The Digital Gamble: New Technology Transforms Fiscal Policy

----
The Digital Gamble: New Technology Transforms Fiscal Policy // IMF Blog
https://blogs.imf.org/2018/04/12/the-digital-gamble-new-technology-transforms-fiscal-policy/

By Vitor Gaspar and Geneviève Verdier

April 12, 2018

Versions in عربي (Arabic),  Español (Spanish),  日本語 (Japanese), Português  (Portuguese), Русский (Russian)

Traffic in Singapore: the city uses digital technology for road pricing to manage road congestion congestion (photo: Kua Chee Siong/ SPH/Newscom)..

In Rwanda, digitally-monitored drones deliver blood supplies to hospitals. In Estonia, it takes five minutes to file taxes and 99 percent of government services are available online. Singapore was the first city to implement electronic road pricing to manage congestion. The world is becoming digital, and reliable, timely, and accurate information is available at the push of a button. Governments are following suit, using digital tools for tax and expenditure policy, public financial management, and public service delivery. 

With better information, governments can build better systems, as well as design and implement better policies. Our new Fiscal Monitor shows both the opportunities and challenges at play as technology transforms fiscal policy.

Place a bet

The gamble? Going for the digital payoff despite the potential for fraud, breaches of privacy and cybersecurity, and the cost of adopting new technologies.

The innovators have been quick to take advantage of digital tools to facilitate the lives of citizens. Effortless tax season? Check. Kenyans pay taxes on their smart phones; Norwegians have their tax returns prepopulated by their government. Better public services? Done. Indians receive social benefits through electronic transfers to bank accounts linked to their biometric identification.

Countries can now tackle tax evasion with digital solutions. British customs are using big data to detect fraudulent behavior of importers at the border. We estimate that adopting such methods could increase annual indirect tax collection at the border by up to 1-2 percent of GDP.

The Panama and the Paradise papers have exposed the substantial wealth sheltered in low-tax jurisdictions—an average of 10 percent of world GDP. With digital cross-country information exchange about taxpayers comes the prospect of more effectively tracking down this wealth before it is hidden away.

Avoid the gamble?

Why would a government not bet on new technology?

Reasons vary. Citizens don't trust their government to safeguard their personal information. In the United States, less than a third of people believe the government can keep their digital records secure.

Many poor households lack access to digital tools and could be left behind. Fewer than half of the population of Africa subscribes to a mobile phone.

New fraud opportunities abound: authorities in Korea recently raided the country's largest cryptocurrency exchanges for alleged tax evasion. Cash-strapped governments with low capacity face greater challenges in managing these risks.

Digital firms are all around

Some challenges are policy related. Firms like Google, Apple, Facebook and Amazon are in the public eye but digital firms are all around us. They generate sales with little physical presence. They benefit from value created by users—using apps on our smart phones produces free yet valuable information. Can and should governments tax such value where the consumer resides, even when the firm has its physical home elsewhere?

The sheer scale of digital activities has raised concerns about the fairness of the current allocation of international taxing rights. Some countries—Israel, Italy—have introduced specialized tax measures targeting digital firms but such uncoordinated solutions cannot provide the answer. As the whole economy becomes digital, global solutions are required.

The way forward

People are replacing taxis with Uber, hotels with Airbnb, and cash with PayPal. Can governments stay on the sidelines of such a transformation?

Probably not. Overcoming challenges will require:

A proactive and comprehensive reform agenda that addresses political and institutional weaknesses to manage digital risks and ensure inclusion. In India, this meant not only introducing biometric identification to deliver income support to the right beneficiaries, but also reforming the design of the program itself.

Adequate resources in the budget . Korea secured budget resources for multi-year plans early on in its digitalization process.

International cooperation . In some cases, confronting these challenges calls for international resolve. For example, reducing evasion to low-tax jurisdictions or forming a consensus on the taxation of the digital economy will require multilateral efforts.

