too long, we have dumped our responsibilities off on society, expecting the government to take care of it, funded with borrowed money.”

    Captain Ramen, I have no idea how much time or energy you have spent taking care of the elderly, so I won’t assume anything. I will only tell you that, having seen what taking care of the elderly can really entail, from people who have actually taken your advice and do this, it basically eats up their entire life and prevents them from doing much of anything. Several of them have become very bitter as a result.

    It is not reasonable to expect people to take care of the elederly on their own, because in many cases it is a 24/7/365 job. The reality is that if you force private citizens to take care of their elderly, in many cases they will simply fail. That is the ugly reality that Social Security, Medicare, pensions, etc. were created to deal with.
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    FM reply: The simple reason few people can take care of their parents is that they don’t have the money. The bottom 20% by income has nothing. The next 40% are to a large extent broke. Debts, no savings, totally dependent for retirement on social security and medicare. These people have led their lives based upon promises of the government. Their reaction to those promises being broken might be neither polite or even rational.

  11. @12 — “…from people who have actually taken your advice and do this, it basically eats up their entire life and prevents them from doing much of anything.”

    Sounds like raising an infant to me. What percentage of the elderly are complete invalids? Does someone turn into an incompetent as soon as they turn 67? I would agree that in the majority of cases, someone is completely helpless in the last months of their life. But there is a wide gulf in between ‘just retired’ and ‘about to die.’ I would be more than happy to pay into Medicare if it was simply ‘guaranteed hospice care at the end of my life.’

    But we all know the reality is different. Free hip replacements and Viagra for a class of people far more wealthy than the workers supporting them, playing shuffleboard and soaking up sun on the beaches of Veracruz.

    I think we need to examine why you (not you specifically, but all of us Americans) would be bitter having to take care of an ailing parent at the sunset of their life. After all, this person fed you, cleaned up your shitty diapers and woke up in the middle of the night when you were crying 24/7/365 when you were helpless. Or did they subcontract it out to a ‘recent immigrant’ because they were too busy and didn’t want to get ‘bitter?’
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    FM reply: It’s a question subject to experiment. Take a petition, calling for aboltion of social security and medicare. All “ailing parents” become the responsibility of their children (if any). Visit retirement communities and busy street corners. Please report back on the results. You will find it an educational corrective to your theories, and the conservative propaganda you appear to avidly consume.

  12. From #13 — “I think we need to examine why you (not you specifically, but all of us Americans) would be bitter having to take care of an ailing parent at the sunset of their life. After all, this person fed you, cleaned up your shitty diapers and woke up in the middle of the night when you were crying 24/7/365 when you were helpless.”

    Basically the reason why is that back then one was a helpless baby with needs, but now one is an adult with desires and goals. I agree that it is a very moral decision to take care of ones parents, and I respect people who do it. From what I have seen, though,
    1. not everyone is going to do that
    2. even people who voluntarily decide to do this often become unhappy due to the constant difficulty

    There is a certain symmetry in expecting people to take care of their parents, just as their parents took care of them when they were young. But life is not always symmetrical. I would much prefer to allow people to be happy, rather than demand that they be moral. It seems to work out much better that way.
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    FM reply: The significant lesson from these comments is that so many people have opinions so disconnected from reality. They can test them, but prefer not to do so. I suspect because they know, at some level, that their views are unrealistic nonsense. The reactions of real people, unlike the delusional applause on right-wing blogs, would be unpleasant.

  13. “Basically the reason why is that back then one was a helpless baby with needs, but now one is an adult with desires and goals.”

    Your parents had desires and goals too before dad knocked up mom. Frankly they don’t have the right to get bitter about it.

    Some people will do a poor job taking care of their parents when they get old. Some people also make crappy parents. These are what we programmers call corner cases. You can and should modify the codebase to handle these corner cases. What you don’t do is break well tested, existing functionality that works for the majority of inputs for the sake of that edge case. Otherwise you get fired.

    “I would much prefer to allow people to be happy, rather than demand that they be moral.”

    This is the state of America today. People are ‘happy’ when they take anti depressants, stuff themselves silly with food and watch all the crap TV they want. Meanwhile our moral obligations – stopping the government from assassinating fellow citizens without trial, taking care of our own families, securing our property, the list is endless; in general, giving a damn about where we live – go unmet.

