The Amateur Economist

Lesson unlearned

http://www.austincc.edu/lpatrick/his2341/tragic.html
….............President Hoover's confidence campaign,[during the depression] while well intentioned, simply did not work. The economy continued its downward spiral-workers cut back on consumption, more workers were laid off, workers cut back further on consumption, etc., etc.
A fiscal conservative, he fought desperately to maintain a balanced federal budget. This was extremely difficult given the demands placed on the government to launch various relief programs and a shrinking revenue base because of unprecedented deflation. Hoover however said: "The course of unbalanced budgets is the road to ruin". The logic of this position was that the business community would be discouraged and delay reinvestment if the government were unable to operate in the black. As McElvaine points out: "The President therefore devoted much of his energies in 1931 and 1932 to the goal of a balanced budget, which was hopeless under the circumstances. Yet, as Hoover himself had recognized in less frantic times, cutting spending and raising taxes diminished purchasing and made the situation worse".
In the name of restoring business confidence, President Hoover also rejected ever-louder demands by Americans that the currency system be inflated. Many Americans reasoned that since the economic disease the country suffered from was unprecedented deflation (as hundreds of millions of dollars were withdrawn from circulation and investment) then the appropriate prescription was inflation. They urged the government to abandon the gold standard and flood the economy with printed currency. Hoover rejected such demands arguing that a stable or "hard" currency system had always been a prerequisite for business investment. If the currency system was inflated by the government, businessmen would refuse to reinvest their funds in the economy. This would simply delay the day when economic recovery could begin. Thus, Hoover refused to give in to the demands for inflation.

Paul Hunter writes:
Enter Lord Maynard Keynes and 50 years of growing prosperity, uninterrupted by major economic down turns.
Given that the body politic often suffers from historical amnesia it should not surprise us that the economic nation went astray in the new millennium. The government's untimed and untargeted tax reductions meant to temper a recession in 2000 was maintained after the recovery and during revenue sapping wartime spending. The result was growing government debt and budget deficits leading up to the financial sector collapse.
Fortunately the lessons learned the had way in the1930s were applied and a great depression was avoided*. The recovery was hampered by the deficits and debt at the time of the crisis.



*Unemployment rate 23.6% in1932 9.6 in 2010