Depression Reality
By Steve Markom on December 24, 2008 at 6:50 AM in Current Affairs
The patient says, “Doctor, it hurts when I do this.”
Doctor says, “Then don’t do that!”
– Henny Youngman
When you meet someone who is very knowledgeable about a particular industry it probably is because the one thing that person was very smart about was not making the same boneheaded mistakes they made in the past a second time.
Free market capitalism has been a long term project of trial and error. It has its wonderful benefits and inherent problems. It is a reflection of our best attributes mixed in with our worst traits.
As a country we have tried to learn from each economic downturn in order to better perfect our free market system. What we learned with each economic problem was supposed to help us to at least navigate through future recessions without falling into the traps of the past.
As a result we have enacted certain regulatory laws and put in more controls. Our hope is to never repeat the mistakes of prior downturns where we can. Or as Henny Youngman’s doctor prescribed, “Don’t do that” – again.
Even with the knowledge and experience we have, it is still understandable that when we are in the midst of a recession that we become consumed with the current circumstances and believe that the worst is yet to come. In certain cases people have reason to feel this is the worst particularly if they lost their job or are struggling financially. But in most cases we have jobs and a home and are experiencing either some relative inconvenience compared to those who have lost jobs, and, maybe, we are “whiners.”
We are watching that happening in the reporting of our economic condition. The media has liberally been reporting that we are on the brink of a Great Depression or that this economic situation is the worst economic situation we have had since the Great Depression. The dishonesty behind those views being reported is perplexing. That is not to say that our current economic condition is not very bad, but we do regard all recessions as very bad and can never see light at the end of the tunnel until we are out of it.
But to say that this is the worst since the Great Depression is a gross distortion. This economic situation is not nearly as bad as the economic stagflation that began in the late 1970’s: we had reached 10.8% unemployment, we had double digit interest rates, and double digit inflation rates. There were the long gas lines and rationing that forced us to only buy gas on odd or even days based on our license plate number. Compared to those times, this is not that bad.
Along with the less than honest discussion about the state of our economy, is the folk tale that has been built around The New Deal. Growing up we learned broad interpretations about that period of history in school. What we learned about The New Deal was that it took us out of the Great Depression. The myth as summarized by economic historian Amity Shlaes in her book “The Forgotten Man” was:
The standard history of the Great Depression is one we know. The 1920’s were a period of false growth and low morals. There was a certain godlessness – the Great Gatsby image – to the decade. The crash was the honest acknowledgment of the breakdown of capitalism – - and the cause of the Great Depression. A dangerous inflation caused by speculating margin traders brought down the nation. There was a sense to a return to a sane, moral country with the crash. A sense that the economy of 1930 and 1931 could not revive without extensive intervention by Washington. Hoover, it was said, made matters worse through his obdurate refusal to take control, his risible commitment to what he called rugged individualism. Roosevelt, however, made things better by taking charge. His New Deal inspired and tided the country over, In this way, the country fended off revolution of the sort bringing down Europe. Without the New Deal we would have been lost.
That is the myth still being perpetuated by Obama’s media. I am not saying that the mythology built around The New Deal is the same as George Washington chopping down the cherry tree, but if we fail to look at facts then we are destined to repeat history. And this is a history none of want to repeat.
In a recent column, Jeffrey Kuhner of the Washington Times opened up some insight about The New Deal
Roosevelt’s New Deal failed to engender economic recovery. His massive public works programs, relief aid and burgeoning welfare policies did not reverse the crippling unemployment and rampant poverty of the 1930s. In fact, his tax increases, class warfare rhetoric, stifling regulations and reckless government spending crippled economic growth, job creation and the formation of vital investment capital.
Contrary to FDR’s claims, the New Deal did not “save American capitalism,” but wrecked it. He established the dangerous precedent of massive government interference in the economy and a rudimentary welfare state – forging a destructive path toward creeping socialism.
FDR’s big government liberalism also led to sweeping away traditional values such as self-reliance, civic virtue, individual liberty, limited government and a decentralized, constitutional republic. America has been transformed into a country our Founding Fathers would not only find unrecognizable but repulsive: a nanny-state characterized by confiscatory tax rates, a swollen federal bureaucracy and a citizenry that depends on government largess. The New Deal destroyed more than a free-market society; it destroyed the American character.
