01/25/13 – Sheldon Richman – The Scott Horton Show

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All right, Sheldon, welcome back to the show.
Our first guest is Sheldon Richman.
Welcome to the show.
Thank you.
Great to be back with you.
Very happy to have you here.
And everybody, you know Sheldon Richman.
He's the vice president of the Future Freedom Foundation.
He keeps the blog Free Association.
And now he's writing for this thing called the Project to Restore America.
Well, that doesn't sound so bad.
I think it's a Ron Paul kind of inspired thing.
Not that he's involved in it directly, but I think we're people who want to sort of carry on his message.
Excellent.
All right.
Well, I've got to tell you, and I think we've discussed this before.
But, in fact, first for the audience, I think this is so important.
If you already know it, well, you already know it.
But I think that so many people are not really aware of the argument that you're about to hear.
And to me, it's an argument that undermines one of the most important foundational myths of America.
It's often like to say it's no longer George Washington and the cherry tree or even Abraham Lincoln freeing the slaves.
The real founding myth of America now is FDR and Truman and World War II.
And so much of what we're taught in school, particularly as youngsters about that era, you know, serves as the underpinning for so much that we do.
Of course, the morality of smashing the Nazis and the imperial Japanese has served as the underpinning for every American foreign policy since then.
Right.
Even the invasion of Iraq or anything else is always compared to crushing the Wehrmacht.
But in this case, we're talking about the domestic effects of World War II and something that I absolutely learned this way in junior high, that Franklin Roosevelt and his New Deal, they were right to give up on Lausanne fair free market capitalism from the 1920s.
It just wasn't working.
It had caused the Great Depression and it could not end the Great Depression.
And so the New Deal was instituted in order to end the Great Depression.
And it worked great and it was doing a really great job, but it wasn't quite enough because free market capitalism had screwed us so badly.
It took World War II to save the American economy.
Is that right, Sheldon?
Well, that's that's the story.
Yeah, that's what most people are taught.
Now, actually, that's a little bit of a change over the years, because there was if you go back far enough, you might have been taught in school that the New Deal got us out of the Depression, that Roosevelt's New Deal did work wonders on the economy.
But they couldn't sustain that view.
The establishment and the Keynesians couldn't sustain that view because it just wasn't true.
There was a depression within the depression and unemployment again shot up and, you know, 37 and things were going pretty poorly.
So they then changed and said, OK, well, Roosevelt maneuvered us into the war, not only to fight the good fight and all that stuff, which included, of course, dropping his successor, dropping atom bombs on two Japanese cities of no military significance whatsoever.
But we'll leave that aside.
Among the other great things it did was it reinvigorated the economy and killed the great depression.
Paul Krugman, Nobel Prize winner and New York Times columnist, of course, makes this point rather frequently.
As part of his argument for greater government spending today, you know, he thinks we're all stupid to be worried about the deficit and the debt.
Don't we realize that if we're going to get the economy really out of the recession that we need massive government spending?
And anybody who doubts that need only look at what happened during the World War II.
And, you know, all these guys don't maybe don't necessarily want war.
They lament the fact that only a war can really get the whole country behind big spending.
You know, if it's domestic spending, there's going to be some constituencies against it because there will be people concerned about debt and deficit.
But when it's national security, apparently, everyone, any dissidents will shut up.
And so we can really get behind that big government spending we need if it's war.
So they point to World War II.
It shouldn't take a lot of thought to see that this is ridiculous, that a war isn't going to get us out of a depression.
And you need to start asking yourself, what is a depression to begin with?
It's not mainly a phenomenon that you find in the statistics, right?
The problem isn't that there's now a minus sign in front of the GDP number, you know, or the growth number, the change number.
So, in other words, shrinking GDP.
It's not – that doesn't capture it.
It's not the fact that there's a – the unemployment rate is going up.
That doesn't capture it either.
After all, we work because we want the things that work brings us, right?
The goods and services that work provides us.
We don't value work in itself.
So those numbers can't really be what the story's about.
The reason we don't like depressions is because our standard of living falls rather than increases.
There are fewer goods.
They're harder to get.
And we have to live with, you know, deprivation.
So it seems to me ending a depression ought to mean the end of that deprivation, economic growth, rising living standards, more goods and services, cheaper, more variety.
That ought to be the test.
If you go to World War II and look at how people lived during World War II, you don't find any of that.
And so how can we say the Great Depression ended?
We can't.
Yeah, but when the government – you know, I still remember the Bugs Bunny cartoons with the buy war bonds in the background, all that kind of thing.
