AEI » Latest Content http://www.aei.org American Enterprise Institute: Freedom, Opportunity, Enterprise Tue, 27 Jan 2015 00:38:13 +0000 en-US hourly 1 Tech policy 2015: The year aheadhttp://www.aei.org/events/tech-policy-2015-year-ahead/ http://www.aei.org/events/tech-policy-2015-year-ahead/#comments Wed, 21 Jan 2015 17:14:27 +0000 http://www.aei.org/?post_type=event&p=828504 If you have trouble registering for this event, please contact conferences@aei.org

Please join AEI’s Center for Internet, Communications, and Technology Policy for a look ahead at the top tech policy issues of 2015. Senator John Thune (R-SD) will present a keynote address, and panels of AEI scholars and outside experts will discuss issues including net neutrality, the Communications Act, and municipal broadband, cybersecurity, Internet governance, and incentive auctions.

As tech policy issues move to the fore in the national debate, this conference will offer unique insights into the year ahead.

If you are unable to attend, we welcome you to watch the event live on this page. Full video will be posted within 24 hours.

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The school choice journey: A conversation featuring US Senator Tim Scotthttp://www.aei.org/events/school-choice-journey-conversation-featuring-us-senator-tim-scott/ http://www.aei.org/events/school-choice-journey-conversation-featuring-us-senator-tim-scott/#comments Tue, 06 Jan 2015 22:15:02 +0000 http://www.aei.org/?post_type=event&p=826592 The impact of school choice in America is about more than improved student test scores. School choice has the potential to inspire political activism among low- and moderate-income parents and families. In their thought-provoking new book, “The School Choice Journey: School Vouchers and the Empowerment of Urban Families” (Palgrave Macmillan, 2014), researchers Thomas Stewart and Patrick Wolf track the experiences of families participating in the DC Opportunity Scholarship Program, the first federally funded school voucher program based in the District of Columbia. They find that parents look to several factors when choosing a school for their child, and the impacts of school choice on parents and families go far beyond anything that can be measured by a standardized test.

We welcome you to join us at AEI during School Choice Week as US Senator Tim Scott (R-SC), Stewart, and Wolf discuss “The School Choice Journey” and why promoting school choice is important to expanding the range of education opportunities for every student in the United States, regardless of zip code.

We invite you to follow the event and comment on Twitter with #ScottatAEI.

If you are unable to attend, we welcome you to watch the event live on this page. Full video will be posted within 24 hours.

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On the power and importance of the ruthless consumer – ‘they make poor men rich and rich men poor’http://www.aei.org/publication/power-importance-ruthless-consumer-make-poor-men-rich-rich-men-poor/ http://www.aei.org/publication/power-importance-ruthless-consumer-make-poor-men-rich-rich-men-poor/#comments Tue, 27 Jan 2015 00:38:13 +0000 http://www.aei.org/?post_type=publication&p=829293 ...]]]> In his 1944 book “Bureaucracy,” legendary economist Ludwig Von Mises explained the important and supreme role of the ruthless consumer in the market economy (emphasis added):

The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor.

The consumers are merciless. They never buy in order to benefit a less efficient producer and to protect him against the consequences of his failure to manage better. They want to be served as well as possible. And the working of the capitalist system forces the entrepreneur to obey the orders issued by the consumers.

The consumers are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or that is cheaper, they desert their old purveyors. With them nothing counts more than their own satisfaction. They bother neither about the vested interests of capitalists nor about the fate of the workers who lose their jobs if as consumers they no longer buy what they used to buy.