  14. Maybe it’s dumb or childish, but every time I see someone refer to members of the “tea party phenomenon” as “tea baggers”, it makes me want to give up researching the candidates and really figuring out what they’re about and just pull the lever for whoever is most aligned with the tea party.

    How do you think Jesse Ventura became governor of Minnesota? I voted for him and I was politically active then, and I know. There is NO WAY Ventura would have won that election if the establishment Dem and Repub had treated him with courtesy or even the barest modicum of respect. During the biggest debate, Coleman couldn’t even look at him or address him directly, he was so disdainful. Humphrey was much the same.

    That made Minnesotans mad. The establishment so transparently looking down their noses at the “prole” candidate. And so they voted, and Ventura was governor for 4 years, and the state didn’t fall into the Mississippi because of it.

    I see the same type of dynamics shaping up for the 2010 elections, and possibly the 2012 ones as well. The way the mainstreamers are falling all over their own feet to insult the tea partiers, this is an EXCELLENT time for anyone who wants to mount an independent run at congressional seats, because they just have to point at the establishment candidates and say “I’m a lot more like you than these people are, and look how they act toward me. That’s how they feel about you too.”

    For people who are truly contemptuous of the tea party movement, it might be better politics to just say that the tea partiers are hopelessly naive and leave it at that.

  15. How did Germany go from Depression to having the money to fund their side of the war ? I know we ( UK ) borrowed from US . But how did Germany do it , and sustain it for 6 years , presumably in a situation where importing and exporting was nearly impossible ?

    Also , the article remarks the ” ( faulty ) ” conservative plan . Since it was never seen through , how could we know it would not have worked ?
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    FM reply: German instituted massive Keynesian stimulus programs (before Keynes published), on a scale not possible for any other nation. FDR was unable to implement very large scale programs, and drastically scale back the stimulus in 1937 (which caused another relapse) because of consensus economics. Hitler did not have that problem, as any economist with good sense replied “Sieg Heil!” Now if only Hitler had been satisfied with large public works and building the people’s cars and autobauns…

    We know that conservative economics did not work, because no nation recovered from the nation until they abandoned them. It was an experiment. For more on this (include a powerful graphical proof), see Fetters of the mind blind us so that we cannot see a solution to this crisis.

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  16. Instead of advocating liquidationist economics and traditional electoral politics anti-establishment conservatives (and anyone else!) might want to focus, taken this ongoing economic crisis, on the necessity (from my perspective) of creating alternative economic, social, and cultural institutions in the here and now.

    For example, can new banking institutions be created within a national fiat money system and be independent of it? Does the creation of credit money (banks taking the initiative in making loans) come before the creation of central bank reserves? If so, could an alternative financial system be built around the top 20 private oligopolistic financial firms and their enablers, the Federal Reserve and U.S. treasury?

    It may be time to put our energy and intelligence into creating such parallel institutions (over the next 5-10 years) which if successfull, to some degree on a local level, could provide a platform for recruitement into a new social movement, that might then move toward electoral politics.

    Such a social movement would have a track record of creating alternative banks or new alternative methods of manufacturing, that actually was a creative response to the economic crisis. This might help to limit the type of increasing resentment which lead to the Nazi ascendency and help to guarantee a democratic future.
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    FM reply: You go to the heart of the situation. Stimulus programs are only first aid, providing time for treatment. We’ve squandered that time, without making any meaningful reforms.

  17. We already have the necessary tools. Just lack understanding & the will to use them.
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    FM reply: Agreed. I’ve said so many times.

    But suggesting that Americans bear responsibility for the Republic is like loudly passing gas at a Park Avenue cocktail party. The guests politely pretend nothing happened. Far more fun to write declarations of independence, and pretend we’re oppressed by Redcoats. Delusions. We prefer the lies.

    When we grow disgusted with the lies, or conditions deteriorate so that we can no longer afford them, then perhaps things will change. Unfortunately by then much precious time will have been wasted.

  18. @17 — Same here. You get sucked into a conversation about ‘so and so is stupid, they’ll be the doom of us all.’ I don’t think they are stupid people at all, yet agree that they are bad presidents / governors but not the end of the world.

    from @19 — “For example, can new banking institutions be created within a national fiat money system and be independent of it? Does the creation of credit money (banks taking the initiative in making loans) come before the creation of central bank reserves? If so, could an alternative financial system be built around the top 20 private oligopolistic financial firms and their enablers, the Federal Reserve and U.S. treasury?”

