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[Tuff-Stuff]

Recession, Fed policy and locusts


Opinion 9:12 p.m. Friday, September 24, 2010

http://www.ajc.com/opinion/recession-fed-policy-and-622763.html

By George Selgin

Now that the Great Subprime Recession has been assigned an official ending date of June 2009, making it the longest postwar downturn on record, apologists for easy money and fiscal stimulus are having a tough time pretending that either succeeded in achieving a quick recovery. Instead, some have resorted to saying that, as severe and protracted as the present downturn has been, it could have been a lot worse: It could have been another Great Depression of the 1870s.

The depression of the 1870s began in September of 1873 and lasted until March 1879, making it the longest on record, and thus the perfect stick with which to fend of those skeptics who doubt that the federal stimulus did much good, according to the National Bureau of Economic Research (NBER), whose pronouncements concerning the starting and ending dates of business downturns are widely treated as gospel.

Trouble is, the stick is rotten. Some years ago Christina Romer, who until August chaired President Obama’s Council of Economic Advisors, discovered serious flaws in the NBER’s way of dating early business cycles. Since then she and others have come up with new dates, according to which the “long depression” of the 1870s actually wasn’t much longer than the recent one — so far. Nor was it as deep. The unemployment rate, for instance, never went past 8 percent, whereas it was still as high as 9.5 percent this June, or a year after the recent downturn is supposed to have ended!

It’s also hard to imagine how any monetary or fiscal stimulus could have brought a much quicker end to the crisis of the 1870s. That crisis began with the failure of Jay Cooke and Co., a brokerage house that gambled heavily on the success of the Northern Pacific railroad.

But what doomed the Northern Pacific was its failure to attract enough settlers to guarantee the land sales and future traffic needed to stay solvent.

The Northern Pacific’s land purchase terms couldn’t have been more generous; and the soil of the Great Plains couldn’t have been more fertile. Bad news nevertheless stanched the flow of settlers, including the terrible blizzard of 1872-73 and occasional Sioux raids.

Worst of all, though, were the “grasshoppers” — Rocky Mountain locusts, actually. In the summer of 1873, clouds of them chewed their way across the land the railroads were counting on, making a mockery of the PR campaign extolling the regions’ grain-growing advantages.

The plague of 1874 was even worse — so much so that, despite government relief efforts, settlers started walking away from their claims. The locusts came again in 1875, and again in 1876, leaving both railroad construction and the iron industry that depended on it stuck where the panic had left them.

In 1877, nature finally came to the rescue: Although the locust eggs hatched again, the locusts flew to Canada, where they died out altogether, freeing the Great Plains to become America’s breadbasket.

What good could easy money or Treasury largesse have done back in the 1870s? Easy money wouldn’t kill locusts, and Treasury handouts couldn’t make a railroad pay despite going “from nowhere to nowhere” (as a gloating Cornelius Vanderbilt said of the Northern’s crash).

Subsidies could have saved Northern Pacific’s creditors. But unless underlying conditions changed they would have only done so by squandering that much more scarce capital. And a 19th-century Fed might have bailed out Cooke’s brokerage house and others judged “too big to fail,” perhaps by taking on their bad debt.

But that, too, would have meant throwing good money after bad. Neither step would have altered the prospects for profitable Western expansion, which depended more on Mother Nature than on the machinations of Treasury officials and bankers.

It wasn’t Mother Nature but unsound monetary and financial-system policies that got us into the most recent recession. So responsible fiscal and monetary policies might conceivably have helped us out of it. That’s the good news. The bad news is that it’s far from clear that Fed and Treasury actions so far have penetrated to the roots of our financial ills, and that whatever’s been eating today’s economy isn’t just going to fly away.

George Selgin is a professor of economics at UGA’s Terry College of Business and a senior fellow at the Cato Institute in Washington, D.C.