The 1930s and the 2000s: Government Barriers to Growth

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This speech was presented at the Jonathan Club in Los Angeles in December of last year. 

As all of you know, the title of my speech is "Government Barriers to Economic Growth." Importantly, it's government barriers that keep the U.S. and global economy from growing right now, and if there's one thing I hope you'll take from my speech, it's this: never in the history of man has the profit motive, or capitalism caused a lengthy downturn or "recession" the likes of which we experienced in the 1930s, or the one since 2008.

What economists call "economic recessions" is in the above sense a certain misnomer. Capitalism can't cause recessions because at its core, capitalism is the happy process whereby the individuals who serve their customers and clients well receive capital necessary to grow in abundance, and those who are failing their customers and clients are properly starved of it.

In short, capitalism in equal parts describes success, and very importantly failure, and if left alone, failed ideas die a quick death so that profitable concepts can grow on the way to removing unease from our lives.

For background on this, I'll quote a March of 2000 Wall Street Journal op-ed by the great economist Charles Kadlec. In it, Kadlec made the essential point that underlies what I'm about to talk about, that "Booms and bull markets never die of old age. They always succumb to policy failure" instead. Our economy today doesn't suffer a lack of ideas or a lack of desire, rather it suffers policy failure that is making it difficult for the producers, or the vital few in our economy, to be productive.

History shows Kadlec's words to be very true.

To see why, let's look at the two major stock-market crashes of the 20th century. To this day, history books suggest that the 12.5% stock-market correction in 1929 was solely a function of stock market having gotten ahead of itself.

More realistically, markets never price in the present, rather they price in the future economic outlook, and on that day news accounts revealed that President Hoover would sign the Smoot-Hawley tariff in 1930. Investors properly understood that a legislative error in the U.S. that would restrict the ability of individuals to trade freely on a global basis would essentially put a tax on work, and worse, it would foster inefficiency globally given the barriers to economic specialization that tariffs on trade always engender.

In short, the stock-market crash of 1929 was then, and is now, easy to understand. Rather than a continuation of open global markets on the way to individuals seeking their own comparative advantage, Smoot-Hawley would put up barriers to the global harmony that free trade invariably brings, and worse, as U.S. statesman Cordell Hull once observed, when goods can't cross borders freely, armies inevitably do. Basically Smoot-Hawley foretold the death and destruction of World War II; war always an economy killer despite the views of some modern economists that wars help economies to expand. More on that horrifying lie later on.

Moving to 1987, stocks didn't correct 22.5% because their prices had risen too much; rather some very negative economic signals emanating from Washington in the week leading to the crash made it inevitable.

For one, Rep. Richard Gephardt was pushing through Congress a tariff bill on Japanese goods. Tariffs always scare investors because they ensure economic inefficiency through the subsidization of the weak at the expense of the strong. Secondly, the Senate Finance Committee was considering a bill meant to heavily tax the very leveraged buyouts that had made businesses around the U.S. far more lean and efficient.

Most problematic of all, U.S. Treasury secretary James Baker went on the Sunday talk shows the day before the crash and quite explicitly talked down the dollar. Contrary to modern opinion, the Treasury is the dollar's mouthpiece as opposed to the Federal Reserve, and for the head of Treasury to talk down the dollar is for that same person to talk down the very savings and investment that drive all economic activity.

To put it very simply, markets are the great voting booth through which investors cast ballots on the economy's future. To grow, economies - which once again are nothing but a collection of individuals - need but four things from the government: light taxation, little to no regulation, the ability to trade freely without regard to country borders, and a stable unit of account; in our case a dollar that is stable in value.

Anytime governments move away from these four basics, economies suffer, and markets must price in these negative inputs.

At present, economists, and most notably economist Paul Krugman, are arguing that there's not enough demand in the economy, and as such Washington must spend dollars taken from the private sector in order to get the economy moving again. The thinking here is false on its face.