Here’s how I explained the role of ruthless consumers and the concept of “consumer greed” in a 2002 article for the Mackinac Center:

Here’s a dirty little secret about capitalism: consumers, not corporations, run the show. If you find something about the marketplace objectionable, it would be more appropriate to blame those who actually call the shots: the ruthless, cutthroat, and disloyal American consumers.
Consumers are the kings and queens of the market economy, and ultimately they reign supreme over corporations and their employees. When corporations make mistakes and introduce products that consumers don’t want, which happens frequently, you can count on consumers voicing their opinions forcefully and immediately by their lack of spending.
In a market economy, it is consumers, not businesses, who ultimately make all of the decisions. When they vote in the marketplace with their dollars, consumers decide which products, businesses, and industries survive—and which ones fail. It is therefore consumers who indirectly but ultimately make the hiring and firing decisions, not corporations. After all, corporations can make no money, hire no people, and pay no taxes unless somebody, sooner or later, buys their products.
What consumer sovereignty in a free marketplace translates into is each person husbanding his resources for the greatest benefit to himself and his family, which in turn translates into the greatest efficiency in the consumption of the world’s scarce resources. If you don’t like the message of the marketplace, don’t assume that corporations and greed are to blame while consumer behavior and consumer greed play no role in the outcome. We should be thankful, in fact, that the marketplace puts consumers on such a powerful pedestal.

 Bottom Line: Consumers ultimately run the market economy, and for that we should be thankful. Because what’s the alternative? The alternative is allow producers to run the economy, inevitably with the assistance of their government enablers who help erect barriers to entry and restrict competition for producers in the form of occupational licensing, protectionist trade barriers, artificial limits on the number of firms allowed to operate (e.g. taxi cartels), etc. In other words, the alternative to consumers running a capitalist market economy, is to have producers running an economy based on the corrupt, anti-consumer principles of “crony capitalism.”

Further, we typically assume that “greedy” behavior is practiced exclusively by business owners and corporate executives, and never by consumers. But consumers, especially when spending their own money on goods and services for themselves and their families, are frequently the very epitome and apotheosis of greed. As Mises observed, “With them [consumes] nothing counts more than their own satisfaction,” and for that we should be thankful. Because in a market economy, the ruthless consumers provide the discipline that guarantees that producers will operate efficiently and offer the best products and services at the lowest prices.
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The school choice journey: Parents experiencing more than improved test scoreshttp://www.aei.org/publication/school-choice-journey-parents-experiencing-improved-test-scores/ http://www.aei.org/publication/school-choice-journey-parents-experiencing-improved-test-scores/#comments Tue, 27 Jan 2015 00:30:57 +0000 http://www.aei.org/?post_type=publication&p=829172 ...]]]> Key Points

  • Studies indicate that low-income parents participating in the District of Columbia’s private-school choice program prioritize—at least initially—the safety of schools over schools’ academic quality as they transition from public schools. Furthermore, when evaluating their child’s academic progress, parents do not view standardized test scores as a key metric of success.
  • Most interestingly, these urban parents report that they want to be respected as advocates of their child’s education and will fight hard to keep their child’s private-school choice program if that program’s future is threatened.
  • These lessons should be considered when designing and implementing publicly funded, means-tested programs in an effort to break the cycle of poverty among low-income families and disadvantaged communities.

 Read the PDF.

Private-school choice is many things, depending on families’ income and geographic location. It is an education policy reform, a flashpoint of political controversy, and an example of government outsourcing of public-service provision. It is also a journey for low-income parents who move from being clients of social services to consumers of goods and advocates for their own political interests.

Most policy analysts and policymakers evaluate private-school choice programs based on the sole criterion of student test-score gains. They assume that test-score increases are what parents and society want most from schools and that student scores are the outcome that school choice will most affect. Our research suggests that these assumptions are largely false.

From 2004 until 2009, we carefully documented the school choice journey of 100 families participating in the District of Columbia (DC) Opportunity Scholarship Program (OSP). The OSP is the nation’s only federally funded private-school choice program. It provides K–12 tuition vouchers worth up to $7,500 to low-income students in DC to attend any participating private school of their family’s choosing.

