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Steve Lunetta: Depression revisited

Right About Now

Posted: January 4, 2009 4:45 p.m.
Updated: January 5, 2009 4:30 a.m.

In 1933, my grandparents were living in Sioux City, Iowa. The Depression that had started with the stock market crash in 1929 deepened in the intervening years, and made it impossible for Russ and Thelma to stay in the corn belt.

Like many, they felt their chances for a better life were much greater if they moved to the Golden State, where jobs were plentiful, the climate was pleasant and a person could start afresh.

So Grandma and Grandpa joined the great migration across the country in their Model A, sleeping on blankets laid on the ground beside the car at night, sharing with their fellow travelers and helping others who had need.

They made it to Los Angeles, where Russ was able to find work as a Lipton Tea salesman. They were fortunate. However, many others were not as lucky.

The Depression dragged on another 10 years until 1943. Massive war spending helped end this difficult period in our history.

President Franklin Delano Roosevelt is widely credited with bringing the Depression to an end. However, the actual truth is probably less flattering to FDR than many realize.

In "The Forgotten Man: A New History of the Great Depression," author Amy Shlaes points out that numerous economic errors made by FDR's administration actually prolonged the Depression.

Policies that encouraged strong unions and higher wages that ignored actual productivity helped drain capital into labor expenses and hindered businesses from growing and expanding.

Further, Cole and Ohanian wrote in a 2004 paper that the Depression may have ended in 1936 were it not for policies that encouraged "cartelization" of industries and increased the power of labor.

To FDR, excess competition was responsible for creating downward pressure on prices and wages. Cartels would stabilize prices by reducing competition and keeping things stable.

Does this sound familiar? Isn't this the exact same policy that we are pursuing today by supporting bailouts and nationalizing industries?

The logical endpoint of this activity is "big government, socialism, and higher taxes at the expense of individual liberty and freedoms," says Solomon Yue, a member of the Republican National Committee.

In 1929, Republican President Herbert Hoover began frantic federal spending. This was amplified and organized in 1933 under FDR's New Deal program, a set of spending programs designed to combat the Depression through massive public works projects, welfare, and labor union support (among others).

Ironically, the worst industrial economic collapse occurred in 1937, eight years after the beginning of the Depression and the massive infusions of government spending into the economy.

Once again, does this sound familiar? Congress is currently infusing billions into selected portions of the economy in a frenetic effort to stop the inevitable.

It took eight years in 1937 - how long will it take now? Even the auto companies themselves say the loans and grants are only a short-term fix.

They will be in the same position a few months down the road. Only now, the taxpayer will have lost billions with nothing to show for it.

In 1932, Hoover increased the top income tax rate from 25 percent to 63 percent. The result was an abysmal contraction of venture capital into areas that may have created new jobs and stimulated the economy. The rich were viewed as "evil" and easy targets for politicians seeking to appease an upset electorate.

Fast forward to 2009. Barack Obama says the rich must pay their "fair share" and will radically increase taxes on those making more than $250,000 per year.

"Stick it to the rich" is a typical naïve Democratic mantra that has struck a chord with voters in the last election. Never mind that it is merely a replay of the same failed policy from the Hoover/Roosevelt era.

For all of its hype, The New Deal was actually a frenetic series of spending initiatives that confused and intimidated business. With so many uncertainties, many managers were paralyzed in the decision-making process for fear of what the government might do next. Net investment was negative through much of the 1930s.

What happened with the $700 billion banking bailout? Most financial organizations sat on it. They were afraid to do anything, and the credit markets are nearly as bad now as they were before the bailout.
Tried to get a car loan lately? Yep, you won't see a dime of it since institutions still aren't loaning money.

Once again, history repeats itself.

So what is the answer? One possibility is that historians should be included in the economic decision-making that is happening now. A historian may be able to shed light on our current dilemma by pointing to the failed policies of the past.

Another possibility is that we need to return to the fiscal conservatism of Ronald Reagan and remember that the "government that governs best is the government that governs least."

All I know is that I don't have a Model A, just a green Honda. And there isn't a golden state to flee to. Maybe Idaho?

Steve Lunetta is a Santa Clarita resident. His column reflects his own views and not necessarily those of The Signal. "Right About Now" runs Mondays in The Signal.


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