10.27.08 5:56 AM ET
Two Men Blind to History
We keep being told we’ve learned the lessons of the Great Depression. Have we? McCain and Obama haven’t. On the navigational course we’re offered through the series of perfect storms heading our way, the choice we have is between John McHoover and Herbert Obama.
“While the public monuments of the New Deal are splendid, what made America great, as Hoover recognized, has always been the risk takers”
John McHoover needs to ask why America was the slowest industrialized country to come out of the depression last time. Only in one year before 1940 did unemployment dip below 8 million. National output was cut by more than a half. With similar suicidal rectitude, each European country tried to balance its budget, but Europeans were quicker to adopt the Keynesian solution of financing a deficit when men and machines lie idle. Socialist Sweden, where one in three had been out of work in 1932-3, was back to full employment by 1939. Thanks to massive public investment (in the autobahn, industry—and guns), Germany’s unemployment rate was by 1938 down to 2.1%, Britain’s to 9.3% while America’s soared to 19% in the wake of yet another attempt at budget balancing by FDR in 1936.
By 1938, national incomes in Germany and Britain had exceeded those of 1929. It took until 1941 for that to happen in America when FDR finally went along with the massive deficit financing required to win the war.
Herbert Hoover’s concern to balance the budget led him to call for tax increases when the country was on its knees in 1932.
Herbert Obama does the same. He promises wide-ranging tax increases in a menacing recession, tax increases that will penalize enterprise.
His “tax cuts” are not like President John Kennedy’s, whose tax cut (the largest in US history) did not exclude the middle and upper brackets, “who can thereby be encouraged to undertake additional efforts and...invest more capital." Obama’s “cuts” are more of a welfare program, transferring money from a minority of tax payers to millions of non taxpayers. Millions of small businesses will face increases in marginal rates.
When you put it all together it is quite a deterrent to risk-taking—individuals who pass a threshold of $164,500 of taxable income will pay more tax; McCain’s top rate is 35%, Obama’s is 41%, plus a 5% increase in capital gains tax that might be fuelling some of the stock market panic, and a big increase in payroll tax on incomes above $250,000. Not the way to get people back to work.
The populist rhetoric about fairness is an echo of the silver-tongued Kingfish Huey Long who scared FDR with his slogan, “Every man a king, but no man wears a crown.” Long started a “Share Our Wealth” movement (where have I heard that before?) promising every American family an upper-middle-class fortune without having to work for it, supposedly to be paid for by taking away every last earned cent over a million a year.
Out of fidelity to the special interests in the unions, Herbert Obama also flirts with protectionism. One of the numerous causes of the Great Depression was the Smoot-Hawley Tariff of 1930 that Hoover signed with a gold pen despite the entreaties of a thousand economists that it would lower world trade and invite retaliation. It did.
Obama is not a budget balancer. His program for rebuilding America’s infrastructure is promising. FDR’s Interior Secretary Harold Ickes feared that a quick program of public works invited waste, inefficiency and corruption, but John Maynard Keynes insisted that FDR should weigh the risks of less speed against those of more haste: “He must get across the crevasses before it is dark.” We must surely do the same.
But inspiration aside, FDR cannot be the model. He rejected the advice not just of that clever Brit, John Maynard Keynes the economist, whom he distrusted, but also the advice of the chairman of the Federal Reserve, the peppery Utah banker, Marriner Eccles, who’d seen first-hand what Hoover’s budget balancing had done. FDR went ahead with disastrous tax increases in 1936-7 and so prolonged the depression with a stock market crash and ten million out of work.
If America was to revive, it had to reawaken the “animal spirits” of businessmen, in Keynes’ phrase. Solely increasing the money supply was no use; it was “like trying to get fat by buying a bigger belt.” But throughout the thirties FDR demonized the business community as they stupidly demonized him, and America came out the loser. David Kennedy, a leading historian of the Great Depression, is right: “It wasn’t so much the regulations that the New Deal imposed that intimidated businessmen in the thirties, it was the fear of what new and unknown provocations Roosevelt might unleash.”
Obama demonizes the business community, too, lumping in the bandits of Wall Street with the manufacturers and innovators who dare to earn more $250,000. (Actually, anyone who dares to cross the threshold of $164,500 will pay more in taxes). In this he is closer to FDR than Hoover. But while the public monuments of the New Deal are splendid, what made America great, as Hoover recognized, has always been the risk takers—the Wright Brothers, Philo T. Farnsworth, Thomas Watson, Jr., Malcolm McLean, Herbert Boyer and Robert Swanson, Raymond Damadian, Edwin Land and, in our time, Fred Smith and Steve Jobs.
Obama has a fine team of advisers, but if they’re telling him truths about the history of the Great Depression, he’s listening with one ear.