Tuesday, March 15, 2011

The Victory of Fear over Sanity

The news today is of stock markets crashing as people have decided that the end of the world is at hand. I always marvel at how easily people panic. It seems that people look for reasons to convince themselves there is no reason to continue living. They simply want to lie down and die because they "just know" that the future will be worse.

Funny, humankind has a 10,000 year history of civilization with an arc of continued improvement. Sure there are downturns, but they are brief compared to the overall arc of progress. But I'm talking to the deaf because people don't want to hear that message. They are all glued to media that is reassuring them that their lives with be shortened by milliseverts of radiation. It will.

The average person has probably lost seconds, maybe a minute out of their 80+ year lifespan. So moan and despair! Yes, you have lost a noticeable amount of life. But that "loss" will be swamped this coming year by the increases in average lifespan due to advances in nutrition and medicine. But this good news doesn't get the headline coverage that a radiation leakage in Japan gets. People focus on the loss and fail to realize that overall they will be living longer at the end of this year than they did in 2010. But bad news sells and gets attention. Sadly this fascination with doomsday misdirects people's attention into dysfunctional attitudes and actions.

That preface got a bit off track...

What I want to focus on is this bit from a NY Times article by Christina Romer, the previous chair of Obama's Council of Economic Advisors:
... Franklin D. Roosevelt took the United States off the gold standard in April 1933, and rapid devaluation led to huge gold inflows and a large increase in the money supply. Roosevelt also made it clear that the monetary expansion would not be reversed. Expectations of deflation, which had been enormous, abated quickly. As a result, with nominal rates at zero, real interest rates (the nominal rate less expected inflation) plummeted.

The first types of demand to recover were ones that were sensitive to interest rates. Automobile production, for example, jumped 42 percent from March to April in 1933. Inflation did pick up somewhat in the mid-1930s, in part because of other New Deal measures like the National Industrial Recovery Act. But the inflation was modest, and after the crushing deflation of the early 1930s, widely celebrated.

THE triumph of hawkish views on inflation means that there is no appetite today for a Roosevelt-style, inflationary monetary policy. But that doesn’t mean the Fed couldn’t be more aggressive if the empiricists were willing to risk a split with the theorists.
The fearmongers of "inflation" are preventing rational economic policies which would help kickstart the US economy into higher growth and more jobs. The funny thing is that 80 years ago, during a much more primitive era of economics knowledge, a leader stepped forward to do the right thing. Sadly, today with much more knowledge and greater wealth, the country is being "led" by a leader who is more timorous and afraid of his Republican opposition than was FDR. This is a tragedy for the American people because they are and will continue to suffer unnecessary unemployment and slower grower in their incomes because of the fear to take on the ideologues of the political right with this blighted ideas about economics. Sad.

4 comments:

thomas said...

RY;

I have been reading a book titled; The Enemy Within by John Demos. It is about 2000 years of witch hunting in our western world.. But, the part that I just finished reading this morning concerns Cotton Mather a figure most famous for the Salem witch trials and in regards to your subject in this post believed that the end of the world would occur in 1697; I don't think he was correct, but his reasons were partly to do with the catastrophic events happening at the time.

I wrote a little on inflation and the current phobia of it in a post yesterday and deleted it in hopes of writing something better soon.. I have read that inflation was used to lower unemployment in the Ford to Carter administrations, and to some degree it worked. I still think, as I thought back when Reagan was elected, that we were on course for better economic times under Carter's administration. I just don't believe the fears of inflation are justified or even that inflation is a real threat. It certainly isn't like some plague that could get out of control and destroy all life as we know it.

Lichanos said...

...the country is being "led" by a leader who is more timorous and afraid of his Republican opposition than was FDR.

As I recall, FDR said he "welcomed their hatred," referring to his political enemies. So, just why are we in this position?

I can point only to the obvious: both parties feed at the same trough; there is no genuine grass-roots or worker base to the Democratic Party anymore. That's what you get...

The two parties are different, and the Republicans can make things much worse, but the Dems...

RYviewpoint said...

Lichanos:

If you follow Robert Reich he is excited about a "People's Party". He thinks this is the energized base that is the Left's equivalent of the Right's Tea Party movement. I sure hope he's right and this blossoms into something big.

One of your comments showed up as "spam" and when I marked it as "not spam" it disappeared. Gone. Sorry!

RYviewpoint said...

Thomas:

The Federal Reserve raises interests rates, a kind of "inflation" because it raises the price of money, as a way to slow down the economy. As rates go higher, it is more expensive for businesses to borrow so they tend to stop expansion plans, stop hiring, and this slows the economy.

Inflation was a serious problem in the 1970s because most unions has a COLA (Cost Of Living Adjustment) clause in their contract. So once inflation got started, unions raise the price of labour, so companies then raised the price of their goods to cover the higher cost of production, but the higher cost of goods meant inflation was up, so the COLA clauses kicked in and unions got new raises in wages. It was a vicious circle. So the 1970s were marked as a decade of "stagflation".

It was Paul Volcker at the end of Carter's administration and the start of Reagan's he kept jacking up the Fed interest rates until he hit 21.5% in 1981 and that killed the economy. There was a severe recession that finally wrung the inflation out of the economy.

My best buddy was working 2 jobs to try to meet house payments. It was a brutal time to take on new debt. On the other side, my father was buying CDs (certificates of deposit) that were giving him interest rates on his savings of 15% to 18%. He was ecstatic.

Today is a very different time. Unions have shrunk from being 40% of the work force to being 10%. Most COLA agreements are gone. So you don't get the vicious circle of wage increases leading to price increases which in turn caused more wage increases. Since there are 9 million "officially unemployed" and another 6 or 7 million who want to work but have settled for part time work or just given up, there is no upward pressure on wages. So there is no inflation pressure from the cost of labour. There is a slight pressure from the rising commodity prices, but I think that is blown all out of proportion. You don't get "inflation" in the middle of a Great Recession. It just makes no sense.

The people who trot that "worry" out are the minions of the rich. The rich are always terrified that their bonds won't be worth as much because interest rates will suddenly surge. They would rather strangle the economy than let the economic pie grow so that everybody gets a bigger piece. I suggest you ignore the right wing crazies who are worried about "inflation".