Avoiding a depression

I have to give Pat Miketinac credit for citing facts and history for his letter about monetary policy. However, following his chain of cause and effect, we still end up at the Great Depression and the perfectly wrong response from policymakers.

Faced with a collapsing economy and steeply declining tax revenues, the Hoover administration tried to balance the federal budget by increasing taxes. And, faced with an economy starved for money, the Federal Reserve raised interest rates.

Hoover was following the economic ideology of his time. The Federal Reserve was constrained by the gold standard. The result of the Fed's policy was continued deflation. As asset and product prices fell, income and wealth was transferred from the producers of goods and services to the owners of money. In their role as producers, people were earning less and less for their products. As consumers, they were so broke that even falling prices did not boost demand. The economy continued a fatal downward spiral.

The current Fed Chairman, Ben Bernanke, wrote his Ph.D. thesis on the banking crisis of the Great Depression. In his first confirmation hearing, he was asked what he would do if, as Fed Chairman, he encountered a similar crisis, he replied, "I'd drop money from helicopters." Turns out, he meant it.

Suppose that President George Bush and the Congress had sharply increased taxes when the recession started in 2008. And suppose the Fed had sharply raised interest rates. We would today be enjoying Great Depression 2.0. But the Bush-Obama administrations followed Keynesian fiscal policies. And the Fed, freed of the gold standard, was able to create enough money to prop up the credit markets. So, we aren't in a depression today.

Mr. Miketinac objects to my use of the GDP as a measure of economic health. GDP is the total market value of all the final goods and services produced within the country within a year. Its components are consumer spending, investment, government spending and exports minus imports. It is a measure of the size of the economy. Although it isn't a perfect measure of social welfare, a growing real GDP is generally better than a shrinking one. You need growth to create jobs and to grow wealth. And yes, some growth is financed by borrowing.

As to Mr. Miketinac's point that people would not have acted as they did if they had foreseen the housing price collapse: Suppose someone had foreknowledge that, at some indefinite time, the housing market would crash and 17 percent of the workforce would be unemployed or underemployed. Most people would reason that they would be part of the 83 percent who kept their jobs. And prices would never drop in their neighborhoods.

People are naturally optimistic. They believe that things will work out. And, usually, things do.

Dallas Dunlap

Brooksville