With financial support from the Annie E. Casey Foundation, we conducted an annual series of focus-group sessions and personal interviews with these low-income urban families. Most of the families were selecting schools, specifically private schools, for the first time. Their stories of excitement, challenge, occasional frustration, and ultimate triumph are told in our new book, The School Choice Journey: School Vouchers and the Empowerment of Urban Families.1

The Journey reveals four key lessons:

  • Parents participating in OSP tend to follow Abraham Maslow’s hierarchy of human needs when selecting schools. They first ensure that their child is safe at school before focusing on academic quality.
  • Unlike policymakers, parents do not view test scores as the key metric of success in education (or even as one of the main indicators of success). They use less-formal measures of student growth and development to assess progress and satisfaction.
  • Urban parents benefit from informational and programmatic supports when exercising school choice for the first time, but they also need to be respected as the shapers of their child’s education.
  • Low-income parents view private-school choice programs as sufficiently valuable to them that they will fight hard to keep their child’s program if politicians try to take it away from them.

Government programs can be delivered to recipients in ways that range from highly paternalistic to completely hands-off. We argue in The Journey that neither of these extremes is constructive for interventions geared toward income-disadvantaged urban families. When government programs are implemented in a highly paternalistic way, clients play no role in shaping the nature of the service and often feel demeaned, disenfranchised, and dependent.

When government initiatives are completely hands-off, though, income-disadvantaged participants can feel overwhelmed by their new responsibilities and fail to make the program work to their advantage. The best way for the government to implement social interventions, we argue, is to aim for a sweet spot that allows program participants sufficient control over the service so that they feel they own it, while also providing key programmatic supports needed to make the program a success.

Many parents whose child received the Opportunity Scholarships to attend a private school of their choice initially had a client mentality: they were used to receiving government services such as Medicaid and disability benefits, which tend to be delivered by professional bureaucrats with an air of spirit-crushing paternalism.2 The new school choice program challenged these parents to transcend their client perspective and become informed consumers and proactive choosers of their child’s private school. A school choice was not going to be handed to them. They had to make their own choice and remain active participants in the process.

Read the full report.

Notes

1, For this and subsequent references to The Journey, see Thomas Stewart and Patrick J. Wolf, The School Choice Journey: School Vouchers and the Empowerment of Families (New York: Palgrave Macmillan, 2014).

2. Joe Soss, “Lessons of Welfare: Policy Design, Political Learning, and Political Action,” American Political Science Review 93, no. 2 (1999): 363–81.

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Why Netanyahu is right to go around Obama to Congresshttp://www.aei.org/publication/netanyahu-right-go-around-obama-congress/ http://www.aei.org/publication/netanyahu-right-go-around-obama-congress/#comments Tue, 27 Jan 2015 00:30:39 +0000 http://www.aei.org/?post_type=publication&p=829140 Do they talk this way about Iranian President Hassan Rouhani?

After learning that Israeli Prime Minister Benjamin Netanyahu had accepted an invitation to address a joint session of Congress about the need for new sanctions to stop Iran’s nuclear program, the Obama administration went . . . well, nuclear.

One “senior American official” threatened Netanyahu, telling the Israeli newspaper Haaretz that “Netanyahu ought to remember that President Obama has a year and a half left to his presidency, and that there will be a price.” Meanwhile a “source close to [Secretary of State John] Kerry” told The Post that the “secretary’s patience is not infinite” and that “playing politics with that relationship could blunt Secretary Kerry’s enthusiasm for being Israel’s primary defender.”

Oh, please. No wonder Netanyahu is going around these people to Congress for support. Is Kerry defending Israel as a favor to Netanyahu, or because it is in the United States’ vital interests to stand with our closest ally in the Middle East? Just the threat of withdrawing that support validates Netanyahu’s suspicion that the Obama administration does not have Israel’s back in its negotiations with Iran.

Using anonymous officials to attack Netanyahu is nothing new. Unnamed officials have called him “chickens—,” “recalcitrant,” “myopic,” “reactionary,” “obtuse,” “blustering,” “pompous,” and “Aspergery” — all to one journalist (Jeffrey Goldberg of the Atlantic, who keeps a running list).

The Obama team’s outrage is a bit overwrought. Clearly, it is not a breach of protocol for a foreign leader to lobby Congress. After all, Obama himself deployed British Prime Minister David Cameron to lobby lawmakers to oppose new sanctions on Iran. It seems Netanyahu’s crime is not so much a breach of diplomatic protocol, but rather, opposing the administration’s position.

