Charlottesville Daily Progress

December 28, 2008

“The Forgotten Man,” by Amity Shlaes, Harper Collins Publishers, 2007

“The Return of Depression Economics,” by Paul Krugman, W. W. Norton and Company, 2009

“The Panic of 1907,” by Robert F. Bruner and Sean D. Carr, John Wiley and Sons, Inc., 2007

“Panic: The Story of Modern Financial Insanity,” Michael Lewis, W. W. Norton and Company, 2009

Four Guides to Helping Understand Economic Politics

By Edwin T Burton

Professor of Economics

If you are wondering what happened to the stock market and why the economy doesn’t feel so good anymore, there are four recent books that you might want to add to your bookshelf.

Amity Shlaes, “The Forgotten Man,” is a readable narrative about the US’s Great Depression. This books suggests that, while some of the things done in the 1930s by the Roosevelt Administration were helpful, other Roosevelt policies mainly served to lengthen and deepen the 1930s depression, which proved to be a ten year affair with unemployment still above 20 percent as late as 1938. Shlaes begins with a description of the roaring twenties with a detailed look at Andrew Mellow who served as Secretary of the Treasury to all three Republican presidents of the 1920s. Mellon was a spokesman for limited government and spending frugality.

In the midst of the 1933 depression, Mellon would provide millions of dollars of his money and his art collection to found what would become the National Gallery. This gift surfaced at a time that the Roosevelt seemed determined to bring criminal indictments against Mellon for tax avoidance for which no indictments were ever obtained. Ultimately the Roosevelt Administration would abandon its attack on Mellon and he would die of old age in 1937, a symbol of the past. The new was represented by Rex Tugwell whose research inspired the Agricultural Adjustment Act, a grandiose scheme to relocate poor farmers into cooperatives. This project was mostly a failure and most of its schemes were abandoned by 1937, except for farm subsidies, which linger to this day.

Shlaes book has been criticized by Paul Krugman, a columnist of the New York Times, a professor of Economics at Princeton University, and the most recent winner of the Nobel Prize in Economics. Krugman quibbles with the unemployment calculations that adorn the beginning of each chapter of Shlaes book, but Krugman’s views, interestingly, are in accord with Shlaes’ that the Roosevelt Administration itself prolonged, and did not end, the Great Depression.

Krugman’s new book, “Depression Economics,” points to the higher taxes and spending cuts of the Roosevelt team in 1935-36 as pushing the economy back to depression levels of output and employment by 1937. Krugman’s book is not, however, about the Great Depression. Instead it is a modern treatment of the world economy since the early mid-1970s. It is a fascinating and extremely well written account of all of the various booms and busts that our generation has witnessed.

Latin America, Asia, and Eastern Europe all take their turn under the Krugman paintbrush. This short book cannot help but improve the reader’s understanding of the past thirty years of world economic history. Ultimately, Krugman is a pitchman for bigger government, more government spending, higher taxes, and more regulation. Even a reader who instinctively opposes all of these big government schemes will find Krugman’s book a great read.

Robert Bruner and Sean Carr tell a tale of bank runs in “The Panic of 1907.”

J P Morgan is the larger than life investment banker who steps from the shadows and rescues the American financial system in 1907 and, by sheer dint of character, pulls together the large financial players to put together rescue of the New York financial trusts just in time to avert catastrophe. Bruner and Carr chronicle the key episodes in this great drama that, in many ways, are similar to the crisis that engulfed modern financial markets in 2007-2008.

The panic of 1907 was principle catalyst for the 1913 legislation that gave birth to our modern Federal Reserve System. The country grew weary of J P Morgan stepping to the fore to rescue the American economy from recurrent banking panics. The answer was the Federal Reserve Act and the central bank that we know as the Federal Reserve System. Now, instead of J P Morgan or some other rich and portly banker, we expect the Fed, as it is known, to step up and save us when the banking system shows fragility.

You can’t leave Michael Lewis out of this group. Lewis, the popular author of “Liar’s Poker,” “ Money Ball” and “The Blind Side,” has a new book out called “Panic: The Story of Modern Financial Insanity.”

Panic is an anthology of short articles about economic booms, bust, and distress. It begins with articles about the 1987 stock market crash. It concludes with articles about the subprime lending and housing bust, some as recent as January, 2008. Lewis inserts an article of his own for each of the four sections of the anthology. Why this begins with 1987 and ends with 2008 is something of a mystery, but it does coincide neatly with the adulthood of Michael Lewis and perhaps that explains the time frame.

The various writings contain some of the flavor of modern finance and if read for atmosphere, this book could be worthwhile sporadic reading. We are even treated to Senator Christopher Dodd deftly giving credit to others for the current housing crisis. He should not be so modest.