5 Economics Lessons Obama didn’t Learn from the Great Depression

lessons on obamaOne of the more cliché statements one hears in politics is those who forget the past are doomed to repeat it,❠stated by George Santayana.

Unfortunately, this statement is very true. And nowhere else is it more noticeable than how the federal government, and in particular President Obama, has attempted to handle the Great Recession.

It is easy to try to justify the president’s decisions by discussing the enormous responsibilities he has on his shoulders and the incredible duties he has to attend to every day.

The problem I have with this argument is that not only are many of those duties and responsibilities voluntarily placed on his own shoulders, since he has taken it upon himself to solve these problems, but if he simply left many of these issues alone he would find greater success in reviving the economy.

The Great Depression, for all of its suffering and hardship, provides us with numerous examples of what works and what doesn’t work when attempting to lift a country out of an economic downturn.

Sadly, an Orwellian mythos has been created for this time period, in which the federal government’s intervention guided❠the nation through the 1930’s rather than stifled it.

The facts speak for themselves. For all the New Deal programs (most of them started under Hoover, contrary to popular belief) and massive government spending, the average unemployment remained at 18 percent throughout the 1930’s, and the economy did not truly recover until after World War II.

Had Obama studied the Great Depression more carefully, and without viewing events through a blatantly ideological lens, the economy might have already recovered within the first year he took office, and his reelection would have been guaranteed.

But the race is now tight and highly contested because he failed to recognize five important economic lessons from the Great Depression. Considering his background, which does not contain a single significant private sector employment whatsoever, it is easy to see how someone who has had such little involvement in actual affairs should be so ignorant about them.

In this way, history has repeated itself.

1. Government (deficit) spending does not boost or stimulate an economy

During his first month in office, Obama signed the American Recovery and Reinvestment Act of 2009, commonly known as the stimulus package. The package cost is estimated to be $831 billion between 2009 and 2019, which Obama, as well as many other politicians argued, was essential for the economy to recover.

Currently, the national debt is $16 trillion. And while the unemployment rate is still high (the exact numbers depend on how you view the statistics) Obama still believes further government spending is needed.

At the heart of this thought is an economic belief known as Keynesianism. Created by British economist John Maynard Keynes, it is based on the idea that governments could spend their way out of recessions or depressions, even if this means running up a deficit and accumulating debt. The idea is for the government to make up for the decrease in private sector spending by increasing its own spending.

This tactic was tried repeatedly, first by Hoover. According to historian and economist Thomas Woods, Jr. in his book the Politically Incorrect Guide to American History, Hoover spent more money on public-works projects in four years than had been spent in the previous thirty years. Although he is portrayed today as a do-nothing president, this image only works if compared to the economic intervention of future presidents.

The idea of government spending would continue into the FDR administration, all to no effect. Gross Domestic Product did not return to the 1929 level until 1940.

Inasmuch as Keynesianism is the bread and butter for many modern economists, most notoriously New York Times columnist Paul Krugmen, it ignores the most basic principle of economics by advocating higher spending than revenue.

It also begs the question: If a private company, which makes up the private sector and economy, can’t spend its way into prosperity, in what way can the government spend its way into prosperity?

Rather than state my own opinion, this is the viewpoint of FDR’s Secretary of the Treasury, Henry Morgebnthau, Jr., also known as the Architect of the New Deal, a viewpoint Obama should have taken heed to:

We have tried spending money. We are spending more than we have ever spent before and it does not work.â

2. Government cannot create wealth

The function of government is to protect and defend the rights and freedoms of its citizens. It is not an institution designed to create wealth, nor can it. Government is not self-sufficient. It relies on a compulsory system of monetary confiscation via taxes to support itself.

This is critical to understanding government. Any money it spends has to come from somewhere else. It does not produce anything. Everything it has was originally taken from the private sector, which is where wealth is created.

The concept of government creating wealth is what leads to ideas such as a high minimum wage, which actually encourages higher unemployment since hiring a worker costs an employer more for performing the same job.

Both Hoover and FDR made this mistake during the Great Depression through the notion of central planning. The National Industrial Recovery Act, through the National Recovery Administration ( the other NRA) created industry cartels that were allowed to institute minimum wages and minimum prices at the same time. Naturally, rather than create jobs, it led to further unemployment because employers couldn’t afford to hire as many employees and had no control over the cost of the product they sold. In such an environment it was impossible to make profit, which is the heart of all private sector growth.

Tied to the notion of spending into prosperity, this also leads to ideas that the government can assist private companies via funding, which always leads to disaster.

One example of this is in the push for green energy❠initiatives which are both impractical and not efficient enough to be cost-productive. Most notably was Solyndra, a solar cell company which received billions either in financial assistance or loans from the government. Another clean energy company, Konarka Technologies, Inc., which went bankrupt in May of this year. Under the Obama administration, Konarka was one of 183 companies to receive $2.3 billion in tax credits as part of the stimulus package.

After Solyndra declared bankruptcy in Sept. 2011, President Obama’s chief strategist, David Axelrod, said “It’s good for the planet, it’s good for the economy, it’ll create great jobsâ¦high end manufacturing jobs.â

Such statements also lead people to confuse job creation with wealth creation. The federal government could hire every single unemployed person in this country, which would lower the unemployment rate to nearly zero. But where does the money come from to pay their wages? Either the government has to incur further debt or take the money from the private sector. And no doubt the private sector would be vastly impacted by the higher tax rate needed to pay for a massive increase in federal workers.

