A Greater Depression?

I suppose just enough time has passed since the 1930s for Americans to forget the policies that made the depression of that time so “great.”

A few historical notes, along with their likeness to today:

1. The government did not properly manage the money supply. Between 1929 and 1932, the Federal Reserve allowed the money supply to shrink by nearly 30%.  Banks failed, and their deposits vanished. Today, it could be argued, the policy in place is the opposite poison – to much expansion in the supply of money (inflation). This is hard to quantify precisely, but the problem begins when the government creates more currency than the economy creates actual value.  The value of dollar bills goes down and thus, the number of dollars needed to purchase goods and services go up.  In the same way that the deflation of the early 30s made life difficult, rampant inflation in the future could make the life we enjoy today nearly impossible. 

2. Politicians started backing away from free trade. In the supposedly valiant effort to “protect jobs” and “save the local economy,” Congress slapped massive tariffs (taxes) on imported products, causing other nations to return the favor. This sent the world economy into a tailspin. American exports declined by around 60% in just two years, and many industries, particularly farming, were devastated. While it is politically-popular to rally against free trade agreements (like today's NAFTA), the overall effect of limiting free trade is always more poverty for more people (see my explanation of this issue here).

3. To pay for government intervention in the economy, Congress raised taxes. Just when the nation needed its people to maximize their productivity, the substantial tax increases of 1932 crippled economic growth. All things considered, the tax burden on Americans nearly doubled after the plan passed. Unemployment skyrocketed to around 25%, (note: this is exactly what happens when you ‘tax the rich’). The Gross National Product fell substantially. As things grew worse, politicians raised taxes in 1933, 1934, and again in 1935, which was precisely the wrong thing to do.  The life blood of wealth-building was sucked out by the Dracula of socialism, in the name of "help".   Today, of course, politicians (particularly of the liberal Democrat variety) are trumpeting the very same “blessings” of increasing tax rates. Beware.

4. The temporary troubles of the Depression were used as reasons to create massive government entitlement programs. The “New Deal” for suffering Americans promised that government would never again allow people to suffer as they did in the 1930s, and the most sweeping pyramid-scheme in history was devised to offer workers a socialist form of “security.” Today’s politicians speak of nationalizing health care, increasing taxes on the rich in order to distribute more cash to the poor, etc. Every economic downturn is used as reasoning for government expansion - every jitter in the stock market is cited as evidence that the free market cannot be "trusted."

Are we doomed to repeat the mistakes of the past?

Will Washington convert a slowdown into a shutdown? A recession into a depression?

If politicians like Hillary Clinton or Barack Obama have their way, Americans can expect that the economic missteps of the Great Depression will be repeated, and, arguably, under worse circumstances. Many Republicans are even getting on this train. Free trade will be restricted. Price controls will be put into effect. Taxes on individuals and businesses will rise. Government entitlement programs will expand dramatically, as will inflation. Military spending will be cut (to pay for government expansion), and the ensuing military weakness will invite new conflicts across the world. The 2010s will become the 1930s.

Why would this scenario breed a “Greater” Depression?

1. Debt. Our personal and government debts are manageable, even helpful, as long as economic growth continues to outpace spending and interest payments. But the day our nation’s productivity goes negative, watch as debt defaults and hyperinflation come to define American life.

2. Terrorism. Due to the proliferation of weapons of mass destruction, it is likely that a world in economic depression will yield even more terrorist activity. A weakened U.S.military (due to spending cuts and currency inflation) will not have the resources necessary to meet rising threats (and many politicians will not have the will to use what military we do have.) The economic decline after 9/11/01 will pale in comparison to the decline the world would experience with terrorist strikes and wars under these conditions.

3. Socialism.  The “New Deal” of the 1930s is catching up with the present generation, and government handouts to seniors and the poor will require even more tax increases on productive citizens. At the same time, the government will be compelled (out of “compassion,” no doubt) to take over the health insurance industry, and possibly begin nationalizing other industries as well (energy, for example). With one major political party already openly promoting socialism, and nearly half of Americans on board with the concept, the financial disaster-in-waiting is not far off. And once that hits, you can bank on one thing: the “answer” they’ll offer will be even more of the same.

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The good news is that the Greater Depression is avoidable. If we let the market run our economy, instead of our government, we have a chance. If we focus on economic growth rather than entitlement expansion, we have a chance. If we open up new markets with free trade, rather than punishing importers to “protect jobs”, we have a chance. If new technologies flourish and new wealth is created, we have a chance. If we allow people to face up to their own responsibilities, rather than bailing them out at the first sign of trouble, we have a chance.

If we remain true to the principles that made America great...

Note: The statistics referred to in this post are referenced from Poverty & Wealth by Ronald Nash.