The fact that Netanyahu felt compelled to speak directly to Congress in order to oppose the administration’s position speaks poorly, not of Netanyahu, but of Obama. If the leader of one of our closest allies is so worried about the deal Obama is going to cut with Iran that he is willing to risk a diplomatic rift with the administration to speak out, perhaps the problem is not with Israel, but with the Obama administration. And it is not just Israel that opposes Obama’s deal with Iran; Arab leaders have made clear that they share Israel’s view.

No doubt politics plays a role in Netanyahu’s decision to address Congress. His speech will come just two weeks before the Israeli elections. But is it wrong for a politician to use the foreign stage of an ally to buttress his electoral case back home? If it is, then Barack Obama — who gave a campaign speech in Berlin before 200,000 adoring Germans who could not vote for him — is the wrong man to level that criticism.

Obama claims that new sanctions on Iran “will all but guarantee that diplomacy fails.” If the mere threat of sanctions is enough to derail Iran’s nuclear talks, then whatever deal is in the works is not worth having. It means that Obama is far more desperate for a deal than Tehran is — which is a sure-fire way to guarantee a bad agreement.

Obama wants a nuclear deal with Iran because it would be a major feather in his political cap at a time when his foreign policy is imploding across the world, from Yemen to Syria to Iraq. For Israel, Iran’s nuclear program is not a political challenge; it is an existential one.

Obama can afford a bad deal because, as that anonymous official put it, he has a year and a half left to his presidency. The people of Israel, on the other hand, will have to live with the consequences long after Obama is gone.

Netanyahu understands this — which is why it is good that he is coming to Washington, and why House Republicans deserve credit for inviting him.

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Did cutting unemployment benefits create jobs?http://www.aei.org/publication/cutting-unemployment-benefits-create-jobs/ http://www.aei.org/publication/cutting-unemployment-benefits-create-jobs/#comments Mon, 26 Jan 2015 21:08:10 +0000 http://www.aei.org/?post_type=publication&p=829278 In a new NBER working paper, Marcus Hagedorn of the University of the University of Oslo, Iourii Manovskii of Stockholm University and Kurt Mitman of the University of Pennsylvania – Tea Party extremists to a man, I am sure – conclude that 2014’s high job growth and decline in unemployment came not despite Congress’s December 2013 failure to renew extended unemployment benefits, but because of it. At the time, the usual suspects mocked the idea: “the G.O.P. answer to the problem of long-term unemployment is to increase the pain of the long-term unemployed: Cut off their benefits, and they’ll go out and find jobs. How, exactly, will they find jobs when there are three times as many job-seekers as job vacancies? Details, details.”

Apparently actual individuals looking for work may be more inventive than Prof. Krugman. Since that’s pretty much what appears to have happened.

Hagedon, Manovskii and Mitman take advantage of the fact that, prior to the failure to extend benefits, different states offered different durations of unemployment benefits. Some had the basic federal level of 26 weeks of benefits, while others were allowed to offer up to 47 weeks more. This produced a natural experiment in which unemployment benefits were cut much more in some state than others. What did the authors find?

A simple descriptive analysis shows a much faster employment growth in 2014 in high benefit states prior to the reform relative to their low benefit counterparts. The same finding holds if we compare the employment growth in counties that belong to high benefit states relative to their neighboring counties that belong to states with lower benefit durations prior to the reform.

Overall, they find that 61% of the growth of employment in 2014 can be attributable to the reduced duration of benefits available to the unemployed.

Does this mean that we should cut unemployment benefits to zero, or reduce all other benefits to the needy? No. But as I argued in a 2012 National Review article, using a very different example, incentives matter: whether it’s using carrots or sticks, the unemployed and those out of the labor force entirely need to want to get back in.

Follow AEIdeas on Twitter at @AEIdeas.

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Congressional leadership: thumbs up or down?http://www.aei.org/publication/congressional-leadership-thumbs/ http://www.aei.org/publication/congressional-leadership-thumbs/#comments Mon, 26 Jan 2015 21:00:05 +0000 http://www.aei.org/?post_type=publication&p=829265 POLITICO reported Monday that House Democratic Minority Leader Nancy Pelosi faces “unrest” within her party’s ranks as House Democrats head to Philadelphia for their policy retreat this week. House Democrats may be making known their opinion of Pelosi, but the rest of the leadership  team in the 114th Congress doesn’t fare much better.