If the national government did borrow all of this money or, you know, inflate to whatever degree they had to inflate to do the same thing, and then they spent all that money into the economy, then, well, why didn't it spur a bunch of growth?
Well, it spurred a certain kind of growth.
GDP went up.
Unemployment went down.
But, you know, the problem with the Keynesians is that they stop with these aggregates, these huge aggregate numbers, and it's the details that matter.
Yeah, but didn't Rosie the Riveter – didn't she go to the grocery store when she got off of work?
She never had a job before.
Now here she is making all this money putting together bombers.
Well, that's the key thing.
Putting together bombers, not automobiles or stereosats, because they don't have stereos, or Victrolas or Frigidaires.
They were putting together bombers, bombers that were going to either blow up or rust and blow other things up in the meantime.
In other words, all this activity, which made the numbers change in so-called positive direction, were all for the sake of things that didn't serve consumers.
The economy is about consumers.
And ending the Depression means consumers are now better off and on the road to prosperity.
But they weren't on the road to prosperity during war spending.
Look what happened.
Why did unemployment go down after it was so intractable throughout the 30s?
Because 10 million men got drafted.
And another whole bunch of men joined up in order not to get drafted into the infantry.
Those people weren't making consumer goods.
Those people were not engaged in activities that raised living standards.
They were being shipped off to the Pacific and to Europe where they were going to maybe get killed and kill other people.
That's not serving consumers.
Look, you may say, someone can say, well, we needed to fight that war.
That's not the issue.
That would be a total distraction, that statement.
I don't need to talk about whether the war was a good war or a bad war.
We're talking about economics.
We're talking about whether the war spending ended the Depression.
It's a separate question whether we should have gotten into the war, whether it was a good war, blah, blah, blah.
That's all separate.
Let's keep our eye on the ball.
And I'm done talking to you personally.
Obviously, you are.
But a lot of listeners will say, wait a second, are you saying we didn't need to fight that war?
I'm not even addressing that point.
I'm addressing the question, did war spending end the Depression?
The fact that you can lower unemployment by drafting 10 million men doesn't constitute ending the Depression.
We could have had them all building pyramids, would we say, at the end of the Depression?
No.
When people were going into factories, they weren't building consumer goods.
They weren't enhancing the life of consumers.
They were building things that were either going to blow up or rust and blow up other things in the meantime.
So, sure, people made money by building those things.
But then they went to the store and they were living with ration coupons or empty shelves.
So the things they were using deteriorated because they couldn't replace them.
Refrigerators, kitchen ranges, all that stuff, cars, gasoline was rationed.
There was deprivation.
There was a declining standard of living.
Now, maybe they felt okay about it because they thought, well, the war is on.
But that doesn't change the fact that consumer welfare was declining.
And so, therefore, we can't pronounce that the Depression ended.
All right.
Okay.
So basically, okay, to make sure I understand this right, your argument is, yeah, unemployment went down.
But just because they conscripted the labor force and sent them off overseas to fight for freedom, so that's just a false indication.
And, yeah, the gross domestic product went up.
But that was just because they borrowed and inflated a bunch of money to buy a bunch of weapons of destruction, which ended up only being net negative there.
And then living standards declining, the rationing and all that.
You're making a great case.
But now, so here's my, I guess, the only devil's advocate question I can come up with after all of that is, yeah, but what about this?
What about the U.S. government under Roosevelt and Truman as basically a big corporation?
And what they did in going into all of that debt to fight that war is they were, yeah, they brought the company's bottom line way, way down for a few years.
But they did so with the result that they had invested in all these new factories and new roads and methods of distribution.
And so then as soon as the war was over, you had all these factories laying around that could be converted to civilian use, where the private corporations didn't have enough capital to make these kind of investments.
Only the national government had enough money to build such a big war machine that when the war was finally over, that war machine could be turned into the consumer product machine that we all know from the postwar years.
And so really the war did save us from the Great Depression after all.
Well, that's actually a different argument, right?
You're making sort of a secondary argument that the war, it's not the war spending per se that did it.
It's just that we held all this stuff left over after the war, and therefore it could be devoted to consumer goods.
Let me back up one second, because you said something which is incomplete.
The rise in GDP may have something to do with inflation, but there's something more basic than that.
Government spending is a component of GDP.
If $10 million is spent to make tanks, that shows up in the GDP just like $10 million being spent to make automobiles.
But tanks aren't serving consumer welfare, automobiles are, and yet the GDP doesn't capture that.
It's still up by $10 million.
There's the problem with GDP.
Again, it's one of these aggregates, and the details are washed away.