Indeed, governments have no resources, so for them to spend is for them to tax or borrow funds from the private sector which, if left there, would more readily reach enterprising individuals eager to produce. As economist Joseph Schumpeter long ago noted, entrepreneurs can't be entrepreneurs without capital, so when governments vacuum up limited capital, the productive, job-creating private sector suffers.

Second about demand, it is our nature to always demand things. As such governments should never concern themselves with a lack of it. As humans our wants are unlimited, but as we all know in this room as individuals, we can only demand something insofar as we supply something first.

In the real economy, we trade products for products, so if demand is what the government seeks to stimulate, it must by definition to remove barriers to production which are once again taxes, trade barriers, regulations and unstable money values.

In my speech today, I'm going to talk about three things: first I'll cover the Great Depression, and how government intervention turned what should have been a minor downturn into a decade of economic hardship. Second, I'll somewhat briefly go over what I think caused the financial crisis given my very contrarian views on its causes. And three, I'll talk about the economy at present, and how intervention by Washington is yet again turning a recession that should have been brief and shallow into something much worse.

The Great Depression

First off, to have a reasonable understanding of the Great Depression, it's essential for you to know what happened in the early ‘20s, when the U.S. economy contracted in a far more severe way than it did beginning in 1930.

Importantly, and essentially as it goes to understanding what happened in the 1930s, the government response in the early ‘20s was the mirror opposite of what occurred in the 1930s. Essentially, Washington did nothing when the economy collapsed in 1920-21. That Washington pretty much let an economy of individuals fix itself explains very elegantly why most have never heard of the early ‘20s recession.

Indeed, as economist Benjamin Anderson pointed out in his classic book Economics and the Public Welfare, the federal government actually reduced spending from $6.4 billion in fiscal year 1920 to roughly $3.3 billion in 1923.  "Austerity" of the spending cut variety has a bad name today, and very few economists would have the courage to call for massive reductions in the burden of government amid a recession, but less hamstrung by fallacy nearly 100 years ago, the size of government was slashed.  According to classical economic theory, the government's non-intervention was the proper response. Government spending is a tax, and the pullback by the federal government left more capital in the private sector to fund real economic growth over government consumption.

And then with the dollar, contrary to the horrifyingly dim "truth" today that monetary authorities must devalue in the face of economic decline, authorities back in the early 1920s made sure to protect the dollar. As Anderson noted, the "gold standard was unshaken" despite the economic crisis.  The savers and investors whose thrift authors our economic advancement were not told - as they have been under Bush and Obama - that their parsimony would be eviscerated by monetary mismanagement.   

So while the 1921 downturn was surely severe, Anderson recounted that by 1923 we had a labor shortage. In the early ‘20s, barriers to production were removed, and the Roaring ‘20s that we all know about soon followed. Basically government spending fell, taxes declined to a 20th century low of 25% on top earners, regulation was light, and the dollar's integrity was largely maintained. The political class followed closely the four basics of economic growth, and in practicing textbook Classical economics, the economy soared.

The early 1920s economic decline shows that economies can naturally heal after a recession. Importantly, and this is another thing that I hope stays with you after my talk, and that's that recessions of the market variety are actually a healthy occurrence.

Indeed, recessions though painful for rising unemployment and business failure, are in fact a sign of an economy on the mend as bad ideas and improper employment are cleansed from the commercial sector so that limited capital can reach better, more productive uses. That's why recessions are usually short.

During recessions bad ideas are starved of capital, and good ones once again receive it abundance. In that sense, it's no surprise that the Great Depression that I'm about to cover lasted so long. Unlike previous downturns that reoriented capital to productive uses, during the Great Depression Washington sought to soften the pain, but in doing so it turned what should have been a short downturn into something very lengthy.

First up is government spending. Much as taxes rob us of the fruits of our labor, so does government spending once again turn the savings so essential for economic growth into cconsumed funds meant to support government waste. President Hoover doubled government spending on the assumption that demand from Washington would enhance the economy.