The Pew Research Center most recently asked Americans about their overall opinions of all four party leaders in the House and the Senate. In December 2014, 47% of Americans had an unfavorable opinion of then-outgoing House Majority Leader Pelosi, down from a high negative of 55% in December 2010. Twenty-seven percent viewed her favorably. Forty-one percent had an unfavorable opinion of outgoing Senate Majority Leader Harry Reid, the highest unfavorable rating for him yet in Pew’s trend, while 20% viewed him favorably.

On the other side of the aisle, then-incoming House Speaker John Boehner and Senate Majority Leader Mitch McConnell fared about the same. Forty-six percent of Americans said they have an unfavorable opinion of the then-incoming Speaker, and 24% had a favorable opinion of him. As for McConnell, 37% reported an unfavorable opinion of him, while 21% expressed a favorable one.

Over the past few years, Pelosi’s ratings have been the weakest. According to the CNN/Opinion Research Corporation trend, a majority of Americans had an unfavorable opinion of her from January 2010 through September 2013. Boehner’s unfavorability breached the 50% mark in October 2013 (55%) in the midst of the government shutdown.

Pelosi’s support within her party caucus may be a bit shaken, but one thing is certain. Although they sit atop Capitol Hill, all four party leaders face an uphill climb to increase their standing among Americans.

Follow AEIdeas on Twitter at @AEIdeas.

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CBO: This is pretty much as good as America getshttp://www.aei.org/publication/cbo-pretty-much-good-america-gets/ http://www.aei.org/publication/cbo-pretty-much-good-america-gets/#comments Mon, 26 Jan 2015 20:16:01 +0000 http://www.aei.org/?post_type=publication&p=829255 The Congressional Budget Office just released its 10-year budget and economic forecast. Let me boil it down for you: These are the good times. Enjoy them because things are unlikely to get much better. In fact, they are likely to get worse. For instance: CBO expects the US economy to grow at 3% this year and next, and at 2.5% in 2017. That’s a definite upturn in post-recession performance, though still below the postwar average of 3.4%.

But then deceleration: “For 2020 through 2025, CBO projects that real GDP will grow by an average of 2.2 percent per year—a rate that matches the agency’s estimate of the potential growth of the economy in those years.”

Or how about the budget deficit? At 2.6% of GDP, according to CBO, this year’s fiscal shortfall is projected to be the smallest since 2007 and a smidgen below the 2.7% that deficits have averaged over the past 50 years.

But then:

Although the deficits in CBO’s baseline projections remain roughly stable as a percentage of GDP through 2018, they rise after that. The deficit in 2025 is projected to be $1.1 trillion, or 4.0 percent of GDP, and cumulative deficits over the 2016–2025 period are projected to total $7.6 trillion. CBO expects that federal debt held by the public will amount to 74 percent of GDP at the end of this fiscal year—more than twice what it was at the end of 2007 and higher than in any year since 1950 (see figure below). By 2025, in CBO’s baseline projections, federal debt rises to nearly 79 percent of GDP.

So this is America’s 21st century Golden Age … unless of course we do something about it. The CBO forecast is only a prediction of what may be, what we are on course to be — not what has to be. Let’s assume the worst and work that much harder to avoid that future and instead create one of prosperity and expanded opportunity.