    Trust. I wouldn’t trust a bank that wasn’t FDIC insured. At some level you may have to play along, unless you can give me a better guarantee of money money then Uncle Sam.

    “Such a social movement would have a track record of creating alternative banks or new alternative methods of manufacturing, that actually was a creative response to the economic crisis. This might help to limit the type of increasing resentment which lead to the Nazi ascendency and help to guarantee a democratic future.”

    Resentment is worse than hatred. It is human nature but must be fought tooth and nail.
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    FM reply: Nicely said!

  19. FM reply: “It’s a question subject to experiment. Take a petition, calling for aboltion of social security and medicare. All “ailing parents” become the responsibility of their children (if any). Visit retirement communities and busy street corners. Please report back on the results. You will find it an educational corrective to your theories, and the conservative propaganda you appear to avidly consume.

    I recall you stating TPers are full of oldsters who want to keep gov funded healthcare all to themselves.

    Who said anything about abolishing these programs? I could circulate a petition about means testing them and get a similar result. Perhaps I wasn’t clear, but IMO those that can take care of their loved ones should. Just like we take care of abandoned babies – but not everyone’s baby!

    FM reply: The simple reason few people can take care of their parents is that they don’t have the money. The bottom 20% by income has nothing. The next 40% are to a large extent broke. Debts, no savings, totally dependent for retirement on social security and medicare. These people have led their lives based upon promises of the government. Their reaction to those promises being broken might be neither polite or even rational.

    I was fortunate enough not to grow up poor but my mother has told me all about it. My grandparents would be ashamed to take a handout. And today? Take a drive by your local housing project and count the number of units with satellite TV dishes. You can bet the other ones have cable. We should teach future generations not to depend so much on the government and save more. 13% of poor people’s wages go into SSI via the payroll tax. That is a lot of money for someone on the bottom. Stop buying loads of cheap crap made in China on credit. Etc.
    .
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    FM reply: Let’s replay the tape. You said…

    “Or we could stop being selfish jerks and take care of our parents in their old age.”

    But there is no need to look at details. You write up reasonable proposals to “reform” medicare. Like, as your suggested, means-testing “Free hip replacements and Viagra”. Then go to your local retirement homes. If you survive, you will return with a better understanding of these issues. As I have said many many times, the problem is not designing solutions on paper — but the operational art of assembling the political majority to enact them.

    “We should teach future generations not to depend so much on the government and save more”

    Nice but irrelevant. By the time those future generations grow up this crisis will be history, and its example probably will have taught those lessons better than any boring textbook.

  20. “Well, Fabius, there is leadership, and there is cowardice.”

    Agree. I have plenty of ammo. After we shoot the wounded, the survivors will be much healthier and wealthier, and younger too!

  21. Oh no not the ‘aging population’ fear again. Economic nonsense. This is 19th century thinking. All you do is move resources from one box of the economy to the other. Yep, kindergarden, schools, baby clothes makers, etc go down. But retirement villages, zimmer frame manufacturers, etc go up. Big deal. Net economic affect … zero. With modern technology and women working we have actually suffered very high real unemployment in most OECD countries for decades. ‘Offshoring’ hasn’t helped either. (Note: offshoring only works because of the tax reduction/avoiding opportunities that Govts’ give to companies, otherwise the numbers in nearly all cases do not add up).

    Take Australia, poster child for a great economy. Official unemployment 5 and a bit % at it’s best during the boom times. Real unmployment 15%, when you add back in all those people that have given up looking for work, people on disability benefits, and the near 1 million who have left the country, etc. And we are the ‘miracle’ economy of the Anglo Saxon world.

    The US, UK, Australia, etc, even Sweden have been lying about their real unemployment for decades now. Started with Thatcher in the UK, followed (and improved upon) by Reagan and all the successors since then and in many other places, re-defining the definition of unemployment to keep it politically acceptable. Paul Craig Roberts put it well recently, if the US used the definition of unemployment it used at the start of the Reagan admin, then it would be called 20% now. So, there is huge unused human resources available. More than enough for a vibrant economy even with a lot of oldies carking it. Plus think of the advantages for the young ones, cheap houses, good wages. Heck they might be able to work, buy a house, get married and raise their children on one salary again. You know like the 1950’s, 1960’s and 1970’s. Do wonders for the birth rate then.

