Thursday, December 25, 2008

Another great depression?

That's the title of a column by conservative economist Thomas Sowell.

He notes that a lot of people are looking at President-elect Obama as the next FDR who will bring us out of our current deep economic recession. Yet he warns that FDR's policies which were fundamentally extensions of Hoovers, which only made matters worse.

Then as now people blame the free market system for the financial problems were facing and therefore call for significant government intervention.

The prevailing view in many quarters is that the stock market crash of 1929 was a failure of the free market that led to massive unemployment in the 1930s— and that it was intervention of Roosevelt's New Deal policies that rescued the economy.

It is such a good story that it seems a pity to spoil it with facts. Yet there is something to be said for not repeating the catastrophes of the past.

When employment began to rise after the 1929 crash, that's when government stepped in to try and prevent the loss of jobs by increasing tariffs to protect US jobs. This only made things much, much worse. Sowell cites two economist who tracked unemployment during that time.

The Vedder and Gallaway statistics allow us to follow unemployment month by month. They put the unemployment rate at 5 percent in November 1929, a month after the stock market crash. It hit 9 percent in December— but then began a generally downward trend, subsiding to 6.3 percent in June 1930.

That was when the Smoot-Hawley tariffs were passed, against the advice of economists across the country, who warned of dire consequences.

Five months after the Smoot-Hawley tariffs, the unemployment rate hit double digits for the first time in the 1930s.

This was more than a year after the stock market crash. Moreover, the unemployment rate rose to even higher levels under both Presidents Herbert Hoover and Franklin D. Roosevelt, both of whom intervened in the economy on an unprecedented scale.

Before the Great Depression, it was not considered to be the business of the federal government to try to get the economy out of a depression. But the Smoot-Hawley tariff— designed to save American jobs by restricting imports— was one of Hoover's interventions, followed by even bigger interventions by FDR.

Today, Obama is already talking about the government trying to create 2.5 million new jobs. It has to be asked is it better for government to create jobs or for the private sector? I think definitely the latter. And will Obama give in to protectionist calls? That remains to be seen.

It will also be interesting whether Obama continues the interventionist policies of George Bush who helped nationalize part of our financial system. If he does, he'll not only have his Hoover foil but also an example to build on.

As Sowell concludes:

Barack Obama already has his Herbert Hoover to blame for any and all disasters that his policies create: George W. Bush.

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