Hoover's rush to Keynesianism failed miserably on the way to him losing his 1932 re-election bid, and then in early January of 1934 President Franklin Roosevelt announced that to get the economy moving, the 1934 federal deficit would be increased to $7 billion. Having chosen to ignore the mistakes of his predecessor, FDR doubled down on Keynesianism. Not surprisingly, his contradictory "cure" made things worse.

The failure of 1930s Keynesian spending should in no way surprise us. To presume that productivity would multiply thanks to government largess is the equivalent of assuming that a thief could aid a convenience store by first stealing $20 from it, then returning later in the day to spend it. Logic tells us that no stimulation results from money simply changing hands.

Considering taxes, Hoover raised the top tax rate from 25 to 62 percent, and then FDR eventually one-upped him by raising the top tax rate to 79 percent in concert with a reduction in rate thresholds so that more Americans could be ensnared by higher tax rates. This is important because in any economy we're ultimately reliant on what economist Reuven Brenner terms the "vital few"; the creative and ambitious individuals who start new businesses based on innovative ideas that will make economies more efficient, and create jobs in the process.

Essentially the vital few were told that if they acted in productive ways in the ‘30s, the fruits of their efforts would be taken from them. Taxes are nothing more than a price, and if the price of productive work effort is a high, those who would necessarily be most productive sidelined themselves.

Looking at trade, J.P. Morgan head Thomas Lamont remarked that "I almost went down on my knees to beg Herbert Hoover to veto the asinine Smoot-Hawley tariff." GM's European head, Graeme K. Howard, sent a telegram to Washington which said passage of Smoot-Hawley would lead to the "MOST SEVERE DEPRESSION EVER EXPERIENCED." In one fell swoop, Washington shrank the very division of labor that enhances productivity, while the tariffs themselves greatly reduced the size of markets for U.S. firms to sell to.

The Smoot-Hawley tariff was an economy killer, and its impact can't be stressed enough. To see why, think of yourselves. All of you pursue an economic specialty, and presumably do so because it's what you're best at. But imagine if the government suddenly told you that you were no longer free to exchange the fruits of your labor for those of others; that essentially you'd be taxed if you bought televisions, cars, houses and clothes from others.

The inevitable result would be that all of you would lead lives of unrelenting drudgery. Given your need to provide on your own for shelter, clothes, transportation and entertainment, you'd spend enormous amounts of time doing what you're not good at, and the time spent would detract from your pursuit of what you're best at. Smoot-Hawley didn't exactly require what I've just described, but when tariffs to trade go up, economic efficiency by definition plummets for the reasons described.

On the wage front, FDR was able to pass the National Industrial Recovery Act of 1933 which, according to economist Richard Vedder, "raised wages in factory employment about 20 percent," thus stalling recovery. This legislation was thankfully killed by 1935, but the Wagner Act followed, and as Vedder recounts, the "resulting wave of unionism led to another double digit rise in money wages, reversing the previous unemployment decline." As a result, unemployment ticked back up to 20 percent by 1938.

It's also the case that heavy spending funded all manner of make-work projects in the United States. In that sense we should not be surprised that unemployment - at least reported joblessness - remained high. Think of it like you might a convenience store: When inventory is rising, meaning demand for goods is low, the logical response is to lower product prices to a market-clearing level that will attract buyers.

The Roosevelt administration did the opposite, whereby through government make-work projects and wage regulations, it made the cost of hiring workers back into the private sector greater than the market would bear. Far from compassionate, these artificially high wages raised the cost of hiring, thus explaining why the headline rate of unemployment was roughly the same at the end of the 1930s as it was at the beginning. Wages were not allowed to adjust to new, 1930s realities, thus explaining nosebleed worker inventory.

Of course in order for businesses to be able to attract the investment that funds expansion and job creation, the value of money must be stable. But rather than maintain the dollar's value as 1/20th of an ounce of gold, Roosevelt essentially robbed the nation's savers so crucial to economic growth with his devaluation of the dollar to 1/35th of an ounce of gold in 1933. Savers and investors were basically told that the dollar's value was a moving target, thus making investing in future expansion a dangerous concept.