    That idiot Spelgler thinks it is some religious political thing. become an athiest and you don’t breed … nonsense, it is always about economics. I’m 25 deep in student debt, no job, cant afford a house … hmm time to start a family. Yeh right. For one proof of that, study the Irish Famine and the after effects.
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    FM reply: How charming that you’ve become the uber-economist, able to dismiss the work of so many emminent economists as “nonsense.” You probably said other things, but I stopped with that first line. If you would like to learn about aging (about which you appear to know almost nothing), I suggest you start by reading “The Age of Aging: How Demographics are Changing the Global Economy and Our World” by the London economist George Magnus.

    The Paul Craig Roberts article to which you refer is “The Economy is a Lie, Too“, Counterpunch, 23 September 2009. He provides no evidence to back up his preposterous claim of 20% unemployment (near great depression levels). If that were true, social service expenses would be 2x what they are — as these people wouldn’t be starving in the Street, as they’d be eligable for food stamps and medicare. Only 12% of the US population recieves food stamps (Reuters), which most of the working poor can get.

  22. Family care of the old would be easier if we didnt live in a society of no-risk , no-time , speed the traffic , beautiful people with breast implants and deodorant . Which means we cant let most oldies out of confinement for fear they ask surreal questions , steal sweets , pick the flowers or trail a leaking urine catheter bag .
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    FM reply: Have you even lived in a society where people don’t use deodorant?

  23. There are similarities to Weimar Germany, but there are also differences. The main difference, I think, is that the Germans did not have much experience with democratic institutions; democracy was not well-established among them. And thus, they did not have much confidence in it’s workings (e.g, rule by decree as a default mode). If we are in the process of losing our confidence in our democratic institutions, then naturally the homology becomes more complete.
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    FM reply: I agree. All historical comparisons are problematic, esp when from a different society. The clear lesson remains: liquidationist economic policy during a severe downturn risks severe political and social blowback. In this sense it’s a radical strategy, not a conservative one.

  24. One of the more bizarre aspects of these comments involves the delusion that social security is some kind of new-fangled liberal invention foisted on the world by FDR during the New Deal in the 1930s.

    In actual fact, old age pensions were first instituted by Otto Von Bismarck in 1889. America came very late, comparatively speaking, among the developed nations in putting old age pensions into place.

    Social mechanisms for taking care of old people are not some sinister innovation by New Deal bureaucrats, they’re a basic component of modern democratic industrial open societies, and have been ever since the late 19th century. Caring for one’s parents made sense prior to the mid-19th century because people worked on farms instead of factories and lived with multiple generations in the same house in the countryside, instead of in apartments in the city, or in suburbs. Also, prior to Pasteur’s germ theory of disease and the public sanitation discoveries of Edwin Chadwick and Dr. Southwood Smith, people didn’t live to a very old age. Cholera epidemics and riots were common. Parents typically died in their 50s. In fact, when social security was put in place during FDR’s administration, the age of 65 was chosen as the start of payments because that was statistically when people began to die in large numbers. Obviously, medicine has advanced to the point where age 65 is no longer considered very old, and that’s the root of the problem with old age pensions and demographics in the industrial democracies.

    With the advent of factory work and modern medicine greatly lengthening citizens’ lifespans in the late 19th century, it became impractical for exhausted workers to take care of their parents — especially today, since people now live so long that immobility or senile dementia in old age has become commonplace.

    Old age pensions prove as fundamental to modern industrial society as roads or the telephone. People who think we can do without them are deluded or bizarrely ignorant.

  25. Fabius says

    German instituted massive Keynesian stimulus programs (before Keynes published), on a scale not possible for any other nation. FDR was unable to implement very large scale programs, and drastically scale back the stimulus in 1937 (which caused another relapse) because of consensus economics. Hitler did not have that problem, as any economist with good sense replied “Sieg Heil!” Now if only Hitler had been satisfied with large public works and building the people’s cars and autobauns

    I would argue that if Hitler had been satisfied with large public works and so on, he would end up with another edition of Weigmar hyperinflation. Every large deficit has to be paid up, and not in some vague distant future.
    German’s massive Keynesian stimulus programs were paid up by Jews, Poles, by people almost all Europe.
    .
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    FM reply: That’s not always true. When a nation has massive unused capacity, the cost of putting it to work is low and the payback is high. The demonstration of this was Keynes’ core insight.