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Maybe it really is this simple: Gasoline prices go down, Obama’s approval goes uphttp://www.aei.org/publication/maybe-really-simple-gasoline-prices-go-obamas-approval-goes/ http://www.aei.org/publication/maybe-really-simple-gasoline-prices-go-obamas-approval-goes/#comments Mon, 26 Jan 2015 19:50:00 +0000 http://www.aei.org/?post_type=publication&p=829237 Americans, we are so easy. A drop in gasoline prices and the folks in Washington start looking better and better. Particularly the president. Gasoline prices are down by a buck since last summer as global oil prices have collapsed. Also since last summer, President Obama’s approval ratings have surged. Gallup puts him back at 50% vs. 38% as September started. Now the correlation isn’t perfect and I am sure the causality is complicated, but this historical chart shows how tightly tightly prices and popularity have been connected:

012615gasoline

 

 

 

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The New York Times just conceded something amazing about free-market capitalismhttp://www.aei.org/publication/new-york-times-just-conceded-something-amazing-free-market-capitalism/ http://www.aei.org/publication/new-york-times-just-conceded-something-amazing-free-market-capitalism/#comments Mon, 26 Jan 2015 19:19:56 +0000 http://www.aei.org/?post_type=publication&p=829215 The modern Democratic message seems to be that all those economic gains in the 1980s and 1990s that (easily) led to two-terms each for Ronald Reagan and Bill Clinton were illusory. Didn’t happen, at least not for middle-class America. As President Obama said back in 2013, ” …  over the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk.”

But what do I see in the New York Times today? Well, the Paper of Record tells me that since the 1960s, the middle class – defined as households earning between $35,000 and $100,000 — has been shrinking. Guess, the Obamacrats are right. Wait … the nature of that decline has changed of late, however:

Few people noticed or cared as the size of that group began to fall, because the shift was primarily caused by more Americans climbing the economic ladder into upper-income brackets. But since 2000, the middle-class share of households has continued to narrow, the main reason being that more people have fallen to the bottom. At the same time, fewer of those in this group fit the traditional image of a married couple with children at home, a gap increasingly filled by the elderly.

Listen, I am pretty sure this is not the message — that the middle-class has been disappearing because it has been getting richer — I have been hearing from the mainstream media or Democrats for the past 30 years. I thought all that deregulation and deunionization and free trading and tax cutting had hollowed out the middle-class since the mid-1970s? Weird. Anyway, the middle-class stagnation and struggle of today is serious and worth noting, as I have written. And here is AEI’s Mike Strain in that Times piece:

“In the Great Recession, we lost a lot of middle-income jobs and we gained a lot of low-paying jobs,” said Michael R. Strain, resident scholar at the right-of-center American Enterprise Institute. “That’s a slower-burning thing, but it increased in ferocity during the recession, and people are feeling it.”

I guess the facts have finally caught up to the left’s insight.

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AEI kicks off school choice weekhttp://www.aei.org/press/aei-kicks-school-choice-week/ http://www.aei.org/press/aei-kicks-school-choice-week/#comments Mon, 26 Jan 2015 18:54:49 +0000 http://www.aei.org/?post_type=press&p=829177 School choice is a promising tool for education reform, allowing families to determine which school is best for their child and their child’s individual needs. To kick off National School Choice Week, here is a preview of AEI work on the issue, as well as an upcoming event:

Michael McShane on the economic argument for school choice:

“Given the trillions of dollars that have been spent and the countless attempts to reform the American education system, it is hard not to ask the question (as many have): what if the system itself is the problem? Enter school choice.

Rather than attempt to right the ship that is the $600-billion-per-year American education system, school choice policy attempts to create a system to replace it. This system, driven by the choices of parents and funding mechanisms that allow the money apportioned for the education of a child to follow her into the school of her choosing bypasses much of the existing bureaucracy, and empowers entrepreneurial school leaders to create new learning environments to meet the needs of students.”

New and Better Schools: The Supply Side of School Choice

Rick Hess on how to expand the appeal of school choice:

“The truth is that today’s school-choice programs are an enormous boon for low-income families trapped in lousy schools but of less interest to other families. After all, about two-thirds of families already “choose” their schools when they buy their residences, select private schools, or use public school-choice options…To broaden the relevance and appeal of school choice for middle-class families, conservatives must ensure that choice is not only a way for families to escape awful schools but also a way for more families to find schools that meet the needs of their children.”

“K-12 education reform to give the next generation a chance to thrive”

Join us for an AEI event, tomorrow January 27th, focused on the possibilities of school choice featuring Senator Tim Scott and researchers Thomas Stewart (Patten University) and Patrick Wolf (University of Arkansas). Register here.

