Interesting comparison with the Great Depression of 1929/1939, received by e-mail...
No Stimulus Without Stability
By Colin Twiggs
January 29, 2008
Global leaders are planning on capital expenditure programs to promote employment and tax cuts to stimulate consumption. Neither will be effective unless consumer confidence is restored. In 1929 President Hoover implemented similar measures, but with little effect. Confidence had been shaken by the rash of bank failures and soaring unemployment (exacerbated by a commitment to maintain high wages and attendant tariff protection). Consumers increased savings and paid off debt to protect themselves from uncertainty, while business adopted a similar defensive strategy: cutting costs, reducing debt and deferring new capital projects. Their priority was survival.
Herbert Hoover is undoubtedly one of the most capable and business-focused leaders to have graced the White House. A professional engineer with a reputation as an efficiency expert, by the age of 35 he had become financially independent and devoted his life to public service. Serving as Secretary for Commerce under presidents Harding and Coolidge, he earning a reputation for thorough research and a bias for action that made him the obvious successor to Coolidge. Despite this, his efforts to rescue the economy from recession failed dismally.
While Hoover is often blamed for the Great Depression, as Secretary for Commerce he had criticized the Federal Reserve's expansionary (cheap money) policy. His attempts to intervene were thwarted by the independent status of the Fed. Bankers serving on the board of the New York Fed (in those days more dominant than the Federal Reserve Board) resented this interference from an outsider. They also sought to preserve the margins enjoyed by borrowing at artificially low interest rates and lending on brokers loans secured by stocks — at call rates between 15 and 20 per cent.
As Secretary for Commerce, Hoover had prepared the economy for a future recession. He planned to smooth out any fall in consumption with increased capital spending programs by government, railroads and other large corporations over whom he had influence. The increase in capital spending was, however, outweighed by an overall decline in private sector investment and in residential construction. Tax revenues also fell as the economy declined, hampering further federal, state and municipal spending programs. Consumption continued to fall, leading to more business and bank failures, more job losses and declining tax revenues. The downward cycle became self-reinforcing. The economy was only rescued by World War II: increased war production and, later, conscription helping to solve the unemployment problem.
In the present crisis, as in the 1930s, neither business nor consumers are likely to be lured into new capital investment or increased consumption until stability is restored. Stimulus packages treat the symptoms of a recession, but they do not address the underlying cause. Rebuilding confidence requires more effort than increasing government spending and a few media releases. Only when concerns over bank solvency, inflationary monetary policy, ballooning federal debt, business failures and further job losses have been settled are we likely to witness a return to normal consumption and investment patterns. The task requires exceptional leadership as well as a deep understanding of the underlying issues. Otherwise we could end up in a worse position than Herbert Hoover.
Attempting to stimulate the economy while confidence is this low is like pushing on a piece of string
Note: internal consumption represents over 70% of GDP (Gross Domestic Product), so when people start saving instead of consuming, the GDP is bound to drop dramatically: next Friday new GDP figures will be published...
