Reply-To: pkt at csf.colorado.edu Message-ID: <01J1ZHIJKLQQ8Y54P0 at hofstra.edu>
In a London speech before taking over Russia's economic problems, Prime Minister Primakov admitted that during the previos seven lean years the Yeltsin government's policies had produced the equivalent of our Great Depression.
On the basis of my trips outside Moscow in 1994 and 1997 I concluded that economic conditions in the Kostroma region were deteriorating and reminded me of the Great Depression of my youth. While Moscow was superficially prosperous, judging by shop windows, my friends were working at a number of jobs just to keep afloat.
If the Primakov government is serious about learning from the New Deal experience, it seems clear that the market was hopelessly inadequate to bring us out of the low level stagnation that characterized the thirties. Instead of following the conventional prescription of the economics establishment -- that wages must be cut -- President Hoover rejected this route, arguing that wages were an important source of purchasing power required to reflate the economy.In Germany where conventional economic wisdom was followed by the Bruning government and where wages were cut by 10 percent, unemployment rose to 40 percent rather than 25 percent in the United States paving the road to the rise of Hitler, who eventually solved the German Depression by following pragmatic Keynesian solutions.
President Roosevelt took office after the price level had fallen by one-third, and his first task was to stop the deflation. One of his early responses was the NRA which had industry "codes" to strengthen wages. In addition, he decided to raise the price of gold or devalue the dollar, as recommended by "rubber-dollar Warren." George Warren was an agricultural economist at Cornell and friend of Henry Morgenthau. Its purpose was to reflate the economy. It represented a devaluation of the dollar of approximately the same magnitude as had occurred inýé the 1931 devaluation of pound sterling. The Britis economy had been depressed by an overvalued pound in the 20s and was less seriously affected by the Great Depression as compared to pre-Hitler Germany or the United States.
The price level stabilized and slowly increased although by the outbreak of World War II was still below its level in 1929. Real (inflation-adjusted) interest rates which had averaged 12 percent in 1932 fell to very low levels in the New Deal years but private investment was unresponsive. At the time Keynesians said that you can;t push on a string. Government investment in dams, bridges, schools, post offices and other infrastructure brought some recovery but unemployment was still of double-digit proportions on the eve of World War II.
One of the main errors of the Roosevelt Administration was the attempt to balance the federal budget in 1937 when unemployment was still well above 10 percent. FDR had assumed that the free market sector would take over from the role of government in bringing full recovery. Instead the Roosevelt recession of 1938 increased unemployment from 14 to 19 percent whichwas a very great shock to all concerned. It was only the very great increase in government spending during World War II that eventually brought genuine full employment. Rearly in 1942 FDR froze interest rates at 2 percent where they remained until after the Treasury Accord in March 1951,
What are the lessons fot Primakov and his advisers? Foremost is the lesson that they should not worry about hyperinflation if they pay off the wage and pension arrears, as is universally predicted by Western monetarists and by Gaidar, Chubais, Nemtsev, Yavlinsky and other domestic monetarists. Rather they should recognize the fact that farmer's markets and producer's goods prices have been falling. The principal source of recorded domestic inflation has been imported consumer's goods which have been accounting for over 50 percent total consumption. The planned depreciation (in a band) of the ruble over the past few years was the root of the problem, as well as the dollarization of Moscow. With the recent large devaluation, the percentage of imported food consumption should fall and the revival of domestic production of consumer's googs (admittedly less attractively packaged) likely.
There must be a return to some form of investment planning by the central government as proposed by Glazev. If the Russians insist on becoming an automobile-based society, at least they should construct a network of autobahns.
There must be some limitations on convertibility of the ruble as inChina and more recently Malaysia. Instead of being priced below the purchasing power parity, the official rate should be as near 4:1 as possible. As in Soviet times, there will (Alas!) be the return of the black market in foreign exchange until the new non-monetarist policy restores normal increases in productivity.
There should be less worry about collecting taxes and budget deficits generally. The current deficits are "passive" coming from unemployed resources that don't pay taxes and are basically non-inflationary as President Reagan's experience showed in the eighties.
wedbi in March, 1951, --- End Forwarded Message ---
-- Rosser Jr, John Barkley rosserjb at jmu.edu