Depressing lessons: We have nothing to fear but politicians making bad decisions

Since late 2008, the Great Depression has made a big comeback in discussions over the economy and public policy. Unfortunately, the lessons that politicians and pundits say we’re supposed to learn often turn out to be dead wrong. But that’s not surprising. Perhaps no other period in U.S. history is so riddled with errors and outright falsehoods.

For example, we often hear that Herbert Hoover was a laissez faire, free-market president. In reality, nothing could be further from the truth. The other mistake is that Franklin Roosevelt’s New Deal saved the U.S. economy. Again, the exact opposite turns out to be the truth.

Here are the four most important lessons to learn from the Great Depression:

First, trade protectionism was the trigger. As it looked more likely the Smoot-Hawley Tariff Act would become law and impose massive increases in tariffs, the stock market crashed in October 1929. Against the advice of economists at the time, Hoover signed Smoot-Hawley in June 1930. A trade war was unleashed. By 1933, exports had plummeted by 66 percent compared to 1929.

While President Barack Obama ran for the White House as a protectionist, he has governed as a do-nothing president on the matter of trade.

Second, huge tax increases deepened and extended the Great Depression.

Both Hoover and FDR were big on higher taxes. Hoover increased personal income taxes, with the top rate going from 25 percent to 63 percent in 1932, the death tax rate more than doubling from 20 percent to 45 percent and the corporate income tax rising as well. FDR piled on even more. From 1933 to 1941, the top personal income tax rate climbed to a stunning 81 percent and the corporate income tax rate gradually increased from 13.75 percent in 1935 to as high as 44 percent in 1941.

The death tax rate was pushed up to 77 percent. As for the capital gains tax, it was nearly doubled in 1934. While it would be cut in 1938, it was increased in 1942.

Today, the emphasis from Obama has overwhelmingly been on increasing personal income, capital gains, dividends and death taxes, along with assorted other levies, including higher energy taxes.

Third, federal government spending increased to unprecedented levels during the Great Depression. Federal outlays during Hoover’s four years in office jumped by nearly 50 percent. FDR further accelerated spending. In 1930, federal outlays stood at 3.4 percent of GDP. In 1939, it was at 10.3 percent, and it hit 12 percent of GDP in 1941.

In terms of GDP, in 1929 gross private domestic investment registered 15.9 percent of GDP, with government consumption and investment at 9 percent. A decade later, in 1939, private investment had fallen to 10.1 percent, with government consumption and investment climbing to 16 percent. In effect, the expansion of government crowded out private-sector investment in the 1930s, with the economy suffering as a result.

Today, massive growth in government spending over the past four years has drained resources from and created uncertainty in the private sector — again, with the economy suffering accordingly.

Fourth, and finally, the Great Depression was a period of unprecedented expansion in government regulation.

FDR got the government involved in, among other escapades, setting prices, wages, farm production and labor agreements. Combined with higher taxes and vast increases in government spending, FDR’s hyper-regulation created fear and uncertainty in, and imposed higher costs on the investment and business communities. Again, it’s no surprise that investment and the economy declined.

Today, the Obama administration has been one of the most activist regulatory administrations — in particular in such areas as health care, the financial industry and energy — since FDR.

As for the results, unemployment went from 1.6 million in 1929 to a peak of 12.8 million in 1933, and was still at 9.5 million in 1939. In fact, employment in 1939 was still lower than in 1929. There also were fewer business concerns in 1939 than a decade earlier. As late as 1938, the size of the U.S. economy in real terms was smaller than it had been in 1929. That’s why it was called the Great Depression.

As for today, one of the deepest and longest recessions running from December 2007 to June 2009, an underperforming recovery since and the threat of another recession mean we’re suffering through one of the biggest economic messes since the Great Depression.

FDR famously declared, “We have nothing to fear but fear itself.” I’ve never understood why this is quoted so much. It’s vacuous political rhetoric. After all, there were real reasons for fear during the Great Depression. A more substantive comment would have been: “All we have to fear are politicians making very bad decisions that send the economy spiraling downward.” That was what the Great Depression was all about in the end, and that is what plagues our economy today.

 

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. Reach him through the Web site at www.sbecouncil.org.
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Posted by on Sep 30 2011. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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