Follow AEI on all things school choice on Twitter at #AEIschoolchoice.To arrange an interview with an AEI education scholar, please contact an AEI Media Services team member or email mediaservices@aei.org (202.862.5829).

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‘The Forgotten Depression,’ by James Granthttp://www.aei.org/publication/forgotten-depression-james-grant/ http://www.aei.org/publication/forgotten-depression-james-grant/#comments Mon, 26 Jan 2015 18:50:58 +0000 http://www.aei.org/?post_type=publication&p=829205 When the next big economic disaster hits, Washington will almost certainly choose to do something: cut taxes, increase spending, lower interest rates. There is another option, of course: do nothing. No fiscal or monetary stimulus. Let the fire burn the rot of excess from the system. From the ashes, goes this theory, a healthier, more balanced economy will emerge.

So opponents of government action — Tea Party Republicans, libertarians, devotees of Austrian economics — do have a plan of sorts. What they don’t have is a compelling story to persuade policy makers or the public. The high school history book lesson of the Great Depression — government inaction in the face of economic upheaval courts collapse — dominates. Much like the Tin Woodman in that Depression-era classic movie, “The Wizard of Oz,” austerians and liquidationists require a testimonial. And it is the need for a success story that drives “The Forgotten Depression,” by the financial journalist James Grant, the founder of Grant’s Interest Rate Observer. Subtitled “1921: The Crash That Cured Itself,” the book tells the tale of the other great slump of the early 20th century.

Pre-World War II economic data can be dodgy, but by the measures Grant prefers, the 1920-21 downturn saw output fall by nearly 10 percent, stock prices cut almost in half and unemployment surge to about a fifth of the labor force. The contraction’s severity can be seen in words as well as numbers. Grant points out the “bitterly sardonic” lyrics of the 1921 hit “Ain’t We Got Fun,” a song often associated with Roaring Twenties ebullience but one that he says was inspired by the decade’s depressionary start: “In the winter, in the summer / Don’t we have fun? / Times are bum and getting bummer / Still we have fun.”

But music failed to soften hearts in Washington. Instead of splurging on shovel-ready jobs to stimulate growth, the budget was balanced. And rather than cut interest rates to boost borrowing, the new Federal Reserve tightened the money supply. As Grant writes: “The successive administrations of Woodrow Wilson and Warren G. Harding met the downturn by seeming to ignore it — or by implementing policies that an average 21st-century economist would judge disastrous. . . . Yet by late 1921, a powerful, job-filled recovery was underway. This is the story of America’s last governmentally unmedicated depression.”

For Grant’s flavor of austere, micro-government conservatism to expand its appeal, this is a story that must be told. The Great Depression narrative not only informs modern policy responses during crises, it’s also the ur-justification for big government. But the present Not-So-Great Recovery — despite an $800 billion fiscal stimulus and inventive Fed monetary policy — has perhaps cracked open the window for a different story, one of “instructive inaction.” And if the better way to deal with a downturn is for government to do nothing, then maybe government should do a whole lot less in other areas of life as well. Grant’s forgotten depression is considered a natural economic experiment in economic freedom by those who think the American project went horribly off track with Franklin Roosevelt’s election in 1932.

Yet whatever the broader merits of Grant’s minimalist philosophy, the supposed hands-off approach to the 1920-21 depression provides a poor argument for it. Grant’s laissez-faire depression was actually an economic episode in which government — via its new central bank — played an active and critical role throughout. Grant himself concedes that “easier money” helped account “for the power of the 1922 rebound.” A better natural experiment for Grant’s depression-fighting formula is what’s happening in the eurozone right now. With a jobless rate over 11 percent, a combination of fiscal austerity and tight money is on the verge of sending the region into its third recession since 2007. But who knows, maybe it will generate a catchy tune or two.

Grant’s book is a lively exercise in economic nostalgia, a game effort to build a bridge to the pre-New Deal era when the tax burden was tiny, the dollar defined by gold and government let business do as it would. But as an economic guide for 21st-century policy makers in a crisis, the forgotten depression is best forgotten.

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