You just have this big number.
Oh, GDP went up 5% or whatever it may be.
Yeah, but it went up doing what?
Is it making bombs, which are going to then explode within five minutes of their use?
Then that's not GDP that matters to individual consumers.
That's one of the things that Robert Higgs debunks.
He looks at these numbers and shows that even the GDP figures aren't trustworthy because of the government.
There were price controls, and there was interference with the price system.
You don't get true indicators.
Okay, so you go on to your next point, that the government brought us out of the Depression because we had all these factories built, which then weren't much good for anything.
I mean, were good for consumer production after the war.
So thank goodness the government had the foresight to force us to build these things.
Well, that's a really expensive roundabout way to get the stuff because factories that are making munitions, they're not easily converted later into factories that can make consumer goods.
I mean, this shows where Austrian economics is so superior to most economics.
Austrian economics stresses that the capital structure of the economy consists of discrete things, right?
Discrete factors, discrete machines, people with discrete skills.
They're not homogeneous.
Capital is not just one big lump of clay, of Play-Doh, that you can easily change its shape just by molding.
You know, from day one, you don't like the purpose, so day two, you just reshape it into something else.
That's a costly thing.
A factory may be not good for much else.
It may only be good for scrap metal or machines that were good for making bombs.
It may not be good for making anything that consumers want.
So it has to be sold to scrap and start all over.
That's costly.
Maybe those things aren't even in the right places where the economy would have sent those resources if it was a consumer-oriented economy instead of a government-oriented economy.
So that's a very bad argument.
It also implies there was no other way to get out of the Depression.
But of course we know how to get out of the Depression.
The government needed to back off, not keep interest rates low by pumping money, having the central bank pump money into the economy.
In other words, if interest rates are kept low, people are discouraged from saving.
They're encouraged to consume.
But recovery, don't forget, the Depression was caused by the government in the first place and a broad malinvestment, which meant there needed to be a rearrangement of scarce resources and a transformation of the economy.
That requires savings.
So if the government is discouraging savings, it's impeding the recovery.
We didn't need the government to go through this twisted route, even if it were true, which it is not.
But we didn't need the government to go through such a twisted route to bring us out of the Depression.
Gotcha.
All right, now, but man, this is so important because you know what?
And geez, you've been alive for some more wars than me.
I'm sure they said the same kind of thing during Vietnam.
But I remember at the beginning of the Iraq war, people who I know who are anti-war and who are good people, this myth is sort of somehow in there.
It's a rationalization.
It's a, well, you know, war is good for the economy.
And everybody knows that.
And so even if you're cynical about it, you go, well, you know, what do you expect those Republicans to do?
War is good for the economy.
They have to have a war all the time.
And so even people who are opposed, they sort of accept it.
And it seems to really like sap their strength because they just figured that means that it's just unavoidable.
Well, I wrote an article some years ago called Military Keynesianism is the Worst Kind of Keynesianism.
And a lot of Republicans are military Keynesians.
A lot of them are Republican-oriented economists or military Keynesians.
They think it is good for the economy.
Not necessarily a war, but military spending.
They may say, well, I hope we don't go to war, but let's be ready.
And one of the dividends is it's good for spending.
And why is everybody worried about sequestration as it applies to the Pentagon?
Well, the Republicans usually say our readiness is going to fall, readiness to be imperialist.
I hope that does fall, that readiness.
But another thing they say and Democrats say is that if you have this across-the-board cut, which includes the Pentagon, there's going to be a loss of jobs.
And I saw a news piece the other day on one of the stations, one of the networks, about how the firms that are part of the military industrial complex are in a holding pattern because they don't know if that sequestration is going to kick in.
And contracts are not being led at the moment because nobody knows what's going to happen.
And this is like, oh, this is terrible.
We're not going to hire the people we intended to hire.
I saw Elijah Cummings, the Democratic congressman from South Carolina, a Democrat, okay?
He's a Democrat.
He hates the idea of military sequestration, Pentagon, any kind of slowing of the rate of growth of the Pentagon's budget, and as he put it, because my district has a lot of jobs dependent on that spending.
I didn't say because of our readiness, but because it's going to cost us jobs.
Well, I don't want people making things for the Pentagon.
I want people making things for consumers.
It's funny, isn't it, how we're so far gone now that these people, you know, I watch C-SPAN or whatever, they don't even know how embarrassed they're supposed to be.
They don't realize that what they're describing is some kind of corruption anyway.
You know, that's the way the system works, and that's the way the system has worked for so long now and because it's a democracy, that means however the system worked, the majority wanted it to be that way, and so therefore it's legit, and so that's just the way it is.