This is also confirmed by Amity Shlaes in her book that takes an analytical view of The Great Depression:
American capitalism did not break in 1929. The crash did not cause the Depression. It was a necessary correction of a too high stock market, but not a necessary disaster.
There was indeed an annihilating event that followed the crash, one that Hoover never understood and Roosevelt understood incompletely: deflation.
Hoover and Roosevelt were alike in several regards. Both preferred to control events and people. Both underestimated the strength of the American economy. Both doubted its ability to right itself in a storm. Hoover mistrusted the stock market. Roosevelt mistrusted it more. Roosevelt offered rhetorical optimism, but pessimism underlay his policies.
But the deepest problem was the intervention, the lack of faith in the marketplace. From 1929 to 1940, from Hoover to Roosevelt, government intervention helped to make the Depression Great.
What the New Deal effectively did was to put some people back to work but never enough people because unemployment remained very high throughout that period. Those New Deal policies supported only work for the government and failed to stimulate work for the private sector. In fact, the New Deal policies had the opposite effect on the economy as popular myth would have you believe. What turned around our economy was our entry into World War II and not the New Deal.
Today, as the current economic circumstances are playing out, Jonah Goldberg humorously called the media hyperventilation over the economy the Great Freak Out of 2008.
The Federal Reserve is a hair’s breadth from pushing interest rates to zero percent. After that, all that’s left is offering a free set of steak knives with every bag of cash.
The Bush administration is having a clearance sale on its few remaining items of fiscal restraint, while the incoming Obama crew is promising infrastructure “investments” the likes of which we haven’t seen since the 1950s.
But here’s a point nearly everyone understands from personal experience: It is not a good idea to make big, life-altering decisions when you’re freaking out.
As Rahm Emanuel, President-elect Barack Obama’s incoming chief of staff, said last month, “You never want a serious crisis to go to waste; it’s an opportunity to do important things that you would otherwise avoid.”
So much for “the only thing we have to fear is fear itself.”
The danger of this New Deal mythology is that Barack Obama is using it liberally to push an economic agenda that could have very dire consequences. Create policies that only rapidly expand government as the only employer and you will have another depression.
Obama’s motives may be similar to those of FDR as noted by Kuhner:
More importantly, the New Deal was never really concerned with reviving the economy. Its objective was more Machiavellian: to cobble together a majority coalition that would win successive elections. FDR was consumed with achieving and maintaining power – both for himself and the Democratic Party. The New Deal was their meal ticket.
Now, Mr. Obama is on the verge of completing what FDR started. Like the original New Deal, Mr. Obama’s “stimulus” plan will fail to kick-start the contracting economy.
While Obama has surrounded himself with admirable economic policy appointments, the overall direction and final decision comes from Obama himself. If we look into his rhetoric and strip away the eloquence we do find a man who was weaned on socialism, was a community organizer, and has held favorable views on big government programs. People who were influential in the making of the New Deal policies were influenced by Stalin and socialism. Obama was also influenced by various types of socialism during his mentoring.
Amity Shlaes warns against the path of least resistance which is big government printing money, not allowing the market to recover, and creating a situation that could very well prolong this economic downturn and make it worse.
With one hand the New Dealers gave, spending to stimulate the economy. In fact, they put through the same kinds of infrastructure projects that Obama and congressional Democrats are considering today.
With the other hand the New Dealers took away, by raising tax rates — just as the new president and Congress are likely to do in 2009.
Especially damaging to the prospects of recovery were the heavy levies of the second half of the 1930s, which, as (NY Times columnist Paul) Krugman points out, were key in “precipitating an economic relapse that drove unemployment back into the double digits.” President Franklin D. Roosevelt specialized in persecuting the rich via taxes, telling the upper class, point blank, that they had “met their master.”
Gazing at Messrs. Paul Volcker, Robert Rubin, Tim Geithner, Austan Goolsbee et al. –- the talented Obama economic team -– you can’t preclude that the new administration will, in the end, scuttle some of its destructive tax increases. The rest of us just have to help them figure out a graceful way to do so.
Shlaes warns not to commit acts that will drive the economy down. She outlines five errors that were made as part of the Great Depression that we should avoid:
1. Giving in to protectionism. Smoot Hawley created devastating protectionist tariffs that stopped our ability to trade. And another ambivalent politician — Sen. Barack Obama — has sent mixed messages to Canada about just how much he wants to roll back the North American Free Trade Agreement.