Digitalization will not solve all the problems faced by policymakers—it may even create some new ones. But governments can't lay odds against this trend. Resist at your peril, or embark on a journey to shape the way forward.


----

Read in my feedly.com

Tennessee Republicans Experience Cognitive Dissonance on Poverty [feedly]

Tennessee Republicans Experience Cognitive Dissonance on Poverty
http://prospect.org/article/tennessee-republicans-experience-cognitive-dissonance-on-poverty

trickle-downers_35.jpg

With this week's "welfare reform" executive order from President Trump, which calls for work requirements in public assistance programs across the board, the outlook for anti-poverty programs is bleak. And this current anti-welfare climate has also made it easier for states to overhaul their public assistance programs. Tennessee, which has one of the highest poverty rates in the country, is one such state. Republican Governor Bill Haslam has proposed a number of welfare reforms that he has asked the Republican-controlled legislature to pass.

In two moves supported by the Trump administration, the governor has already announced that the state will further limit food assistance for adults without children, and the legislature may well impose work requirements on Medicaid recipients (using dollars earmarked for the cash assistance program to implement and monitor those requirements. But at least some Republicans in Tennessee's General Assembly have gained a partial understanding of the difficulties of poverty, because they also voted this week to increase welfare benefit payments to poor families for the first time in 22 years. Nonetheless, the impact of such an increase would largely be offset by other anti-welfare policies that the legislature is pursuing—like the work requirements for Medicaid.

Currently, the maximum benefit for a family of three in Tennessee from the U.S. cash assistance program, Temporary Assistance for Needy Families (TANF), is $185. States choose how to spend their TANF block-grant funds, whether on basic assistance, work supports—or sometimes, to fill budget gaps. Most states have neglected to ensure that cash assistance levels meet the needs of poor families; as of mid-2017, 99 percent of TANF recipients receive benefits that, when adjusted for inflation, are worth less than the average benefit 22 years ago. Tennessee's payment to poor families has remained at $185 since TANF was established in 1996. When adjusted for inflation, that payment had depreciated in value by nearly 36 percent by 2017.

New legislation, which on Monday passed overwhelmingly with 88 votes for the bill and just seven against, will increase those benefit levels, as reported by Andy Sher of the Chattanooga Times Free Press. The increase is just one component of a larger bill, however. The bill also proposes to implement stricter initiatives to curb fraud in public assistance programs.

If enacted, the bill would increase Tennessee's maximum monthly benefit from a paltry $185 … to a slightly-less-paltry $277.

"$277 for a family of three still puts [those] Tennessee families at 16 percent of the poverty line," says Michele Johnson, executive director of the Tennessee Justice Center, an advocacy organization in Nashville. "We are grateful to the governor for increasing the grant," Johnson says, but the increase still "leaves us in the bottom rank of states." Tennessee has the second lowest TANF benefit in the country. The increase would bring the benefit to the sixth lowest. And this is a one-time raise—it's not indexed for inflation.

Since welfare reform, states increasingly use their block grant funds on initiatives other than basic assistance to poor families. Indeed, only about 25,000 families in Tennessee receive cash assistance; while in 2016, nearly 142,000 families lived below the poverty line. And it's not for a lack of funds—there are hundreds of millions of dollars in Tennessee's unspent, reserve fund.

Instead of using more of this reserve fund on assistance for poor families, the legislature is proposing to use the money to facilitate the introduction of Medicaid work requirements—that is, to help remove people from public assistance. A handful of other states have recently established work requirements for Medicaid, since the practice has been greenlighted by the Trump administration (though none have suggested they will use TANF dollars to do so).

But here's the rub: Tennessee hasn't expanded Medicaid to all adults under a certain income level like those other states. The other states that have established work requirements have targeted them to childless adults, who gained coverage through the Medicaid expansion. That population isn't generally eligible for Medicaid in Tennessee. Instead, Tennessee's Medicaid program primarily serves children, caregivers, people with disabilities, and the elderly. The few childless adults who could receive Medicaid benefits in Tennessee include groups that are very small, among them former foster children until they reach the age of 26 and women under a certain income level who have been diagnosed with breast cancer or cervical cancer.

