James K. Glassman is the brilliant journalist and opinion-maker whose Dow 36,000 was published just before the tech boom crashed. In this book, he claimed that stocks were woefully undervalued and would rise sharply, with the Dow Jones Industrial Average reaching 36,000 by 2004 – at the latest. This prescient thinker has now written what is turning out to be an influential piece in some circles. For one, House Minority Leader John Boehner cites it on his blog.1 I even saw some people reading print-outs of the article on my train – which is fairly unusual. It strikes me as an article written for those who already want to agree with the conclusions – and that it’s premises aren’t defended as much as stated as implicitly true.
For example, Glassman makes five historical claims which are – at best – debatable. I am not an expert on economic history – and I am sure Glassman can find an economist who will agree with each of these claims. But my understanding is that they are contrary to the general consensus.
- From the stock market crash of 1929 to the attack on Pearl Harbor, “fiscal stimulus simply did not jump-start the economy.”
While it’s clear that the New Deal spending did not get us out of the Great Depression, the economy had made significant progress before Roosevelt raised taxes in 1937 causing a sharp downturn. (See especially the graph of Gross Domestic Product that Paul Krugman produces. It makes clear how disingenuous Glassman is being with the above remark.)
- “[C]onsidering the fact that federal spending tripled during the Great Depression, rising from 3 percent of the country’s gross domestic product to nearly 10 percent in 1939, it does not seem the likeliest explanation” that “World War II and the unprecedented infusion of government dollars” was what brought us out of the Great Depression.
This claim is somewhat silly. Glassman fails to account for several basic factors: (1) Stimulus would not work to push the economy into growing in theory unless it was significant enough to counter the downturn. If the economy dipped more than 7% during the Great Depression, then this surge in federal spending would not have been sufficient to counter it. (2) States and other local governments cut their budgets and raised their taxes during the Great Depression, reducing the amount of total government spending more than the federal government was willing to make up. (3) Roosevelt also raised taxes significantly in 1937, thus offsetting the stimulus measures to some degree – and throwing the country into a devastating downturn within the Great Depression. (4) The spending during World War II dwarfed that of the New Deal – it just doesn’t make sense to claim that because spending increased significantly during one period that if it increases still more, it wouldn’t have any effect.
- “[E]fforts [to stimulate the economy through government spending] during the ten subsequent recessions proved…ineffective.”
Another seemingly true but misleading statement. As the Congressional Research Service explained in their report on economic stimulus (CRS – Report R4104 – Economic Stimulus: Issues and Policies) during the past 8 recessions, legislation was only enacted before the end of the recession once. Government spending was ineffective in combating all of these recessions because it came after the economy had already recovered – and as Glassman acknowledges, the one timely stimulus plan is generally agreed to have had some effect, if not an effect as large as expected. With escalating job losses and many other dire economic indicators, action now would seem to be timely.
- “It appears that the current sickness occurred because the Fed, in an effort to keep the economy stimulated after the collapse of the tech-stock bubble and in the wake of September 11, cut interest rates far too much during 2001 (from 6.5 percent at the start of the year to 1.75 percent at the end) and waited too long to raise them, making credit so easy that businesses expanded beyond all reasonable bounds, and banks, flush with cash and trying to make higher returns, shoveled money at borrowers with poor credit; risk aversion disappeared, and loans, especially to home buyers, went bad.” This is a theory – and not an entirely implausible one – but it seems hard for me to presume this – or to accept that this was the only cause – with so many other factors at work. It is a classic Austrian explanation for any recession. Glassman – while portraying Keynes as an enabler of ideological solutions to the business cycle – fails to acknowledge that his explanation is equally driven by ideology. And regardless – there are more than enough alternate explanations to call into question placing all of our faith in a single ideological explanation.
- “Wait, he has a blog?” “Yes, he actually does.” [↩]