Now that we are at Labor Day — meaning the start of the year of presidential campaigning — let us review the five big errors that made the Great Depression. These were spelled out three years ago in a column by our Amity Shlaes. It was issued in the Washington Post under the headline “Five Ways to Wreck a Recovery.” Her lessons are drawn from her seminal history of the catastrophe of the 1930s, “The Forgotten Man.” Her list remains, in our view, one of the most prescient op-ed pieces to herald President Obama’s accession.
The tragedy of Mr. Obama’s presidency is that he has committed nearly every one of the errors that extended the Great Depression. The first was, as Miss Shlaes put it, “giving in to protectionism,” a blunder confected on the eve of the Great Depression by three Republicans, Willis Hawley, a congressman from Oregon, Reed Smoot, a senator of Utah, and President Hoover. They ignored the warnings of more than a thousand economists who issued an open letter warning that duties would “raise the cost of living and injure the great majority of our citizens.”
President Obama hasn’t done anything as egregious as the Smoot-Hawley tariff, but neither has he been — at a time when he should have been — a tribune of free trade. A captive of labor, he failed to take the lead in respect of Colombia, South Korea, and Panama. He feigns to fight for free trade by blaming the Republicans; the Times had a piece on the feud a few days ago. Even worse and more broadly, he has run a weak-dollar campaign in an effort to boost our exports, a protectionist scheme in fact if not in name that, in the end, fails even to protect our exports and, in any event, raises prices at home.
Second on the list of five errors is “blaming the messenger,” or, as Miss Shlaes put it, “punishing the stock market for the 1929 crash.” Back in the early 1930s, the titans of capital were hauled in for hearings, and the Roosevelt administration was prosecuting business leaders, including even the former secretary of the treasury, Andrew Mellon, and the utilities magnate, Sam’l Insull. It was a campaign that “petrified” Wall Street and led to an “Atlas Shrugs” type capital strike that helped lengthen the Depression.
The error of the 1930s is echoed in the haranguing, vilifying, and regulating of business titans by such Democrats in the Congress as Messrs. Dodd and Frank, by such strident ideologues as Elizabeth Warren, and by Mr. Obama himself, with his railing about corporate jets and billionaires. American corporations have been sitting on more than a trillion dollars in cash, waiting for a hospitable business climate to become manifest in America.
“Increasing taxes in a downturn” is how Miss Shlaes characterized the third error. At the onset of the 1930s, Hoover more than doubled income tax rates, taking the top marginal rate to 63% from 25%, and FDR raised it to 90%. Miss Shlaes suggests that Roosevelt worsened things by having his treasury department craft taxes on undistributed and excess profits, which, as she put it, ultimately sucked cash from a capital-starved economy.
Today Mr. Obama and his party can be counted on to seize a tax increase the first chance they get. Which may be soon, as the great drama is still unfolding in respect of whether America will be forced into default. It is a context in which President Obama and his colleagues in the Congress have made all too clear that they want what they call “revenues” and the rest of us call “taxes.” The idea is to protect favored government programs. Until this threat is defeated, it will chill the prospects for growth.
The fourth error on Miss Shlaes’ list is the assumption that “bigger government will bring back growth.” It is the ghost of Keynes spooking the 21st century. Miss Shlaes noted three years ago that New Deal programs did much to alleviate the pain in the short term, as hundreds of thousands found dignity in six months of labor at the Works Progress Administration, the Public Works Administration, or the Civilian Conservation Corps.
“But,” she warned, “economics is a competition for scarce capital. Such state solutions tended to suppress the creation of long-term private-sector jobs, as did the aggressive Wagner Act for organized labor.” During the Depression, the National Recovery Administration favored large businesses, while the Tennessee Valley authority and the Public Utility Holding Company Act muscled aside private utilities that “hoped to light up the South.” Today the Obama administration is bailing out GM and spending enormously on stiumuli without, it seems, comprehending the impact on the broader business climate.
Fifth of the Five Errors was “ignoring the cost of inconsistency.” Miss Shlaes wrote of FDR speaking of “bold persistent experimentation” and Mr. Obama offering a mantra of “change.” Without a coherent, pro-growth keel to keep policy on course, what is the purpose of agitating for experimentation and change? Do Americans really want it? More than half the states are now in court fighting against Obamacare. It has long since become clear that Mr. Obama hasn’t fully thought things through.
These five errors were laid out by Miss Shlaes against a backdrop of what she reckons was the greatest reason the Great Depression lasted through the 1930s — a perverse monetary policy. This was the decade in which President Roosevelt seized the private gold holdings, sundered the gold clauses, and set the price of gold while sitting in bed and talking with Secretary Morgenthau. No wonder the hundreds of millions of participants in the world economy felt in the 1930s that they couldn’t rely on monetary policy. No wonder today that neither the lectures of Mr. Obama nor the rambling statements of the Federal Reserve are pointing the way to prosperity.