Monday, October 06, 2008

A relative forwarded me an email supposedly from Bill Cosby which contained, among other things, an appeal for a radical protectionist program. The following was my response:

Sigh. Good thing he isn't an actual politician. 100% import tariffs. Just what we need on the cusp of a new great depression - our very own Smoot-Hawley Tariff - on steroids!

People claim that Hoover got us into the Depression by lax government oversight - 'laissez-faire'. This is a myth - a lie invented by FDR partisans & promulgated through partisan historical wallpapering. Herbert Hoover was a technocrat and a 'corporatist' - someone who believed in a co-operative alliance between government and big business. In Italy, corporatists were called fascists. In the US, we called them 'progressives'. Hoover worsened the banking crisis in 1930 by letting Congress pass the Smoot-Hawley Tariff, which was a punitive slate of heavy taxes on tariffs. The Republican Party up through the middle of the last century was a protectionist party, and high tariffs was party orthodoxy. It was also the very worst thing they could have done in the midst of an economic depression. It helped turn a sharp, deep economic downturn into a total catastrophe.

The other big things that Hoover did, which were totally his fault, was the institution of a series of aggressive, over-the-top public works programs designed to soak up unemployed workers, and to stimulate the economy. Hoover Dam was the biggest fruit of this ill-considered exercise in unifying government excess, but there was a lot of other stuff, most of it a lot more make-work than hydroelectric dams. The real problem here was that these public work programs were *expensive*, and Hoover pushed a serious income-tax increase to balance the budget. Income taxes were mostly on the rich and wealthy in those days, and the sad fact is that those with a lot of income and a lot of capital are *most* sensitive to signals from the the taxing authority - by which I mean to say, if Johnny Rich-bags has enough to keep his mansions in maintenance and his family in food, he doesn't have a burning need to make *more* money, if the marginal cost of the tax burden has increased such that for every new dollar he makes, X additional percentage is taken in taxes. The poor and middle-class have less margin above the necessities, so they tend to be less responsive to this sort of tax "signals". When the wealthy get over-taxed, they shut down & shift their capital or time into activities which are less likely to result in wasted effort for not enough gain - US treasury bonds for the capital, and off playing golf or tennis for their time.

So, Hoover provided the massive tax increase, Congress provided the idiotic protectionist tariffs, and the Federal Reserve provided the completely mis-managed financial crisis. Voila! Hoover-era Depression.

But it wasn't a "Great" Depression until FDR got his hands on the situation. He campaigned on a tax-cut - sound familiar? FDR promised to shrink the organs of government, which had greatly bloated over the two previous presidential terms - Hoover had been Coolidge's Secretary of Commerce, and had spent a lot of his time as Secretary building an enormous office complex for the Department of Commerce, and filling it with officious busy-bodies.

FDR *did* get the Smoot-Hawley Tariff replaced, which fixed *that* particular horror, but he made up for that by fiddling disastrously with the price of gold, and wasting three more years before getting us off the gold standard which was *generating* the financial crisis underpinning the world-wide Depression. Bernanke himself wrote a book endorsing the orthodox view that the world-wide depression was generated by the gold-standard financial crisis, btw, and did a lot with regression analysis showing that the sooner a country got itself off the standard, the faster the depression ended in that country.

Anyways, FDR looked at all the money-wasting that Hoover had done in public-works, and asked if this amp went to 11. Made Hoover look like a piker, and introduced the well-known galaxy of three-letter acronyms to seize control of the economy from the rich so-and-sos and put it in the hands of their well-educated college-professor neighbors and children and well-connected competitors. *That* went well. They managed to pour enough fiat money into the economy in 1936 to cause the economy to kick like a dead frog with an electrode stuck into its ganglia, and the unemployment rate dropped down to a balmy 13%-14%, just long enough to get the Democrats re-elected. Then the juice stopped flowing, the dead frog stopped kicking, and we were back in the 20% unemployment range again. Only the destruction by fire of the rest of the world's industrialized economies and the direct stimulation of a war command economy really ended the Great Depression in the United States.

Really, let's not do that one again. It couldn't have been fun the first time around, although I'm sure the NRA 'blue eagle' rallies must have been stirring.

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