By Martin Hutchinson

In times of economic prosperity, good economic policies produce good results, so that in the likes of the United States or the United Kingdom eventually both major political parties become committed to their continuance, as with Bill Clinton in 1992 or Tony Blair in 1997. Only in resource economies, where good policies can become disjointed from good results, can the electorate become confused between what works and what doesn't; thus democracy is a more fragile flower in Argentina, Brazil or Peru than in Western Europe or Asia. However, if recession becomes prolonged, the voters can lose faith in rational economics and become corrupted by radical nostrums of left or right. In today's economy, we are in increasing danger of this.

 
 In the United States, only two severe recessions have occurred since the electorate believed government economic policy could affect their living standards (the Panic of 1837, severe though it was, produced no major outbreak of populism). In 1893-96, the country got lucky. The depression coincided with an admirably economically orthodox president, Grover Cleveland, and even at the bottom of the slump orthodox policy in the form of William McKinley was able to win fairly easily over William Jennings Bryan's forces of economic chaos.


In 1929-33, the country was economically unlucky, in that the depression was substantially worsened by the actions of the ineptly interventionist Herbert Hoover, but politically fortunate in that in 1932 an apparently attractive solution was available in the form of the economically unsound but only moderately radical Franklin Roosevelt. His actions prolonged the Great Depression just as Hoover's had exacerbated it, but following the 1938 mid-term elections, orthodoxy was restored and prosperity returned even before the lift of wartime armaments orders.


Other countries in the Great Depression had different fates. Britain was exceptionally lucky, in that its advent coincided with a minority Labor government, constrained to orthodoxy by its lack of a working majority. Thus when the economy worsened and the government fell, a National Government under the economic management of the admirably orthodox Neville Chamberlain was available, which was able to alleviate Britain's Depression sufficiently to make the 1930s a time of considerable economic advance. Other countries were less lucky - Argentina, relatively democratic and very prosperous in 1929, rigged elections for the conservatives when the crisis hit, which got them blamed for a miserable 1930s "Infamous Decade" that condemned capitalism forever in the minds of the Argentine electorate.


In Germany, notoriously, economic misfortune led to political disaster. After the crisis hit, the economically admirable Heinrich Bruning was elected chancellor in March 1930 and proceeded to institute austerity policies of public spending cuts and salary reductions very similar to those of Neville Chamberlain in Britain a year later or Latvia in 2008-09. However, unlike Chamberlain, Bruning had neither the full support of president Paul von Hindenburg nor a stable majority in the Reichstag. Foolishly, he called an election before his austerity policies had produced any benefits and allowed Hitler's NSDAP to become a major Reichstag force.


With international forces against Bruning (the major banking crisis of 1931 forced the Darmstadter bank into bankruptcy), the Nazis were able to use Keynesian economic arguments against him in the series of elections in 1932, forcing him out in May 1932 and maneuvering into power in January 1933.

Continue: http://www.atimes.com/atimes/Global_Economy/NH15Dj02.html

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Comment by Nathan on August 15, 2012 at 12:45pm

Government Spending Cuts Are Bad for the Economy?

“Looks like I picked the wrong week to quit amphetamines,” laments the gruff air traffic controller played by Lloyd Bridges in the ribald disaster-spoof Airplane! Facing the tense situation of helping a nerve-wracked pilot safely land a large passenger jet, “Steve McCroskey” could get a performance boost by popping some pep pills, right?

In like manner, many commentators have suggested recently that the U.S. economy could use an upper in the form of more government spending—specifically, more public-sector jobs. Governments at all levels, they might say, picked the wrong time to engage in mass layoffs. The sentiment is expressed in recent articles in the New York Times and Wall Street Journal. The Times reporters claim that the recent loss of 706,000 public-sector jobs—mostly at state and local governments—is “hurting [economic] recovery.” The article claims the unemployment rate would be a full point lower if government employment were at its 2009 levels and that public-sector “layoffs will siphon $15 billion in spending power [from the economy].”

The Journal reporters make similar claims about federal government employment. Their sources warn that (alleged) coming federal spending cuts “would tip the U.S. into recession early next year.” They note that federal spending is declining at 0.4 percent annually, with the federal government having shed 52,000 jobs in past year. These cuts have a ripple effect on employment and income, they argue, due to less federal “stimulus” money for state and local governments to maintain spending and employment, less money flowing to government contractors, leading to less employment in these local industries, and so on.

Somewhere the ghost of John Maynard Keynes is smiling his consent; if only the U.S. economy could continue to tap the stimulant of government jobs, the recovery would be much stronger!

But it just ain’t so. Pundits who lament the declines in government employment fall for one of the classic blunders in economics: looking only at the short-run effects of a policy on some people, but ignoring the long-term effects on everybody else. (Henry Hazlitt’s classic, Economics in One Lesson, exposes this blunder.) To understand the confusion, we must dissect what exactly people mean by the term “economic recovery.” A proper understanding of economics reveals that government cuts—not increases—are what’s needed for renewed economic vitality.

 

Full article here: http://www.thefreemanonline.org/columns/it-just-aint-so/government-...

 

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