Davidson: Government repeating mistakes of Depression Published by: The University Daily Kansan Davidson is a Tonganoxie senior in economics.

"In 2005, Chris Edwards of the Cato Institute outlined policy blunders that lengthened the Great Depression. He included policies such as increasing taxes, blocking trade and controlling prices. Many of the mistakes Edwards blames for prolonging the Depression were made in the first 100 days of the FDR presidency and in the first 100 days of the Obama presidency, we are repeating them." [comment: Cato Institute is a conservative think tank and so it’s conclusions are likely to be dismissed by some. As to whether the New Deal policies helped or hindered the recovery is disputed between Keynesians and Austrian economists. Keynesians like Krugman would say that FDR didn’t spend enough for long enough and is saying the same thing now about Obama. Free-market economists of the Austrian school say that government cannot create jobs or stimulate the economy only private enterprise can create real jobs that create wealth instead of debt. I recognize that the TVA produced electric power, charged for its service, but where did the profit go, if any? It did manage to put Wendell Willkie’s Commonwealth and Southern power company out of business, and usurped the field of power production by excluding private corporations from competing.]
 

The Obama administration, like those of Hoover, FDR and Bush, has chosen to employ fiscal stimulus through deficit spending. Unemployment was high through the 1940s despite Hoover and FDR’s stimulus efforts, and Bush’s modern attempt you can judge for yourself. Obama’s charge for fiscal stimulus is based on the belief that every dollar Obama spends will put about $1.50 into the economy, according to an article in the Wall Street Journal. But studies of this type of policy by the International Monetary Fund and the Università Bocconi concluded that results like this would be unlikely. Based on these two studies, every dollar Obama spends will boost the economy by less than $1.[ comment: In case you are not familiar with the Università Bocconi, it has been ranked among the top 20 best business schools in the world by The Wall Street Journal. Of course some would like to know what the professors at the Harvard Business School [HBS] would say; I’ll save you the trouble. The Harvard Business Review [HBR] published an article entitled: Obama's Education Stimulus Isn't Enough, February 19, 2009, by Clayton Christensen and Michael Horn. Knowing that GWB graduated from the Harvard Business School it is not difficult to understand why he signed on and passed the first “stimulus” package. But to be fair, not everyone at the HBS is enamored with BIG government, in the July-Aug 2009 issue of the HBR, Robert B. Reich wrote: “In the United States, business was ascendant between the end of World War I and the start of the Great Depression, which called into question the capacity of the private sector. Government was ascendant between the election of Franklin D. Roosevelt in 1932 and the late 1970s, by which time its excesses had become apparent. Regulation was stifling growth, federal spending had led to double-digit inflation, and taxes were deterring innovation. And so, beginning with the presidency of Ronald Reagan, public sentiment moved against government, unleashing the influence of business and finance.”]

Obama, like Hoover with his Revenue Act of 1932 and FDR with the Revenue Act of 1936, will kill incentive for investment by raising taxes. Obama is looking to raise corporate taxes, increase the capital gains tax and start cap-and-trade carbon permits, among other clever ways to pay for his endeavors. This would all be wonderful if the costs of spending were really borne by “polluters” and “evil corporations.” But the costs will be paid by real people. Your dad’s ailing portfolio will decline as corporations struggle to maintain a profit because of higher taxes. Worse, he may lose his job because it’s cheaper to make soap in London and ship it all the way to Mexico than to pay high corporate taxes in the U.S. Energy prices will go up because of cap-and-trade; poor families will be hurt the most because a larger percent of their income is spent on energy. [Comment: I would add to the mix  the power that FDR gave unions, the faith in man-made global warming and; saving endangered species and plants has resulted in costly regulation that arguably have forced domestic companies to close their doors. Take the steel industry for example. The story of U.S. Steel’s Garry Works is a struggle between the free-market and government regulation. Garry Indiana was once a major player in supplying steel to the world.  The 1901 steel strike was countered by capital mobility and industrial relocation. This should have been a wake-up call that private enterprise would find a suitable place to produce the commodities that the world demands. Garry Indiana provided a welcoming venue for U.S. Steel's new plant, but years of government squeezing savings and every last dollar for taxes out of the Garry Works resulted in the loss of thousands of high-paying jobs. Between the United Steel Workers of America, high-taxes, local zoning, and the Environmental Protection Agency, by 1919 Garry Indiana, two weeks into the national steel strike, violence erupted in the streets. Strike breakers fought against police so bloody that on October 7th of that year, the government had to declare marshal law. Once a united family of workers who met for work and play, now due to the decline in jobs, they abandoned the city to find work elsewhere. What developed was a city  of political corruption, saloons, gambling, prostitution, and vice. In the spring of 2000 Donald Trump proposed to build a Casino to replace the rusted rails of industry, and overhead cranes. Bethlehem steel, once the second largest steel producer in the world, suffered the same fate as the Garry Works.  Both steel plants that produced products to build bridges, skyscrapers, ships, and armaments of war, now house gambling casinos. Instead of wealth producing works, Bethlehem Pennsylvania that once employed 25,000 works now employs under 100.]

This cap-and-trade program is similar to the Smoot-Hawley Act of 1929. Smoot-Hawley increased tariffs by 60 percent, causing foreign governments to return the favor, and world trade plummeted by two-thirds. Steve Chu, Obama’s energy secretary, recently said he supported raising tariffs on countries that don’t institute cap-and-trade.
A study by UCLA economists Cole and Ohanian concluded that FDR’s National Industry Recovery Act, or NIRA, extended the Depression into the late 1930s. The study showed the NIRA kept prices and wages high, which lowered the demand for goods and labor. Helping the NIRA raise unemployment was the Davis-Bacon Act, which requires that government contracts pay prevailing wages; this in effect raises the market wage and again lowers demand for labor. We are not headed towards another disastrous NIRA but the minimum wage is being raised and all the stimulus package pet projects will be under Davis-Bacon rules. [Comment: Someone will say that to equate high tariffs to a two-thirds decline in world trade is wrong, but what they cannot deny is that when on June 17, 1930 when President Hoover's Smoot-Hawley became law it imposed an effective 60% tax on more than twenty thousand imported goods.  Even though the law was not in effect yet, investors knowing its possible results reacted. Some say that Smoot-Hawley was the final nail in the coffin that buried the economy for two decades.]

Figuring out how to fix the mess we’re in isn’t going to be easy, so wouldn’t it be a good idea to start by taking a look at how we screwed up in the past and not repeat those mistakes?