So instead, Tennessee's requirement would seemingly target all adults on Medicaid who don't have dependent children under six, as that's all the bill says. But the bill is so vaguethat proponents of the bill don't seem to understand exactly what it would mean and whom it would cover. The bill's sponsor in the State House, Speaker Beth Harwell, said that a full-time caregiver to her son who is disabled would be exempt from the requirement. The bill's sponsor in the State Senate, Republican Kerry Roberts, also reiterated that women who were full-time caregivers would be exempt.

But according to the bill they support, that is not the case if those caregivers' children are over the age of six.

Despite the assembly's new willingness to increase the welfare benefit, not all Republicans went along. State Representative Tilman Goins harked back to the "welfare queen" myth when speaking for his amendment to the bill, which would have kept the fraud-reduction measure but eliminated the increase in TANF payments entirely. Goins said the increases would amount to "cash money—that can be used to buy anything from cigarettes, to liquor, to prostitutes. Maybe they want to rent a hotel room for less than six hours, they can do that with this money," as the legislators around him laughed.

Goins's remarks could have been drawn from the rhetoric surrounding welfare reform in the 1990s, which spoke of lawless, immoral poor people who refused to work. These views were clearly racialized, as was Ronald Reagan's "welfare queen" rhetoric, about a woman, assumed to be black, that defrauded the government to live high on welfare money.

But poverty forces families to live anything but high, which some Republicans in the State House seemed finally to understand. Two cited "compassionate conservatism" as their reasons for supporting the meager TANF payment increase. Republican State Representative Dan Howell, who sponsored the bill, said, "We get as legislators … a [yearly] cost of living increase. It's been 22 years since TANF families have received a basic increase in the allotment … the average working family on TANF in Tennessee earns $933 a month. [Add the TANF payment and] they're making about $1,100 a month. It's been a long, long, long time since I've had to live on $1,100 a month. I'm not sure that many of us could do that."

Still, Republicans who supported the bill also provided a number of disclaimers about the TANF population, stressing that these are the working poor. "These are people who are trying," said Republican State Representative Patsy Hazlewood. "You have to understand there is a work requirement to TANF," said Howell. While true, such arguments still legitimize welfare stereotypes by separating the working poor, who "deserve" help, from those who don't—seemingly, people who aren't trying, or who buy cigarettes and liquor. In reality, there are number of reasons why people receiving assistance may not be able to work full time—disabilities, caregiving responsibilities, or a lack of employable skills, to name just a few.

Goins's amendment ultimately failed, after Howell read out statistics of how little TANF recipients earn, how little fraud is in the program, and how TANF "is not a way of life." Was Howell beginning to understand the depths of poverty in the country? Was he seeing how Americans tend to ostracize the poor in order to escape the reality of a social system where hard work doesn't necessarily equate with success? Was Howell about to gain insight into how devastating work requirements can be to people in poverty?

The House already passed the Medicaid work requirement bill last month. Both Howell and Hazlewood voted for it. Next week, the Senate may approve the work requirements for Medicaid.

Tennessee's lawmakers aren't just pushing a policy—they're pushing a narrative about the deserving and the undeserving poor.

Tax Cuts for the rich. Deregulation for the powerful. Wage suppression for everyone else. These are the tenets of trickle-down economics, the conservatives' age-old strategy for advantaging the interests of the rich and powerful over those of the middle class and poor. The articles in Trickle-Downers are devoted, first, to exposing and refuting these lies, but equally, to reminding Americans that these claims aren't made because they are true. Rather, they are made because they are the most effective way elites have found to bully, confuse and intimidate middle- and working-class voters. Trickle-down claims are not real economics. They are negotiating strategies. Here at the Prospect, we hope to help you win that negotiation.

