Five Myths About the Great Depression
Andrew Wilson has an excellent article over at the Wall Street Journal today on Five Myths About the Great Depression. He states:
The current financial crisis has revived powerful misconceptions about the Great Depression. Those who misinterpret the past are all too likely to repeat the exact same mistakes that made the Great Depression so deep and devastating.
Here is perhaps the most pervasive myth:
Enlightened government pulled the nation out of the worst downturn in its history and came to the rescue of capitalism through rigorous regulation and government oversight.
In reality:
To the contrary, the Hoover and Roosevelt administrations — in disregarding market signals at every turn — were jointly responsible for turning a panic into the worst depression of modern times. As late as 1938, after almost a decade of governmental “pump priming,” almost one out of five workers remained unemployed. What the government gave with one hand, through increased spending, it took away with the other, through increased taxation. But that was not an even trade-off. As the root cause of a great deal of mismanagement and inefficiency, government was responsible for a lost decade of economic growth.
Why is this important?
With the vitality of U.S. and world economies at stake, it is essential that the decisions of the coming months are shaped by the right lessons — not the myths — of the Great Depression.
For two really helpful books on the Great Depression, I would recommend FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression and Bernanke’s Essays on the Great Depression.
(HT: JT)
If You Are Not Economically Free, You Are Not Politically Free
Nearly all recognize the value of freedom in the political sphere. It is wrong for the government to coerce us to speak, believe, or think contrary to our wishes, or to deprive us of our right to life without due process.
But it is equally necessary to realize that economic freedom is a necessary component of political freedom. If the government tells me how much of my money I can spend, what I can or cannot buy, where I can or cannot work, or what prices I can charge for goods that I produced, I am not free. I am being constrained to act, rather than allowed to act in accord with my voluntary and free choice.
OK, so the government doesn’t tell us what we can buy or where we can work, so there’s no problem here. Right?
Well, fortunately nobody wants to take things to that extent. But have you ever considered the subtle role that taxation plays in hindering the economic freedom of the people in our nation?
Now, I’m not against taxes. I completely affirm that taxes are necessary and it is right for the government to tax.
The problem comes with excessive and overcomplicated taxation. The higher taxes are, the less free we are economically to spend our money as we choose. This is a real restriction on freedom.
This is why I would argue that it is a responsibility of government to keep taxes low — and on all income levels. If the fundamental purpose of government is to protect life and liberty (see previous post), then it follows that government has an obligation to keep taxes low and thus prevent the reduction of economic liberty.
The integral relationship between political freedom and economic freedom is one of the main points of Milton Friedman’s classic work Capitalism and Freedom. “Clearly, economic freedom, in and of itself, is an extremely important part of total freedom.” If I am not economically free, then neither am I politically free.
This is why it is not only bad policy, but also wrong in principle (given current tax rates and the current tax complexity) to raise taxes on those earning over $250,000/year. (Plus, it doesn’t work.)
What McCain Should Say (Update: Should Have Said)
The guiding principle of sound governmental and economic policy is to maximize freedom. That’s it. Very simple. Government exists to protect freedom, not restrict it.
This is not only right in principle, but it also works better — when people are left free to make their own choices, greater prosperity results (and I don’t mean this simply in economic terms). When people are left free, their initiative and creativity and diligence are free to create and innovate and produce. When people are restricted by government policies and excess taxation, the incredible potential of the people is also restricted.
I’m not saying that the Republicans have done a good job of living up to this in the last eight years, but when it comes to the two candidates before us McCain is much more in line with this thinking than Obama. Yet he has not been able to make an effective case for his economic principles, and has not done a good job of countering the standard charge of “favoring the rich.”
What we need is a candidate — whether McCain now or someone else later — that simply explains these principles clearly. It’s not hard. I think that a candidate that could do this, and stay on this note, would win every time. McCain simply needs to say something like this:
I am not for keeping taxes low because I am looking out for the wealthy. I am for keeping taxes low precisely because I am looking out for the little guy.
When businesses are able to keep more of the money they earn, it gets invested in jobs and other productive endeavors. The result is that there are more jobs and a growing economy–things which benefit the middle class and the poor.
But if we increase taxes on business and higher income brackets, they do not have that money available to create jobs. Instead, it gets shifted to the government, which then uses it to create ineffective government programs to compensate for the fact that the economy is not producing enough jobs.
Politicians are really good at “coming to the rescue” when all they are really doing is solving problems of their own making. Let’s stop creating more problems, and stay out of the way. This country is great because of its people and the principle of liberty upon which it was founded. Let’s trust our people, stop interfering with their liberty, and let them live their lives. This is both the right thing to do and what is best for this nation’s economy. The American people will do far more good with their money than government ever can. Let them keep it.
He could even go on further and overcome some objections:
Sometimes these ideas have wrongly been accused of being “trickle-down economics.” But that is a straw man. As economist Thomas Sowell has argued, no economist in the history of the world has held to a notion of “trickle down” economics (see Sowell’s Basic Economics, pages 388-389 in the second edition). Instead, it is “trickle up,” because the business or entrepreneur investing in the economy and job creation is the last to get paid.
For example, a small business decides to add a position to their company. They incur expense to find the right person, train them, and have them continue the ropes for several weeks or months on the job. During this time, the business is incurring significant expense and not yet experiencing a return. When the position does start to become profitable, it remains the case that the employees are paid first, along with expenses such as rent, utilities, supplies, and production costs. Finally, the business receives as profit whatever is left at the end, after paying all of these things. This is not trickle-down; if anything, it is trickle-up. The business and entrepreneurs get paid last. What the business has done is in fact admirable and, as Michael Novak argues in The Spirit of Democratic Capitalism, in some sense heroic. This is a good thing. We should not penalize the ability to do this through our tax code.
