Mellonism is alive and well and just as wrong as in the '30s

When the Great Depression struck, many influential people argued that the government shouldn't even try to limit the damage. According to Herbert Hoover, Andrew Mellon, his treasury secretary, urged him to "Liquidate labour, liquidate stocks, liquidate the farmers ... It will purge the rottenness out of the system." Don't try to hasten recovery, warned the famous economist Joseph Schumpeter, because "artificial stimulus leaves part of the work of depressions undone".

When the Great Depression struck, many influential people argued that the government shouldn't even try to limit the damage. According to Herbert Hoover, Andrew Mellon, his treasury secretary, urged him to "Liquidate labour, liquidate stocks, liquidate the farmers ... It will purge the rottenness out of the system." Don't try to hasten recovery, warned the famous economist Joseph Schumpeter, because "artificial stimulus leaves part of the work of depressions undone".

Like many economists, I used to quote these past luminaries with a certain smugness. After all, modern macroeconomics had shown how wrong they were, and we wouldn't repeat the mistakes of the 1930s, would we?

How naive we were. It turns out the urge to purge - the urge to see depression as a necessary and somehow even desirable punishment for past sins, while inveighing against any attempt to mitigate suffering - is as strong as ever. Mellonism is everywhere these days. Turn on CNBC or read an op-ed page, and you're likely to encounter an alleged expert ranting about the evils of budget deficits and money creation, and denouncing Keynesian economics as the root of all evil.

The fact is these ranters have been wrong about everything, at every stage of the crisis, while the Keynesians have been mostly right. Remember how federal deficits were supposed to cause soaring interest rates? Never mind: after four years of such warnings, rates remain near historic lows - just as Keynesians predicted. Remember how running the printing presses was going to cause runaway inflation? Since the recession began, the Fed has more than tripled the size of its balance sheet, but inflation has averaged less than 2 per cent.

But the Mellonites just keep coming. The latest example is David Stockman, Ronald Reagan's first budget director, who has just published a mammoth screed titled The Great Deformation.

His book doesn't have much new to say. Although Stockman's willingness to criticise some Republicans and praise some Democrats has garnered him a reputation as an iconoclast, his analysis is pretty much standard "liquidationism", with a strong goldbug streak.

We've been doomed to disaster, he asserts, ever since FDR took us off the gold standard and introduced deposit insurance. Everything since has been a series of "sprees": spending sprees, consumption sprees, debt sprees, and above, all money-printing sprees. So what should we be doing? By all means, let's restore the kind of effective financial regulation that, in the years before the Reagan revolution, helped deter excessive leverage. But that's about preventing the next crisis. To deal with the crisis that's here, we need monetary and fiscal stimulus, to induce those who aren't too deeply indebted to spend more while the debtors are cutting back.

But that prescription is anathema to Mellonites, who wrongly see it as more of the same policies that got us into this trap. Unemployment, not excessive money printing, is what ails us now - and policy should be doing more, not less.

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