 -- via my feedly newsfeed

Economists Say U.S. Tariffs Are Wrong Move on a Valid Issue [feedly]

I am pleased that most economists question Trump's "strategy" in combating alleged unfair Chinese trade practices. A trade war will be destructive, and, given the chaos of the Trump regime, and the apparent  steadiness and smartness of the Chinese one, at the moment, China would likely emerge from  such a 'war' relatively stronger. Although everyone knows that in an overall sense, all will lose in a trade war. 

There seems to be a consensus, sort of, among even liberal economists that 'intellectual property' is being "robbed" from the US, and that on that issue, Trump's criticism of China is correct. 

This is an interesting test of the theory that 'ideas' merit being called 'property'. It is not at all clear in economic literature since the rise of the intangibles and high-tech industries that innovation is well served by the frameworks of US patent and copyright law. Especially considering the roles of monopoly.

China does not even have a private property law, and socialist values would not encourage privatizing ideas as commodities. I predict the Chinese state will get MORE involved in science and AI, not LESS. We should think of reforms in that direction ourselves. Consider the open source movement's complex, but inexorable invasion into the private property intangible spaces.

Economists Say U.S. Tariffs Are Wrong Move on a Valid Issue
https://www.nytimes.com/2018/04/11/business/economy/trump-economists.html

 -- via my feedly newsfeed

Economists Say U.S. Tariffs Are Wrong Move on a Valid Issue

By JIM TANKERSLEY

WASHINGTON — President Trump's advisers insist that the economics profession is solidly behind the administration's threat to impose tariffs on hundreds of billions of dollars of Chinese imports. Many top economists say, no, they're not.

Across the ideological spectrum, trade experts and former top economic advisers to presidents say Mr. Trump is right to highlight issues on which China is widely viewed as an offender, such as intellectual-property theft and access to its domestic market. But many of those experts say Mr. Trump's planned tariffs would backfire — by raising costs to American businesses and consumers, and by inviting retaliation against American exporters. They say he would better serve his purposes by enlisting international allies in a pressure campaign against Beijing.

"Many economists have said, yeah, there's some legitimate issues here," said Laura D. Tyson, an economist at the Haas School of Business of the University of California, Berkeley, who headed the Council of Economic Advisers under President Bill Clinton. "I haven't seen any who have said the appropriate response is a series of tariffs on a bunch of goods, most of which don't have any real link to the underlying issue."

Ms. Tyson and many other economists say it was mistake last year when Mr. Trump pulled the United States out of the Trans-Pacific Partnership. Proponents of that agreement say it would have unified a dozen countries against the Chinese on trade issues.

"I don't think the way the administration is going about it is a particularly strategic one," said David Autor, a Massachusetts Institute of Technology economist whose research suggests that opening trade with China cost the United States two million jobs in the late 1990s and early 2000s. "The first way to go about it should have been to sign TPP, which was set up as a bulwark against China."

Mr. Trump has long railed against Chinese trade practices, and he has long criticized previous presidents for their approach to the issue. This year, he has pushed aggressively on the issue. He levied tariffs on imported steel and aluminum that were largely viewed as a shot at Chinese oversupply of those metals. Then he proposed as much as $150 billion in tariffs on other imports from China.

His advisers have stressed that economists largely agree with Mr. Trump that the Chinese are stealing American intellectual property and restricting access to their market in ways that put American companies at a disadvantage.

"No free-market guy, no free-trade guy disagrees on this subject," Larry Kudlow, the new director of the National Economic Council, said on CNN's "State of the Union" on Sunday. "The guild, if you will, the brethren of the economic profession have all agreed that something has to be done."

Peter Navarro, the director of Mr. Trump's Office of Trade and Manufacturing Policy, told NBC's "Meet the Press" on Sunday that "what we have here is a situation where every American understands that China is stealing our intellectual property, they're forcing the transfer of our technology when companies go to China, and by doing that, they steal jobs from America, they steal factories from America, and we run an unprecedented $370-billion-a-year trade deficit in goods. This is an unsustainable situation."

