Intervention may prolong the slump, history suggests

Just last week, Vice President Biden informed us that the Obama administration had underestimated the severity of our country’s economic situation. On Monday, Rhode Island Senator Sheldon Whitehouse (D) informed us that another stimulus bill is probably needed. What we are witnessing is the machinating and vicious cycle of modern liberalism: government programs and initiatives aren’t working—solution=more government programs.

As the U.S. economy continues to struggle along, the temptation for the Democrat-led government is to meddle some more. So when the TARP funds are gone, the stimulus money has been spent, and the takeover of the auto industry has failed to achieve anything, their solution will be to spend more and increase federal control of the economy. Their failure to learn from history is indeed troubling.

Much of the recent scholarship on the Great Depression and of the government programs of Presidents Hoover and Roosevelt, as well as the Federal Reserve policies of the late 1920s and early 1930s, reveal the historic modern tendency to intervene more, when less is what is called for.

President Hoover’s passage of the Smoot-Hawley Tariff in June of 1930 was perhaps the most protectionist legislation passed in all of US history. In total, 887 tariffs were increased and several new tariffs were added. Everything from wine to wool was taxed. These tariffs in turn crippled U.S. production. It was argued by proponents of these new tariffs that it would encourage Americans to buy more domestic products. The result, however, was a crippling of U.S. industry. Rather than spur economic growth, this intrusion into the market by the state exacerbated the problems. Hoover, despite claims that he opposed spending programs, oversaw the increase in the government’s share of GNP from 16.4 to 21.5 percent in one year alone between 1930 and 1931. When the tariffs and spending programs failed to achieve an end of the depression, the Hoover administration passed the largest peacetime tax increase in American history. The top income bracket rate rose from 24 to 63 percent. Hoover failed to realize that his decision to raise taxes in a depression would neither reduce budget deficits nor spur economic growth.

Of course, Roosevelt (in spite of his campaign promise to balance the budget and dramatically reduce government spending) expanded the faulty spending and regulatory policies. In the first three years of the Roosevelt administration, government spending rose by 83%. Roosevelt proposed spending over $10 billion dollars while having revenues of only $3 billion. So much for a balanced budget!

The creation of the Social Security Administration, The Agricultural Adjustment Act, The National Industrial Recovery Act, the minimum wage law, The Civil Works Administration, The Works Progress Administration and the rest of the “Alphabet Soup” were all new intrusions by the government into the economy. Each of these programs was promised to be a solution to the economic crisis. Yet with each new program, the depression persisted. When one program failed, rather than stepping back and questioning their approach, they simply tried something else, each time placing greater governmental control over the economy. When unemployment and economic stagnation continued, rather than freeing up businesses through tax cuts and pro-growth incentives, the Roosevelt administration passed the Wagner Act which federalized labor relations. The National Labor Relations Board (a decidedly pro-labor and anti-business agency) gave outrageous powers to labor unions while crippling the primary generator of jobs: private businesses. As with the other Roosevelt initiatives, the Wagner Act did nothing to improve the nation’s economy.

Larry Reed, in his excellent essay on the failure of national economic policy by both Hoover and Roosevelt, summarizes well the state of the nation in 1940: “At the end of the decade and 12 years after the stock market crash of Black Thursday, 10 million Americans were jobless. The unemployment rate was in excess of 17 percent. Roosevelt had pledged in 1932 to end the crisis, but it persisted two presidential terms and countless interventions later.”

Returning to our opening: the failure of modern liberalism rests in its belief that it can – through taxation, government spending, and regulation – resuscitate an economy, and that when policies fail, it isn’t because government shouldn’t be doing these things, but that it just needs to do more and do more “better.” The Great Depression stretched on because of a failure to realize this fallacy. As long as the Democrat-led government remains blind to this fallacy, they will continue to meddle and our economy will continue to struggle.

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