As Woods points out, such jobs are funded by taking money from some people (taxpayers) and giving it to others, so there is no net stimulus. In fact, such programs are positively bad in that they divert capital from the private sector and inhibit healthy job creation.â

In other words, creating jobs in order to create wealth doesn’t make sense. You create jobs when there’s wealth. And the private sector creates the wealth, and the jobs they create as a result are more productive than government jobs because they exist to produce rather than merely provide for the worker.

Just last year, the White House pushed to extend unemployment benefits, claiming it would create❠one million jobs.

When pressed by a Wall Street Journal reporter as to how this would create❠jobs, Press Secretary Jay Carney replied “Oh, uh, it is by, uh, I would expect a reporter from the Wall Street Journal would know this as part of the entrance exam.”

There’s a reason why he deflected the question. It doesn’t create jobs; it merely allows people to collect financial assistance without having to work. Which also violates another basic economic principle.

3. People don’t work when you take away any incentive to be productive

The Bible says He who does not work shall not eat.❠But with Obama it’s he who does not work shall eat with food paid for by those who do work.â

This summer, Obama waived Section 407 of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, which requires work as a condition to collect welfare checks. While his Administration has denied this, one would be hard pressed to explain what else could is waved instead.

Additionally, food stamp recipients have skyrocketed. Out of a population of roughly 300 million, 47 million collect food stamps. In June of this year alone, 173,600 people were added, which was three times greater than Americans who found jobs, most of which part-time, according to the Bureau of Labor Statistics.

The Obama administration has even partnered with the Mexican government through the
United States Department of Agriculture to increase participation in the food stamp program for immigrants.

If Obama’s wondering why the unemployment has remained high, this may be an idea to consider: why should someone go through all the trouble to apply for a job and have to work when they can get what they need from the government?

This was a factor that prolonged the Great Depression. The Works Progress Administration (WPA) was designed to put Americans back to work. Instead, the guaranteed❠jobs meant workers had little or no incentive to actually work, since the purpose of the jobs wasn’t to create or produce, but to provide employment.

The work they performed was also either unproductive or counterproductive. A common occurrence was for one group of WPA workers to dig a hole during their shift, only to have the next shift of workers fill it back in.

4. Government intervention hinders, not benefits economy

Another big myth of the Great Depression is that Black Tuesday in October 1929 started it. While there massive loss of stock value certainly paved the road for future economic downturn, there had been other similar instances before. Yet the Great Depression was the first time that the government took it upon itself to assume control of the economy, which is somewhat like a toddler attempting to land a space module on the Moon.

Rather than help the economy recover, government efforts did the opposite and actually were the chief causes of the Great Depression.

For example, Congress passed the 1930 Smoot-Hawley Tariff, which was intended to protect American businesses by making it more difficult for foreign companies to compete. Rather than stimulate growth, however, it cause havoc within American export industries, and foreign governments retaliated by raising tariffs on American companies or shutting them out altogether.

The myth of government intervention dies hard. Myths have already been created about the Great Recession, one of which is that the repeal of Glass-Steagall allowed the crisis to happen.

But the fact is the law was never repealed. Only the provision prohibiting a commercial bank and an investment bank from being controlled by the same holding company was repealed. This, incidentally, had nothing to do with the financial collapse in 2009.

As Robert Wenzel wrote in an article for the Washington Post, “Bear Stearns, Lehman Brothers and Merrill Lynch â” three institutions at the heart of the crisis â” were pure investment banks that had never crossed the old line into commercial banking. The same goes for Goldman Sachs..The infamous AIG? An insurance firm. New Century Financial? A real estate investment trust. No Glass-Steagall there.”

But none of this prevented Obama from signing the Doddâ“Frank Wall Street Reform and Consumer Protection Act in 2010. Among other things, it established another federal bureaucracy designed to “prevent” another similar incident.

Rather than keeping federal government out of such financial institutions entirely, thereby forcing them to rise or fall on their own merits, such legislation creates innumerable provisions that necessitate entire departments in order to comply with all federal laws and regulations.

5. Uncertainty prevents business investment

In the business world, the worst state to be in is uncertainty. Even if the situation known is bad, at the very least the risks can be measured when making financial decisions. But when there is no certainty at all, and possible legislation by Congress could dramatically change everything or affect their investments, a business or investor will be very unlikely to risk losing their wealth.

This was another huge factor to the sense of uncertainty during the 1930’s. With a new law or proposed law coming out of Washington D.C.

In his self-explanatory-titled article for the Independent Review, Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War❠economist Robert Higgs argued that long term investments, such as in the bond market, were significantly affected by what came out of the White House.

Had FDR simply sat back and said nothing at all, and allowed some certainty into the economy, businesses would have been more inclined to invest and growth might have occurred rather than stagnant for a decade.

So every time Obama discusses how the wealthy or rich need to pay their fair share,❠or proposes some new idiosyncratic legislation such as the Buffet Rule, he is inadvertently (or deliberately) scaring potential investors away from putting their wealth into a business or venture. It may be political rhetoric merely designed to get Obama votes or help shore up his base supporters, but businesses, who have millions and billions of dollar at stake, take such talk seriously.

photo by osipovva