Hands Off My Macroeconomics

I’m always a little excited to see that a new issue of The Intercollegiate Review has arrived. In case you’re not familiar with this “Journal of Scholarship and Opinion,” it is published by the Intercollegiate Studies Institute. ISI is a non-profit educational organization, “whose purpose is to further in

successive generations of college students a better understanding of the values and institutions that sustain a free and humane society.” They provide online information, lectures, publications, conferences, and more. They are champions of “limited government, individual liberty, the rule of law, a free market economy, personal responsibility, and moral standards”—my kind of people. The Intercollegiate Review is cost-free but priceless. (ISI.org, and The Intercollegiate Review is here)

A few years back I read Hayek’s The Road to Serfdom, and began an interest in Austrian economics (which you can learn more about through the Ludwig von Mises Institute online: Mises.org). So when I saw an article in The Intercollegiate Review mentioning Hayek’s book, I turned there first: “Economic Policy and the Road to Serfdom: The Watershed of 1913,” by Brian Domitrovic, assistant professor of history at Sam Houston State University. I’d like to share a few chunks of the piece here, talking about America’s golden macroeconomic era, and what we can learn from it.

The most impressive half century in American—arguably world—economic history was that which followed the Civil War: the nearly fifty years form 1865 to 1913. The American economy expanded at a yearly rate of 3.62 percent from 1865 to 1913. By way of comparison, from 1913 to 2008 (also a peak-to-peak period), the American economy grew at 3.26 percent per year. The difference of about four-tenths of a percent per year proved enormous. Had the United States maintained the trend that held in the half century after the Civil War, it would now be about half again richer than it is now, in the second decade of the twenty-first century.…

The greatest decades of economic growth in American history were the 1870s and 1880s, when the economy expanded by two-thirds each time. There was one significant recession in this period, in 1873. It was overwhelmed so soon and so comprehensively that the 70 percent real growth gained in the 1870s amounts to the largest of any decade in the peacetime history of the United States.

As for the “panic of 1873” of textbook lore, that year brought a big drop in output, with people thrown out of work. The episode was a function of the incredible depreciation of the dollar that had been undertaken in the Civil War, when (following decades of price stability) the Union government printed greenbacks so quickly that the dollar suddenly lost half its value. After 1865, the U.S. government pledged to restore the value of the dollar against gold (and consumer prices), but doubts about this led to speculative investments to hedge the uncertainty and ultimately produced the asset crash of 1873.

In the wake of the 1873 bust, however, the dollar slowly reclaimed its value, just as the U.S. government had pledged. The price level declined by 1.4 percent per year on average for the next two decades, such that by the 1890s, a dollar saved before 1860 achieved its original purchasing power. As for unemployment, the term was not coined until the tail end of the century for a reason. The United States was importing tens of millions of immigrant workers on account of labor shortages given the growth boom….

[G]rowth was high; recessions were rare, shallow, and short; prices changed little as employment boomed—that it effectively defined the kind of results that governmental macroeconomic management should aspire to. The irony was that there was precious little macroeconomic management at all for most of this era. We can say with statistical precision that there has never been a golden era in American macroeconomic history like the 1870s and 1880s.

There were two other significant recessions in the half century after the Civil War. These occurred in 1893 and 1907. Both cases correlated to governmental overtures to introduce macroeconomic policy. In 1890, the United States signaled that, despite having attained the very price level that had held for decades before the Civil War, as well as having watched growth cruise at more than 5 percent per year for the long term, it was now going to monetize a new asset, silver. The prospect was of too much currency in the economy (1873 redux), and the markets quickly swelled and crashed. The recovery from 1893 stayed tepid while President Grover Cleveland spent his term trying to end the silver lark. Aggregate output was flat from 1892 until the next election year, 1896; in the latter year, free-silverite William Jennings Bryan succeeded Cleveland as Democratic nominee for president. The strong recovery began only when, with the election of Republican William McKinley in 1896, the United States committed to dropping the program for the extra silver money. Overall, growth was slower in the 1890s that it had been in preceding decades—33 percent for the decade, a typical twentieth-century number. But from the year McKinley was elected until 1907, growth came in a 4.6 percent per year, approaching the 1870s-1880s standard of 5.2 percent annually. This is tantamount to saying that the real trend of yearly growth in the post-Civil War period was not 3.62 percent but something like 5 percent per year—because 5 percent held as long as the government stayed out of the way. [Emphasis mine.]

I know that was a lot of numbers. But the point illustrated is that the free market brings about world-record-setting growth and prosperity, and government interference always causes lower growth and less prosperity. There’s more in the rest of the article, including the damage done by instituting the income tax in 1913, the depression and recovery because of hands-off policy in 1920-21, and then the interference that resulted in the Great Depression.

At Spherical Model I try to identify principles that will provide us the greatest freedom, prosperity, and civilization. I believe the U.S. Constitution is an inspired document that limits government in the very ways that lead to the best outcomes. But usurpation by power mongers slowly (and sometimes quickly) erodes our society. The Constitution limits economic interference to safeguarding the wealth of citizens: law enforcement, protection from invasion and piracy, preventing refusals of trade between and among the various states, and standardizing measures and coining money to make exchanges equitable. The 1913 amendment is now part of the Constitution, so taxing for the purpose of raising revenue to pay for the Constitutional services is also included—but any collection of taxes to redistribute wealth, provide “charity,” or anything else not spelled out in the Constitution is theft. And this theft will ALWAYS deteriorate our freedom, prosperity, and civilization. As the IR article shows, there is plenty of evidence to prove the principle true.

I suggest we once again try living by the Constitution and then see the prosperity that follows.