Hoover Redux

Here are some key bits from a review of new books on Hoover and the Great Depression. This is from a review written by Jonathan Chait in the New Republic:

When they say that the New Deal "didn't work," conservatives almost always mean New Deal fiscal stimulus. (Other policies, such as Social Security or clearing the way for unions, clearly succeeded on their own terms, whatever their ideological merits.) And then, in turn, they confuse New Deal fiscal stimulus with Keynesian economics, which is also not exactly the same thing. So let me step back and briefly explain for the uninitiated what Keynesian economics means. We may not all be Keynesians now, but we would all benefit from knowing what a Keynesian actually is.

Prior to Keynes, the economy was held to be self-correcting. The only cure for a recession was to let wages and prices fall to their natural level. The prevailing attitude, as Paul Krugman writes in his recently re-issued book The Return of Depression Economics, was "a sort of moralistic fatalism." Keynes upended the orthodoxy in a way that was every bit as dramatic as Galileo challenging geocentrism. He insisted that recessions are not a natural process, or the invisible hand's righteous judgment against our sins, but a simple failure of consumer demand.

When people worry about losing their jobs, they sensibly cut back on their spending. But that decision, in turn, reduces demand for goods and services, which results in reduced income or lost jobs for other workers. Keynes called this phenomenon "the paradox of thrift": what makes sense for individuals turns into a disaster for society as a whole. The recession was therefore a failure of collective action that required government action. Government needed to encourage spending by reducing interest rates or, failing that, to inject spending into the economy directly by deliberately running temporary budget deficits.

At the time, orthodox economists deemed this diagnosis heretical and dangerous, but, in the decades that followed, it became a consensus view. Today economists disagree sharply about how to apply Keynes's insights, with many conservative economists questioning the practicality of large-scale government spending to combat recessions; but the essential framework constructed by Keynes--that recessions are caused by a failure of demand, and that at the very least government should not respond to an economic slowdown by paring back its largesse--is no longer in dispute. Even a right-wing Republican economist such as Gregory Mankiw, a former Bush advisor, writes that "if you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes."

...

But now we have come to a time when leading Republicans and conservatives--not just cranks, but the leadership of the party and the movement--once again sound exactly like Herbert Hoover. "Prosperity cannot be restored by raids upon the public Treasury," said President Hoover in 1930. "Our plan is rooted in the philosophy that we cannot borrow and spend our way back to prosperity," said House Minority Leader Boehner in 2009. They have come to this point by preferring theology to history, by wiping Hoover's record from their memories and replacing it with something very close to its opposite.

Read the whole article to understand how ideology is blinding the Right to what real economists have to say about fixing the current economic mess.