Many economists agree that China needs to be confronted on several trade issues, though very few share Mr. Trump's fixation on the United States' trade deficit with China. Most say bilateral trade deficits are not a good measure of market access or the fairness of trade agreements.

"I think the basic issue that the Trump administration is pointing to — the lack of intellectual-property protection — is a serious one, particularly for the United States," said N. Gregory Mankiw, a Harvard economist who headed President George W. Bush's Council of Economic Advisers. "It's a completely serious and appropriate issue for the administration to be concerned with."

What worries Mr. Mankiw and others is Mr. Trump's threat of tariffs, which administration officials have portrayed both as a bargaining chip and as a policy Mr. Trump would certainly carry through on.

Economic forecasters are just beginning to predict how tariffs would affect growth. Goldman Sachs analysts wrote this week that the currently proposed tariffs would cut less than 0.1 percentage points off American growth this year, but also said that "it is harder to rule out continued escalation to a level that does ultimately have a first-order impact on the economy" if the United States and China could not find compromise.

Because tariffs would raise prices for American businesses and consumers that buy imported goods, "you're hurting yourself if you follow through with it," Mr. Mankiw said. "It just seems to me to be a not very smart threat to be making, given that it would not be rational to follow through with it."

Economists who don't like tariffs but favor action against China largely say the United States should be forming a multinational coalition to confront the Chinese.

"Any good strategy has to include getting other countries on your side," said Jason Furman, an economist at Harvard's Kennedy School of Government who headed the Council of Economic Advisers under President Barack Obama. "If it's the United States versus China, we're similar-sized economies. If it's the United States and the world versus China, that's not something China can win."

Mr. Furman, Mr. Mankiw and others said the United States should continue to press its case against China before the World Trade Organization — a strategy that Mr. Navarro and other advisers to Mr. Trump say has not produced favorable results in the past. The economists who disagree with the administration's approach also stress, frequently, that joining the Trans-Pacific Partnership would have given the United States leverage in this dispute.

Since Mr. Trump quit the pact, 11 other countries have forged ahead on it. He said this year that he would reconsider joining the agreement if it was renegotiated to benefit the United States more substantially.

"It's obviously a terrible mistake" to have quit the agreement, said Austan Goolsbee, an economist at the University of Chicago's Booth School of Business and another past chairman of Mr. Obama's Council of Economic Advisers. "This was a coalition of the vast majority of the economies of Asia outside of China, agreeing to principles exactly of the form that we're now saying that we want. We would be in a lot better situation if we had all of those people on our side."

Mr. Trump's unilateral approach, including his tariff threats, has drawn qualified support from at least one unlikely high-profile economist: Martin Feldstein, of Harvard, a chairman of President Ronald Reagan's Council of Economic Advisers.

Mr. Feldstein began a syndicated op-ed column last month, on the subject of Mr. Trump's steel and aluminum tariffs, by declaring, "Like almost all economists and most policy analysts, I prefer low trade tariffs or no tariffs at all." But he went on to criticize China's intellectual-property policies and predict that the United States "cannot use traditional remedies for trade disputes or World Trade Organization procedures to stop China's behavior."

American negotiators, Mr. Feldstein wrote, would use tariff threats "as a way to persuade China's government to abandon the policy of 'voluntary' technology transfers."

"If that happens, and U.S. firms can do business in China without being compelled to pay such a steep competitive price," he continued, "the threat of tariffs will have been a very successful tool of trade policy."

Bloomberg: China Is Nationalizing Its Tech Sector [feedly]

Don't blame Bloomberg for being a bit hysterical at this development!     😎😂

China Is Nationalizing Its Tech Sector
https://www.bloomberg.com/view/articles/2018-04-12/china-is-nationalizing-its-tech-sector

Meet the new boss.