McCain could also go on to point out that this is not about materialism or greed:
Very often, people misrepresent the free market and capitalism as being about “greed” or “materialism.” I join you in saying greed is evil and materialism is empty. No thank you. But capitalism is not driven by greed. Sure, some people are, and capitalism forces their greed to be funneled to the good of society, because in order to make any profit at all, you have to think first about how to serve your customer. So capitalism is actually a very powerful check on greed, forcing it to serve the benefit of the common good.
But most people are not so thoughtlessly driven by greed, and capitalism is not about greed and it does not depend upon greed to work. Capitalism is about freedom, which means enabling people to pursue projects of interest to them; endeavors and initiatives which are of their own choosing. Capitalism is about being able to undertake what you choose, not what the government tells you to do, and to do it for whatever reason you want.
For most people, their aim is not selfish gain, but to serve their families and make their communities better. In capitalism you might choose to earn all the money you can for selfish reasons. But just as many people — in fact, more — are simply seeking to make an honest living, serve their families, and give some of what they earn to do good for the world.
In fact, capitalism doesn’t have to be about making money at all. You can choose to start a non-profit to fight AIDS in Africa, or a soup kitchen to fight hunger in your city, or an innovative new organization like Kiva. The whole point of capitalism is freedom: let people do what they choose. And multiple, numerous, incredibly creative initiatives will result that are good for society on all fronts, both economically and non-economically.
McCain could then tie it all together by closing something like this:
My campaign exists to make this vision of freedom thrive. These are the ideals that have enabled our people to prosper and serve over the last two hundred years and, yes, even grow in virtue. We don’t want to go through four years under a regime whose ideology distrusts your freedom and thinks that it is centrally planned government policies that make our nation great rather than the people themselves. Economic freedom and political freedom go hand in hand. If you are not economically free, you are not politically free. Vote for someone that will keep you free.
Gallup Poll on Income Redistribution
Gallup has a helpful article on how Americans Oppose Income Redistribution to Fix Economy. “Americans overwhelmingly — by 84% to 13% — prefer that the government focus on improving overall economic conditions and the jobs situation in the United States as opposed to taking steps to distribute wealth more evenly among Americans.”
This extends across parties and income levels:
Americans’ lack of support for redistributing wealth to fix the economy spans political parties: Republicans (by 90% to 9%) prefer that the government focus on improving the economy, as do independents (by 85% to 13%) and Democrats (by 77% to 19%). This sentiment also extends across income groups: upper-income Americans prefer that the government focus on improving the economy and jobs by 88% to 10%, concurring with middle-income (83% to 16%) and lower-income (78% to 17%) Americans.
Should the Government Raise Taxes on Those Making More Than $250,000?
It has been said on the campaign trail a couple of times now that those making over $250,000/year can “afford” to pay more in taxes. There are lots and lots of problems with this thinking. First among them is that the issue is not about what citizens can “afford,” but about what the government has a right to do with people’s money. Another issue is that this statement wrongly assumes that the government can utilize that money more effectively than the individual who earned it. We’ll talk about these things more in future posts on making good decisions in the economic and political realms. (In the meantime, I highly recommend Thomas Sowell’s Basic Economics 3rd Ed: A Common Sense Guide to the Economy.)
But if we want to talk about fairness, Hugh Hewitt made an excellent point last Friday in his post on Obama’s plan to “share the wealth:”
What Obama doesn’t understand is that behind every small business that gets to the level he where he wants to slam new taxes on it, are years and sometimes decades of hard work and low, if any, profits, deferred dreams, and large debts that need to be paid from today’s success as well as tomorrow’s retirement plan to fund.
The Great Depression as we Know it Was Avoidable
Most of my life I’ve been wondering, far in the back of my mind, if another spell like the Great Depression or the misery index of the 1970s would hit. This probably stems in part from the media (they always seem to be talking about the dangers of a recession, whether the economy is doing well or struggling), and in part from thinking that events like the Great Depression are random or periodic necessities of the business cycle that are completely out of our control.
The recent financial crisis has motivated me to look into the causes of the Great Depression more fully. The chair of the Fed, Ben Bernanke, is actually an expert on it, and his book Essays on the Great Depression is very good. He points out that “to understand the Great Depression is the Holy Grail of macro-economics.” One accomplishment of the book is to show the very significant role that governmental monetary policy–rather than just the standard business cycle–played in causing and continuing the depression.
In fact, there is a good amount of literature out there making a good case that the actions of the federal government were responsible for making the Great Depression much deeper and longer than it would have been otherwise. This makes sense from an understanding of the basic principles of economics. Perhaps the best summary of this comes from Jim Powell’s book FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression, which is also proving to be an excellent read.
Here is Powell’s summary:
I believe the evidence is overwhelming that the Great Depression as we know it was avoidable. Better policies could have prevented the bank failures which accelerated the contraction of the money supply and brought on the Great Depression. The Great Depression could have been over much more quickly–the United States recovered from the severe 1920 depression in about a year. Chronic high unemployment persisted during the 1930s because of a succession of misguided New Deal policies.
A principal lesson for us today is that if economic shocks are followed by sound policies, we can avoid another Great Depression. A government will best promote a speedy business recovery by making recovery the top priority [FDR's administration made "reform of capitalism," not recovery, its top priority], which means letting people keep more of their money, removing obstacles to productive enterprise, and providing stable money and a political climate where investors feel that it’s safe to invest for the future.”
Here we have a large example of the effect that making bad decisions can have on people.
About Matt Perman
Follower of Christ. Husband of one, father of three. Former director of strategy at Desiring God. This blog exists to help equip Christians in good works, because that's what productivity is really about.
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