Imitating the wrong historical period.
The Great Depression that began in 1929, just as the Great Recession we have today, needlessly rotted our economic core.
In those early days, tragically misguided federal policies, adopted to diminish what was thought to be unruly capitalism, prevented the economy from fully recovering for a decade. Today, just as in the 1930s, expansive government is the culprit, prolonging the lack of economic recovery.
The Great Depression created a widespread misconception that market economies are inherently unstable and must be managed by the government.
Keynesian economics, the economic theory of “priming the pump” through spending and economic policies during the Great Depression, failed, just as the Obama Administration spending spree and the creation of money by the Federal Reserve have failed to resuscitate the U.S. economy.
The economic policies of the 1930s are “a continuing source of myth and confusion," according to Chris Edwards, Cato Institute Director of Tax Policy. Many still believe capitalism caused the Great Depression and that President Roosevelt helped end it. These “claims are incorrect.”
It is valuable to look back to the years just preceding the Great Depression. In the early 1920s, unemployment was low and the economy rolled along smoothly. The government got out of the way and let the market alone. Resources shifted to market-guided areas. Optimism radiated from the business community, and investment grew.
In the early 1920s, Warren Harding’s brilliant Treasury Secretary Andrew Mellon led an economic boom. He had found that taxes from the wealthy had fallen with each new rate increase. Mellon concluded that lowering the rates on everyone—especially the wealthiest—would actually result in their paying increased taxes.
From 1921 to 1926, Congress cut tax rates from 73 percent on the top income earners and 4 percent on the lowest earners to 25 percent and 1.5 percent, respectively. The taxes were cut even further in 1929. The tax take from the wealthy nearly tripled, while others also saw their taxes drop. The national debt fell by a third in five years.
Federal spending under both Harding and his successor, Coolidge, was held low. American entrepreneurs produced the most vibrant eight-year burst of innovation and manufacturing in the country’s history.
Many politically wise economists believe benefits somewhat similar could happen again as occurred in the administrations of Presidents Reagan, Kennedy and George W. Bush.
But the results of the successful tax cuts in the 1920s were abandoned as the economy took a dive after 1929. Top tax rates soared from 25 percent to 65 percent under Hoover. Then Roosevelt jacked up the top individual rate to 75 percent. State and local taxes also rose, killing initiatives for work and investment.
Also the Federal Reserve between 1929 and 1933 permitted a monetary collapse. And a tariff war smothered trade.
Misguided government policies caused the economic depression and kept the economy from full recovery for a decade. The failed ideas and host of expensive public works projects of the 1930s influence economic policy-making today.
Many people, particularly Obama supporters, have believed we must have big federal government policies and spending to reverse the recession.
The cost of the Obama stimulus package—typically reported as $789 billion--instead, totaled $3.27 trillion for the variety of programs loved by the left, from Head Start to the Earned Income Tax made permanent, according to the Congressional Budget Office (CBO) estimate requested by Rep. Paul Ryan (R-WI).
Add the expense of ObamaCare, which the CBO now figures will cost $2 trillion, even though Obama, Nancy Pelosi and their allies still cling to the falsely low cost estimate of $1 trillion over 10 years.
The Medicare chief actuary says that the percentage of the gross domestic product spent on health care would also rise in relation to current law, increasing from 17 percent today to 21 percent in 2019. And, as the CBO reports in its latest scoring, as of 2019 there would still be 23 million people in America lacking health insurance.
No one knows the total spending for “green” projects. But in Massachusetts alone, the major green energy mandates, programs and incentives will cost $490 million this year and more than $9.8 billion cumulatively over the next eleven years, Suffolk University estimated.
In the Great Depression, real output only regained its 1929 level in 1936. Then it slipped again in 1938. Unemployment held at 14 percent for 10 years.
New Deal interventions in the economy backed by large spending, plus union power make the Great Depression’s days seem more like the Obama economy, with Obama’s damaging anti-growth policies, high tax insistence, more regulations, huge debt and much larger government. He has created an environment of uncertainty among business and industry by the massive expansion of government and regulations.
The Obama administration is sorely in need of an historian.
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