  26. Right you are McLaren. Bismarck did implement old age pensions and many other safety net programs in the newly united Germany. Why, because he knew that he had to buy off the German working class and prevent them from communist style revolution. It worked. They became “ballot box socialists”, and were reviled by Marx, Engels and others as “revisionists”. Meanwhile Bismark’s authoritarian military and foreign polices remained intact. But the youg Kaiser Bill did not want the old man anymore and “dropped the pilot” and fell in with advisers who were not as smart or cautious as Bismark, which eventually led to the Great War.

  27. Umm FM. First I’ve done a lot of (paid) work on demographics. Built a model recently of how Australian population ageing would increase certain types of health costs and was used by one of our biggest economic groups for a report to our Govt.

    And as for unemployment … well your own BLS numbers gives your U-6 numbers (the most inclusive) at what now? Excuse me while I check it, oh 16.5% (and that doesn’t count the people who have fallen off the radar, like myself when I was unemployed, or my wife who was too sick to work for a while and now can’t get a job).

    For no better authority check this out (the famous Mish Shedlock): http://globaleconomicanalysis.blogspot.com/2010/02/jobs-contract-yet-again-unemployment.html

    For the readers of this blog, Mish is a must read on economic matters as is:

    Steve Keen: http://www.debtdeflation.com/
    The Automatic Earth: http://www.theautomaticearth.blogspot.com/
    The Great Yves Smith at: http://www.nakedcapitalism.com/
    Of course Zero Hedge: http://www.zerohedge.com/

    Check those out and follow their links to other sites and you can’t go far wrong.

  28. And, groan. I have to update it for another proposal to our Govt.

    Just went back through my calculations on Australian unemployment. At our lowest level it was, officially, just under 5%.

    Total nonsense. Taking the real figures I got between 15%-20%. And those were the good times.

    It’s all about definitions. The Thatcher Govt in the UK started this about changing defs. The US quickly, under Reagen, copied and even improved on it. Ditto just about everyone else in the World. Politicians know a good thing when they see it. Easier to lie than actually fix things.

    So the defs are so tight now that just about everyone who is unemployed is not counted.

    The US is no different, several people there have done my Australian calculation. I’d put the US similar to Australia, 15%+ in the ‘good’ times, 20%+ and rising very fast now, can’t be far off 30% now. Plus some of those hidden 2% in the prison (the largest in the World) are being let out now because there is no money (though as usual after health, welfare cuts happen first, oh your elite does love the ‘national security state’, basically because they don’t pay for it.)

    Your Paul Craig Roberts is right.

    Why hasn’t the Oz or the US (or the UK) blown up?

    Supression, prisons, welfare programs and drugs (legal and illegal). And most importantly the middle class has muddled through by taking on more debt.

    But here is where it ends. The ponzi asset bubbles have ended, the middle class is taking it in the neck, the rich contribute nothing (actually now they suck gobs of money out of the rest of society) and have gone beyond arrogance.

    And no developed country has ever survived ruining the middle class without a regime change.

    My WAG guess for the US’s future (if average people want to survive with anything like a reasonable life) is now the lowest probability I gave a just few years ago.

    Breakup.

    The alternative is such a brutal oppressive State that many US people will be going to China or Russia as political refugees. And then breakup will happen anyway.

    You honestly don’t think that some big boys in California (or Texas) in smoky rooms haven’t been crunching the numbers and thinking about it?

  29. But here is where it ends. The ponzi asset bubbles have ended, the middle class is taking it in the neck, the rich contribute nothing (actually now they suck gobs of money out of the rest of society) and have gone beyond arrogance.

    My WAG guess for the US’s future (if average people want to survive with anything like a reasonable life) is now the lowest probability I gave a just few years ago.

    Breakup.

    The alternative is such a brutal oppressive State that many US people will be going to China or Russia as political refugees. And then breakup will happen anyway.

