Tag Archives: Depression

KRUGMAN CALLS FOR REPEAT OF THE SMOOT-HAWLEY ACT, THE LAW GENERALLY REGARDED AS THE CAUSE OF THE GREAT DEPRESSION

Paul Krugman has sunk to the level of complete idiocy with this latest recommendation. All through most of the 1920’s a debate was raging in Congress over the passage of a bill to put large tariffs in place, most notably on imported steel. The argument pro was to protect American industry by making imported products non-competitive. The argument con was that other nations would respond with similar tariffs on American goods and trade would cease. The law was passed, other nations retaliated by raising their tariffs on American goods, exports collapsed, the stock market crashed, the Roaring Twenties ceased, the Great Depression began.

Edited from a Wall Street publication:

So after President Herbert Hoover took office in March 1929, Congress immediately set to work on a new tariff regime. This is an important point, because you have to picture that this legislation was winding its way through committee long before eventual passage in June 1930. It is a fair statement to say that the prospects for Smoot-Hawley had something to do with the October 1929 market crash itself.

On Monday, October 28, the New York Times ran a front-page story on possible passage of Smoot-Hawley, the next day, on Tuesday the 29th, the day of the Crash, other national papers had picked up on the issue.

Now Krugman wants to do the same thing again. Of course it is not the steel industry this time. Steel was a major import in 1930, now it’s goods from China. It is forgivable for the man in the street to think this is a good idea. We’re all a bit miffed that everything seems to come from China and the world of economics is not broadly understood.

What would China do? What would American industry do? What would other nations do? We have spoken previously of the economic tenet called Rational Expectations. All players act, I should say react, in their own best interest. One rational expectation would be for China to cease funding our debt. This could cause a 200 to 300 percent increase in the currently very low rate of interest we are paying on our skyrocketing national debt.

Another expectation is China would raise its prices to recoup the tariff. U.S. manufacturers cannot produce goods as cheaply as the Chinese. If they could, they would be doing it already. The cost of everything we get from China would increase, and likely by more than the rate of the tariff itself. When Smoot-Hawley was enacted, even nations not directly affected perceived an opportunity and instituted high tariffs as well.

Einstein is usually the one credited with defining an idiot as someone who repeats the same mistake while expecting a different result. Krugman is an ideologue posing as an economist. Yes, I know he was awarded the Nobel Prize in economics. That only serves to confirm my opinion of him.

ROOSEVELT REDUX

ROOSEVELT

OBAMA

Franklin Delano Roosevelt (FDR) is to liberals what Ronald Reagan is to conservatives, a hero for their cause. Roosevelt was more destructive in his own time than Obama has been in his… thus far. Roosevelt responded to the recession he inherited with a combination of massive spending on new government programs and sweeping controls over private industry, (sound familiar?). His thinking was, government spending would get people back to work, and controls over private industry would end deflation. Rules and regulations over private industry were put in place designed, incredibly, to increase the prices of goods. The President and his advisors saw deflation as one of the causes of continuing recession, not as a result.

The Works Progress Administration (WPA) and the Civilian Conservation Corps (CCC) were formed. The WPA was created to carry out infrastructure projects (sound familiar?) and the CCC to provide government jobs for young men by performing work of a conservation nature on government owned land. The WPA and CCC were the prime elements of FDR’s stimulus program.

The Reconstruction Finance Corporation (RFC) was a government sponsored organization (GSO) structured somewhat like Fannie Mae and Freddie Mac. The RFC was expanded by Roosevelt and served as the money conduit for bailing out failing banks. It was funded with over 5 billion dollars in taxpayer money, equivalent to 84 billion today after adjusting for inflation. According to Wikipedia, “The RFC was bogged down in bureaucracy and failed to disperse much of its funds. It failed to reverse the growth of mass unemployment.” (sound familiar?)

A Farm Board was created for the control of production and prices of crops and livestock. Crop farmers were required by the board to let land lie fallow and paid by the government for crops they were ordered not to produce. Six million young pigs were ordered to be slaughtered at government expense as a measure to reduce the supply and increase the price of bacon and pork. (Instead of pigs, Obama chose used cars).

Roosevelt’s first legislative victory was passage of the National Industrial Recovery Act administered by the National Recovery Administration (NRA). This law gave Washington vast new powers of control over private enterprise, even to the establishment of maximum and minimum wages and prices for various industries. It was the most contentious of all the programs in Roosevelt’s “New Deal”. Had it not been for the economic crisis then at hand such sweeping legislation could never have been enacted. (sound familiar?).

It turned out to be a step too far. As a strategy to end the controversy surrounding the NRA, Roosevelt chose to make an example of a Kosher chicken processing firm in Brooklyn, NY by arresting the proprietors who were found guilty of violating the new law and put in jail. The strategy backfired when the proprietors, known as the Schechter brothers, fought back. The issue went to the Supreme Court. The Court decided the National Industrial Recovery Act was unconstitutional. The decision was unanimous. Roosevelt had no choice but to dismantle the NRA.

Today’s closest equivalency to FDR’s NRA is the system of czars, purse strings and intimidation currently being employed to control private industry. The fractured nature of this approach makes it more difficult to defeat. These methods also create greater uncertainty for the business community than when there is a clear cut law around which to plan, even though the law may be an unfavorable one.

FDR was first elected in 1932. Eight years later, as Roosevelt’s second term in office was coming to an end, the unemployment rate stood at 14.6%. Henry Morgenthau, Jr., FDR’s Secretary of the Treasury from 1934-1945, admitted to himself as he wrote in his personal diary that their stimulus spending programs had failed.

“We have tried spending money. We are spending more money than we have ever spent before and it does not work…  We have never made good on our promises. . . . I say after eight years of this administration we have just as much unemployment as when we started . . . . And an enormous debt to boot!”

Then came the day reputed to live on in infamy, the day the Japanese attacked Pearl Harbor, December 7th 1941. Tanks and planes, guns and ships started rolling off assembly lines running 24 hours a day. Rosie was busy riveting away. Government debt soared but no one cared. The cause was shared by all. The American worker went back to work. FDR, already the only President to win a third term, went on to win a fourth.

Obama is treading the same path taken by FDR, with steps that prolonged a recession and gave us a depression. But take heart dear friends, we survived the Civil War, Woodrow Wilson, Franklin Roosevelt and World War II. We will survive Barack Obama as well.

Bob B

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