You know what you ought to do is you ought to create a thing that sells things to the Pentagon too.
We could all be rich.
Yeah, well, you know Nick Terse's research on this better than I do.
You've talked to him, and I'm sure you've read his book, and his whole point is that much of the economy is dependent on Pentagon spending and related spending, and that if all that were to be slashed way back to, you know, let's say truly defensive proportions, a lot of people believe it would be a catastrophe for the economy, and in the short run in a way it would be.
Yeah, it would be hugely disruptive just because it's been so long.
In fact, there's a new thing by Christopher Coyne from George Mason, I'm going to interview him on Monday, about this too, about the unseen costs and just how perverted the economy is where, like you say, if they were to change it, if Ron Paul was up there and said, that's it, bring the empire home and whatever, there would be a hell of a lot of people out of work, man, for the short term anyway.
Well, but assuming if we really freed the economy, that would change quickly.
Don't forget, as the World War II was winding down, the Keynesians all warned that we were going to go back into the Depression.
They said, wait, we're going to dump 10 million men or so into the civilian market, right, they're going to be decommissioned from the military, and we're not going to need as many tanks and bombers and all that stuff as we had before.
We're going to be in a Depression.
But guess what?
It didn't happen.
We ended up in a boom time, and Robert Higgs and his work shows why that was so.
And it was, in a lot of ways, a genuine boom.
It wasn't a government-stimulated boom.
People were making more money because they were being hired for consumer production, and the wage price controls, I guess, at that point were relaxed, at least the wage controls, so people had rising incomes.
I think there was some fall in taxes, so they had more money to spend.
They didn't disgorge their savings, though.
See, some people have argued against my position that, well, what really led to the boom after the war was the fact that people had a lot of savings, right, because there was nothing to buy.
So the war was actually good.
There was nothing to buy.
People saved.
And then when the war was over, they had all this money to go out and spend.
Except the problem is, as Higgs points out, they didn't.
Their savings rate slowed, but it didn't go into reverse.
And even if that was true, there'd be no justification for the policy.
Well, that's true, too, but it isn't true.
Regular people, the savings rate did not go negative.
It slowed.
But they had rising incomes, so they went out and they did spend.
But there was also savings.
There was still savings, so there was money for investment.
And businesses increased investment.
That's where the boom came from.
All right, now let me ask you real quick, and I'm sorry we've got to go.
We're way over time.
I'm running way behind the clock today.
But I want to ask you one last thing, which is, you know, we hear all this stuff about America's decline.
And, of course, most of this, it seems, comes from a statist point of view.
Our empire is going to have to come home, maybe in slow motion, but it's going to have to come home because the government is broke.
If they tax us anymore or inflate any worse, they're, you know, risking their own power, that kind of thing.
But tied up in all of that is this whole thing about, yeah, that's it for America.
You know, our best days are over.
Now is the time of the rise of China and all this and that.
And I wonder, you're so much better at economic type stuff than me.
Do you think that if they really did abolish the empire and they tried to just be, never mind anarcho-capitalism, but if we just try to be a normal country in a normal time, like Jean Kirkpatrick said at the end of the Cold War, and we just, you know, tried to focus on being a constitutional commercial republic and all that, is it the case that we really have seen our best days?
Or could it be that America would still be the wealthiest country for hundreds of years on into the future as long as we have a free economy, that kind of thing?
Because everybody seems so sure.
It was like, we had our rise and now's our fall and that's it.
Whereas to me it sort of looks like, yeah, but that's just some stupid government policies that had their rise and fall.
But that doesn't mean that America has to be over.
Well, no, I agree with you.
If you free the market and leave people alone, leave them to control their resources, engage in mutual exchange, I can't think of any reason why there wouldn't be, you know, the economy wouldn't be booming and living standards would rise.
I mean, are people just going to sit around and twiddle their thumbs and say, well, without government motivation, you know, I'm just going to sit around here.
No, people want things.
They want comforts.
They want a better life for themselves and their kids.
They're going to work and exchange and trade and do all the things people do.
Government impedes that stuff.
It doesn't stimulate it.
So I don't see any reason to be concerned about that.
But the market needs to be free.
All right.
With that, we've got to leave it.
Thank you so much for your time as always, Sheldon.
Anytime, Scott.
Everybody, that's the great Sheldon Richman.
He's the vice president over at the Future of Freedom Foundation.
And you can find this one at theprojecttorestoreamerica.com.
Theprojecttorestoreamerica.com.
It's called World War II spending did not end the Great Depression.
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