    Sorry, FM, but this is what I’ve been sitting since 2005. I offer only two consolations:
    1. You honestly don’t think that some big boys in California (or Texas) in smoky rooms haven’t been crunching the numbers and thinking about it? At least right now this is blatantly false for two reasons:

    a) California is perched on a crumbling financial cliff right now, they aren’t about try leaving. And if they did the Federal government would have no choice but to force them to stay, they are too big a part of the country.
    b) The major political powers in Texas are Republicans and they are probably too busy looking towards the 2012 election and planning what they will do to the Constitution and the country when they get elected.

    2. The collapse can be staved off for many years by sensible action.

    For example, Mr. Volcker seems to have a sensible plan for getting the economy back on track but it could easily be derailed if the 2010 elections go as badly as I fear they will for the Democratic Party. If we return the Republicans and their Wall Street allies to power we are in serious danger of facing financial booms and busts every five years or so. Stability is SO underrated until its gone…

  30. “German’s massive Keynesian stimulus programs were paid up by Jews, Poles, by people almost all Europe.”

    Sheesh…

  31. Here’s another interesting lesson on deficits and paying down the national debt, but from America’s past:

    1. 1817-21: In five years, the national debt was reduced by 29 percent, to $90 million. A depression began in 1819.
    2. 1823-36: In 14 years, the debt was reduced by 99.7 percent, to $38,000. A depression began in 1837.
    3. 1852-57: In six years, the debt was reduced by 59 percent, to $28.7 million. A depression began in 1857..
    4. 1867-73: In seven years, the debt was reduced by 27 percent, to $2.2 billion. A depression began in 1873.
    5. 1880-93: In 14 years, the debt was reduced by 57 percent, to $1 billion. A depression began in 1893.
    6. 1920-30: In 11 years, the debt was reduced by 36 percent, to $16.2 billion. A depression began in 1929.

    And of course, we need to add in Clinton’s surplus years–are we calling it a depression yet or sticking with great recession? Either way…

  32. California’s fundemental problems stem from the fact it is a State and a massive net contributor to Federal funds. It has no control over Fed debt and spending.

    Now given that it would be a G8 country if it was independent. It would (theoretically of course) be clear of the massive Federal debt burden and be able to keep all its tax money for itself. In that scenario it would still have big problems, but it would be far better off than it is now. It could as a sovereign nation raise far greater amounts of money (not getting into arguments about whether or not it should of course, the tax/spend balance still has to be fixed).

    It has massive natural wealth and of course many high tech industries all of which would make it very competitive in the World market place. With its own currency which would almost certainly be valued at a lower rate than the current $US then exports to the remaining US and the rest of World would give it a tremendous boost. You would almost certainly see (if this admitedly low probabality event happens) that it would be a group of States that went with it. Probabaly ditto Texas. It would also mean the greatest default of a nation every seen in history as (in a multiple breakup scenario) it means US Federal debt default.

    But after that it is over. And after the shock and horrer, re-building can begin. Paying down debt dooms the US (UK, Spain, etc,etc) to decades of agony .. can anyone here guarantee that societies and political systems will survive that? Didn’t last time. Democracy went out the door just about everywhere (nearly in the US) and we then had a World war. I don’t like those odds. Yep creditors take it in the neck, say, in China’s case in reality nothing changes. They have a pile of money in US investments, nearly all virtually non-earning Treasuries. They can’t spend it. They are not allowed to (which would be more logical) buy US assets. Far better for them to be able to buy, say, Boeing. At least their money is now more fixed in the country (instead of being able to switched out at a flick of a button)and they will pay off its debts and put in investment capital which might be able to save it (cause I don’t give it much of a chance of survival over the next 5 years or so .. definitely on my pick of companies to ‘short’).

    But they lose all that money. Good, shake them up and get them investing internally.

    Despite all the good/bad talk about China I’ll know when it becomes serious about internal development … when it builds a proper National Health Scheme (Uk/Geman/French/Candadian/whatever or even somehting entirely new). Until then it is a Japan wannabe .. and we all now how that turned out*.