 Photographer: Paul Yeung/Bloomberg

As Bloomberg News reported this week, a key stumbling block in trade negotiations between China and the U.S. has been Beijing's extensive support for its technology firms. But if President Donald Trump's administration thinks that will change any time soon, it hasn't been paying attention: Far from reducing support for the tech sector, China is on the verge of nationalizing it.

By many measures, China's tech companies seem unstoppable. Private equity and venture capital investment grew from $14 billion in 2012 to $120 billion in 2017. Last year, 34 Chinese companies joined the elite ranks of startups valued at more than $1 billion, second only to the U.S. From health care to bike-sharing, Chinese companies are improving on ideas from overseas and innovating in their own right.

And it's not just startups. China's established tech firms -- notably Baidu, Alibaba and Tencent, or the BATs -- are experiencing enormous growth as well. Tencent Holdings Ltd., with nearly 1 billion users, reported that its net income almost doubled in the last quarter, to $3.3 billion. Alibaba Group Holding Ltd., which  dominates online retail, is expecting growth of 55 percent this year. Investors may worry about Chinese debt, but they're giddy about Chinese tech.

At first glance, this rapid growth would seem to dovetail with the government's efforts to prove its market bona fides. China regularly pushes for recognition as a market economy at the World Trade Organization, while touting the benefits of "supply-side reform" at home. In a speech at the most recent Communist Party Congress, President Xi Jinping pledged to "support the growth of private businesses."

Look beyond such rhetoric, though, and a very different picture emerges.

Communist Party committees have been installed at many tech firms, reviewing everything from operations to compliance with national goals. Regulators have been discussing taking a 1 percent stake in some giants, including Alibaba and Tencent, along with a board seat. Tech companies have been widely encouraged to invest in state-owned firms, in the hopes of making them more productive. The common denominator of all these efforts is that the government wants more control.

An executive at a Chinese search engine recently summed up the new dynamic:

We're entering an era in which we'll be fused together. It might be that there will be a request to establish a Party committee within your company, or that you should let state investors take a stake, you know, as a form of mixed ownership. If you think clearly about this, you really can resonate together with the state. You can receive massive support. But if it's your nature to want to go your own way, to think that your interests differ from what the state is advocating, then you'll probably find that things are painful, more painful than in the past.

This quasi-nationalization applies to China's startup scene, too. One recent report found that 60 percent of Chinese unicorns have either direct or indirect investment from the BATs. China's venture-capital sector is dominated not by traditional tech dealmakers but by the state: There are more than 1,000 government-owned VC firms in China, controlling more than $750 billion.

All this has direct consequences for the trade dispute with the U.S. A recent research note from Natixis SA found that 70 percent of the products targeted by the Trump administration in its initial tariff list fall under the China Manufacturing 2025 initiative, which aims to support Chinese companies in 10 high-tech sectors, including robotics and biotechnology. If Beijing insists on protecting those industries -- as it gives every indication of doing -- significant progress on trade talks seems unlikely. 

Perhaps a bigger worry for China, though, is that this creeping nationalization could harm its most dynamic companies. Lavishing the new national champions with handouts -- such as cheap loans and employment subsidies -- could turn them into rent-seekers. More bureaucracy could mean less efficiency and growth. Firms may start currying government favor rather than taking risks and innovating. Tech could become the new coal.

And that wouldn't be in anyone's interest.

 -- via my feedly newsfeed

DeLong on Schumpeter: Joseph Schumpeter on "Liquidationism": Hoisted from the Archives [feedly]

Joseph Schumpeter on "Liquidationism": Hoisted from the Archives
http://www.bradford-delong.com/2018/04/joseph-schumpeter-on-liquidationism-hoisted-from-the-archives.html

Hoisted from the Archives: Joseph Schumpeter on "Liquidationism": Three things strike me while rereading Schumpeter's 1934 "Depressions" (and also his 1927 Explanation of the Business Cycle):

1. How much smarter Schumpeter is than our modern liquidationists and austerians--he says a great many true things in and amongst the chaff, which is created by his fundamentally mistaken belief that structural adjustment must be triggered by a downturn and a wave of bankruptcies that releases resources into unemployment. How much more fun and useful it would be right now to be debating a Schumpeter right now than the ideologues calling for, say, more austerity for and more unemployment in Greece!

