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The govt. should do LESS during hard economic times, not more: Jim Grant

·Nicole Goodkind

In his latest book, The Forgotten Depression, Jim Grant explores the economic slump of 1920-1921 and applies the lessons learned to today’s economy. The largest takeaway? During hard economic times, less federal intervention is actually more.

To get out of the 1920-21 depression, says Grant the Federal Reserve actually raised interest rates. “So a question for those who contend and contend forever more for radical federal intervention is, how did this slump ever end? Why aren’t we still in it?” asks Grant. Grant believes that the U.S. historical narrative (which he contends favors federal intervention) should be revised to include an event where the “price mechanism, Adam Smith’s fabled invisible hand, did the work and what followed was a dynamic recovery and the 1920s roared,”

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What we can learn from this event is that flexibility in wages as well as prices is a good thing, says Grant. Wages declined in 1921 and that decline led to the restoration of profit margins because prices had fallen. “If wages hadn’t fallen profits would have been eviscerated and there would have been massive unemployment,” he says. If you’re not flexible, warns Grant—downturns might turn into great depressions. “Herbert Hoover worked assiduously to prevent another decline in wages with the result that profit margins were wrecked and mass unemployment resulted.”

Policymakers ought to invest more trust in the simple price mechanism, says Grant. “What happened in 2008 was a fast-forming consensus of well-intended but rather muddleheaded academics who decided against supply and demand…notice that seven years after we are still being stimulated to one degree or another and that we signally lack anything like a dynamic recovery.” If Grant were king for a day, he says he would restore the price mechanism back to its proper place “in the arsenal of American public policy.”