    Overall a sharp break is better for everyone worldwide. Crises mean that people have to do things differently, rather than just keep the ‘old system’ propped up on life support (ie the current scenario). Slowly sliding down (in a sort of downward step style) burning up wealth and people and resources until a final and much worse and much more final collapse later on. Who knows, in the brak up scenario, we actually might be able to create a workable World economic (and diplomatic, etc) system as we had 1948-1972. The bancor anyone?

    Its just that the trendlines for the World (and the US/UK in particular) are now so bad in so many ways that something has to break the pattern before it gets really insane (this includes accidental World war, a low probability but now not an insignificant event, or one or more of the US/UK/etc becoming totalitarian states, or X the unknown event that no one predicts, or even $500 a barrel oil = an attack on Iran).

    Cause there are certain rules “what can’t continue … wont, though it might limp along for far longer than most people expect”.

    * The Spengler idiots don’t get it at all. When the birth rate falls massively it means (1) your people have no confidence in the future and as a sensible woman you won’t bring children into it (duh), (2) the cost of having and raising children are so high that you can’t afford it (again duh).

    Translated it means in most semi/non democratric countries (and Japan is definitely one of those with a ‘kiddy on’ democracy) that women are voting with their wombs about your idiotic policies. Change those (as per Sweden) then amazingly birthrates improve (double again duh). Oh and don’t be fooled by the US’s so-so birthrate, amongst the (goodbye) middle class its as bad as anywhere, the rest of it is made up by recent migrants and the ‘marching morons’ (look it up – famous book).
    .
    .
    FM reply: I doubt that much of this is true, and most is just wild guessing.
    * You clearly have little understanding of California, or you would not write “the fact it is a State and a massive net contributor to Federal funds.”
    * As for your godlike announcement of why birthrates fall massively, unless you have some research or are the designated spokesman for women everywhere — you’re just making this up.
    * See this graph of Sweden’s fertiity rate, it’s trending down in the usually erratic fashion. And well below replacement rate.
    * Your statement that among the US TFR “is as bad as anywhere” is false. It’s substantially higher than TFR in the middle classes of many other developed nations.
    * Rebuttal by making stuff up, citing no sources, and saying “duh” is not cool, IMO.

  33. OldSkeptic–I dunno about the rest of your analysis–it’s a bit hard to parse–but this is certainly confused: “Paying down debt dooms the US (UK, Spain, etc,etc) to decades of agony ..”

    There are substantive differences between the UK and US and Spain’s monetary institutions. Spain is part of the EMU. Effectively, it is still on the gold standard. Spain, like the rest of the eurozone, is constrained by the market. The UK and the US face no such constraint. There will be no decades of agony for either. Just generic scaremongering. They are both sovereign non-convertible currency issuers–they can set the tax rates wherever they want regardless of interest or principal payments on debt.
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    FM reply: Agony is probably an exaggeration. However there is a large body of economic research showing that deleveraging requires several years, during which GDP grows slowly or not at all. Most notably, the articles and book by Carmen M. Reinhart and Kenneth Rogoff. And then there is the example of Japan…

  34. As long as we are talking about public debt, the point stands. Of course, it is precisely the private sector debt overhang and concomitant balance sheet repair process that necessitates deficit spending and the build-up of public debt. Spain and the UK, e.g., are not comparable across this dimension, because Spain is pegged to the EMU, whereas the UK issues debt in its sovereign currency.
    .
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    FM reply: This dynamic between public and private debt is far more complex, but beyond the scope of any comment. For an excellent description of how this worked for Weimar see “Currency vs. Banking in the German Debt Crisis of 1931“, Albrecht Ritschl and Samad Sarferaz, 8 August 2006.

  35. Er, at first scan, not only does that paper seem to refer to a crisis that occurred under the gold standard (compounding OldSkeptic’s error), but it does not seem to explore the dynamic between public and private debt at all, focusing instead on the role of excessively loose fiscal policy in the period directly preceding the crisis.

    Japan is a key data point for apples to apples comparisons. Richard Koo is very good on Japan, but I presume you already know that…
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    FM reply: The title, abstract, and most of the text discusses the interplay between Weimar’s foreign commerical debt, its banks (always the weak link from private sector defaults), and government debt. Your statement is impossible to understand.

  36. This is happening in Greece, its scary to read between the lines. just change your story with names of the present greek politicians.

    Greece is doomed not because of the debt but because of the timing for the solution!

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