2. Blaming the messenger. Punishing the stock market for the 1929 crash was popular in Washington in the early 1930s. Lawmakers attacked the practice of short selling. the arbitrary nature of the assault petrified Wall Streeters. Today, too, a “Blame the Street” mood prevails. this cleanup will send companies and jobs abroad.
3. Increasing taxes in a downturn. Hoover more than doubled income tax rates, taking the top marginal rate to 63 percent from 25 percent. FDR hiked the top rate to 90 percent. Perhaps worse, Roosevelt’s Treasury crafted taxes to punish business, including an undistributed profits tax and an excess profits tax, that ultimately sucked cash from a capital-starved economy. Effective top rates approach 50 percent. There are also proposed increases for dividends and capital gains. Taken together, these will make the U.S. economy sluggish and more like that of Europe.
4. Assuming bigger government will bring back growth. New Deal programs did much to alleviate the pain month to month — many found dignity in six months of work at the Works Progress Administration, the Public Works Administration or the Civilian Conservation Corps. But economics is a competition for scarce capital. Such state solutions tended to suppress the creation of long-term private-sector jobs, as did the aggressive Wagner Act for organized labor. The National Recovery Administration, the New Deal’s centerpiece, favored large businesses at the expense of small fry. This yielded the “Depression within the Depression” of 1937.
5. Ignoring the cost of inconsistency. FDR spoke of “bold persistent experimentation.” Obama speaks of “change.” Both can do damage. Our bailouts look reassuring, but even Washington cannot rescue the entire economy. And foreign investors wonder where Washington will stop.
The proximate danger today is a repeat of the 1970s, not the 1930s.
And to not repeat the errors of the New Deal
At least three economic reforms under discussion now were also central in the New Deal package. Trouble is, these reforms didn’t necessarily work well when they were first tried – and some failed outright.
President-elect Obama has said that “the one thing I can say with certainty is that we are going to need a stimulus package passed either before or after my inauguration.” That stimulus package is now nearing a trillion dollars. Shlaes noted that FDR’s original stimuli as part of the New Deal did fail:
Although Roosevelt got a slow start, he poured billions into the economy in his first term – an unprecedented action for a US leader in peacetime. Federal spending doubled between 1933 and 1936, the year he ran for reelection. The year 1936 saw a deficit of 2.6 percent of the economy, compared with say, a surplus in 1930. The economy did grow in those years. But it never got back to its old 1929 level. As soon as FDR stopped doling out the cash (in 1937, after the election) the economy crashed again. The stock market plummeted. Five years into the New Deal, in the winter of 1937-1938, two in 10 were again unemployed.
The stimuli of the New Deal solely focused on government employment and did not focus on developing private enterprise.
Evidence from that period suggest that government was crowding out the private sector. The Tennessee Valley Authority, for example, dealt mortal blows to a private employer that wanted to electrify the South, Wendell Willkie’s Commonwealth & Southern. For every state-relief job created, about half a private-sector job was lost.
No one knew what it meant, and markets were terrified. Everyone feared FDR would regulate or prosecute them next. Businesses refused to invest. The 1930s’ second half proved frustrating for the country: The economy was always recovering but never quite recovered. The Dow didn’t get back to its 1929 level until the mid-’50s.
So how did FDR get re-elected 3 times? Kuhner compared how the press fawned over Obama the way they did over FDR.
Like Mr. Obama today, FDR had a fawning and sycophantic press corps, which significantly downplayed – and even ignored – his numerous policy mistakes (and scandals). In fact, the liberal media covered up anything they believed might hurt their man’s standing with the voters.
While today’s economy is not as dismal as the Great Depression, Obama’s economic policies sound similar to that of the New Deal, particularly relating to proposals to raise taxes, restrict free trade, and to strengthen trade unions.
However, his stimulus package would be worthwhile if it focused on stimulating private sector business and job creation. Obama’s efforts in the major areas of energy and healthcare could be a wise use of government money if they are directed at long-term private sector development rather than greater government bureaucracy. At some point in time the money we are printing today will be debt that we will have to pay off and that can only be done with revenue coming in from private sector expansion.
The first six months of Obama’s administration will provide an answer to how much Obama’s socialist mentoring influenced him. Should he pursue a balanced approach to using government stimulus responsibly in sparking a long term free market expansion, then this period will be a bad memory quickly. But if he falls back on his old beliefs and takes the path of New Deal II then our economy could very well fall into another depression.
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