2. How very strange it is for Schumpeter to be laying out his depressions-cause-structural-change-and-growth theory of business cycles at the very same moment that he is also laying out his entrepreneurs-disrupt-the-circular-flow-and-cause-structural-change-and-growth-theory of enterprise. It is, of course, the second that is correct: Growth comes from entrepreneurs pulling resources into the sectors, enterprises, products, and production methods of the future. It does not come from depressions pushing resources into unemployment. Indeed, as Keynes noted, times of depression and fear of future depression are powerful brakes halting Schumpeterian entrepreneurship: "If effective demand is deficient... the individual enterpriser... is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros.... Hitherto the increment of the world's wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough..."

3. How Schumpeter genuinely seems to have no clue at all that the business cycle is a feature of a monetary economy--how very badly indeed he needed to learn, and how he never did learn, what Nick Rowe and company teach today about the effects of monetary stringency on economic coordination.

---

Joseph Schumpeter (1934): Depressions: What Can We Learn from Past Experience?

The problems presented by periods of depression may be grouped as follows: First, removal of extra economic injuries to the economic mechanism: Mostly impossible on political grounds. Second, relief: Not only imperative on moral and social grounds, but also an important means to keep up the current of economic life and to steady demand, although no cure for fundamental cases.

Third, remedies: The chief difficulty of which lies in the fact that depressions are not simply evils, which we might attempt to suppress, but--perhaps undesirable--forms of something which has to be done, namely, adjustment to previous economic change.

Most of what would be effective in remedying a depression would be equally effective in preventing this adjustment. This is especially true of inflation, which would, if pushed far enough, undoubtedly turn depression in to the sham prosperity so familiar from European postwar [i.e., World War I] experience, but which, if it be carried to that point, would, in the end, lead to a collapse worse than the one it was called in to remedy.

Fourth, reforms of institutions intended to remedy the situation but suggested by the moral and economic evils of both booms and depressions: The crucial point of these reforms lies in the coincidence of a political atmosphere exceptionally favorable, and an economic situation exceptionally unfavorable to their success. No doubt they will always be carried amidst enthusiastic clapping of hands. But they will also be stigmatized in the future by their tendency to prevent or retard recovery. This should not blind to us to any merits they may have, but it is a plain and undeniable fact.

 

The Atmosphere of Periods of Depression: We have seen that the course of events in all periods of depression presents a significant family likeness. So do the attitudes of the people. Defeat on the battlefield destroys the prestige of military rulers and their confidence in themselves; crises destroy whatever of both these things business leaders may enjoy. Their cry for help is the more damaging for them the more they disapproved of government interference before. For the time being, the majority of people grows out of humor with the economic system under which they live, and becomes inclined to favor what in some cases we call reaction and in others radicalism. In fact, it makes astonishingly little difference which way they more politically. The consequences are much the same in both cases....

The Upshot: There is on reason to despair--this is the first lesson to be derived from our story. Fundamentally the same thing has happened in the past, and it has--in the only two cases which are comparable to the present one--lasted just as long. We are more keenly alive now to human suffering, and we are dealing with the situation under political pressure by political methods, but substantially we are confronted only with problems which the world was confronted with before.

In all cases, not only the two which we have analyzed, recovery came of itself. There is certainly this much of truth in the talk about the recuperative powers of our industrial system. But this is not all: our analysis leads us to believe that recovery is sound only if it does com of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatending business with another crisis ahead. Particularly, our story provides a presumption against remedial measures which work through money and credit. For the trouble is fundamentally not with money and credit, and policie of this class are particularly apt to keep up, and add to, maladjustment, and to produce additional trouble in the future...

---

 -- via my feedly newsfeed