Saturday, November 8

How we are about to repeat the Great Depression

I am shocked at how quickly and completely the circumstances have led us to repeat the same problems that kept the American economy in a depression for most of the 1930s.

First there is the similarities in personality and party. In 1930 FDR was swept into power as a Democrat on a campaign of personal hope in difficult economic times. He told us that all we had to fear was fear itself. Obama tells us "Yes we can." FDR also took over from the unpopular and big government Republican Hoover who had already unsuccessfully tried to revert the economic disaster by government meddling in the private market and dramatic governmental spending. I'm sad to say it, but Bush looked very much like Hoover in his final months in office with his $700 billion bailout.

Second, and more specifically America talked and built trade barriers. As one of Hoovers parting floundering moves to try and stabilize farm prices, he signed the Smoot-Hawley tariffs. Economists still disagree on all the reasons that caused the depression but almost universally these tariffs are condemned as contributing to the depression. And Obama now? One of the things he has promised is to renegotiate NAFT which stripped of the poli-speak means he will increase trade restrictions in some way. If there is anything that economists can agree on it is that restricting free trade will only hurt the economy.

Third, we are soaking the rich and the corporations. FDR passed the Revenue Act of 1935 that increased the top rate of tax for those earning more than $50,000, and increased the corporate tax. Today Obama wants to tax the Joe Plumbers and windfall profits from the oil companies and anyone else who has succeeded. If we are concerned about the lack of capital in the market, why would offer as a solution to tax that capital more and decrease the supply? It makes no sense at all.

Some might look at the Revenue Act of 1935 and believe that it was part of the solution to the problem since the worst really happened in 1929 and everything after that was smooth upward sailing. Not so. In 1937 we had the Roosevelt Depression which drove the economy down and unemployment up significantly in a manner that perplexed Roosevelt. Additionally, one of the biggest points missed about the Depression is not that we had a crash or panic in 1929. All through American history the relentless drive upward has experienced panics, recessions or drops. Most of the time these panics have been short-lived and limited to those who speculated. The depression was unique not only in how deep it went but in how long it lasted. It was more than a decade until we recovered. Not surprisingly, it was unique in that amount of government intervention.

So our outlook for the future? I want to be on record to say that if Obama repeats these problems of the Great Depression, we are not likely to see an economic turn around very soon. I don't say this lightly. I believe the American economy has an incredible resiliency, yet it is not above being strangled. Welcome to the european/socialist invention of the extended and expanded recession.

Update: Below is a graph of unemployment during the 1930s. (Stanley Lebergott, Manpower in Economic Growth: The American Record since 1800 (New York: McGraw-Hill, 1964), table A-3.)

Notice two things. First, unemployment peaked about three years after Roosevelt took office. Second, it continued for years and shot up again in 1938. It will take lots of government intervention to destroy American industry, but if anyone could it is Obama right now. Fasten your seat belts and cinch in the belts.