Perhaps most economically crippling was the passage of the Undistributed Profits Tax of 1936. For corporations with profits of less than $10,000/yr. the tax ran from 10 to 42.14 percent, while companies earning more than $10,000 faced taxes on undistributed profits of 40 to 74 percent. The plan there was to force the distribution of profits through dividends that could be taxed as income, but what it meant in practice was that savings put aside by corporations for future growth or for a rainy day would have to be handed over to the federal government. Is it any wonder that the U.S. economy foundered in the 1930s? I think not.

The economy collapsed because the Roosevelt and Hoover administrations violated the four necessary inputs to economic growth: taxes went up alongside crippling regulations, trade was made less free, and the dollar was devalued. The Great Depression did not have to be.

World War II. Mentioned earlier was the conventional account suggesting World War II ended the Great Depression. The basic argument is that government spending employed a lot of people, and the economy grew. But logic tells us that this assumption puts the cart before the proverbial horse. Once again, governments can only spend if they can tax and borrow against productive work that's already occurred. Instead, it would be more accurate to say that a resumption of work combined with a less economically interventionist Washington did the job.

Amity Shlaes observed in The Forgotten Man that FDR knew a "war on business and a war against Europe could not happen at the same time," and as has been shown, New Deal legislation so harmful to employment and capital formation was effectively halted by 1938. In 1942, FDR ordered the liquidation of the Work Projects Administration. The WPA employed 2.4 million Americans in 1939, but by June of 1943 the number was down to 42,000. World War II didn't end the Great Depression so much as its seeming inevitably - right or wrong - to Roosevelt meant that the New Deal's myriad interventions in the economy would cease.

To assume war is stimulative is to argue for governments that regularly wage wars or massive employment programs. Looked at locally, and if you believe that war is stimulative, it would then be a good idea for Los Angeles politicians to regularly destroy all of the buildings in downtown, only to reconstruct them. Destroy wealth to stimulate an economy? I think not.

How death and destruction could help any economy has never been explained, and with good reason. War is as a rule a destruction of wealth that halts the international division of labor, and it involves the killing of potential customers. War can only delay the economic specialization which is at the core of economic growth, and as such was only stimulative insofar as it once again ended the New Deal.

Furthermore, if it in fact had been stimulative, then it would have to have been the case that once the war ended, that the decline in military employment in concert with greatly reduced spending would have led to another economic collapse. Instead, the opposite occurred as the U.S. economy boomed post-war thanks to Americans returning to productive pursuits over the killing, wealth destruction and autarky that defines war.

Better yet, the passage of the Bretton Woods agreement in 1944 which put the world on a dollar standard, and the dollar on the gold standard, was a signal that countries were chastened by the tariffs that made World War II more likely, and that instead the world return to a trade compact that would once again resume the global exchange of goods.

In short, barriers to growth gave us the war, but happily the war's aftermath ensured a return to freer trade, less in the way of government regulations, a stable dollar, and with government spending a tax on productivity like any other, an end to government spending made necessary by the war itself.

The Financial Crisis

I'll now move to the financial crisis of 2008, one that many can credibly say is still with us. This too has Washington's hands all over it.

About its cause, my view is very different from what you're probably used to hearing. Indeed, I believe that its origins lay in the rush to housing that began in 2001. Where I'm different, is that I don't buy for one second the popular notion that in order to fix the economy, ongoing market intervention is essential to reflate a housing sector that is weaker than it was.

This gets things backwards, and to understand why we need to ask if housing is an economic input. It's decidedly not. Investments in housing don't make us more productive, they won't lead to cancer cures, or software innovations that make businesses more productive, nor do they open foreign markets. Housing doesn't drive the economy, rather on its best day, a good market for housing is the consumptive result of otherwise productive economic activity.

Worse, housing landlocks us. This is problematic, particularly during an age in which capital moves at the speed of light. When governments use resources taken from the private sector to stimulate home ownership, they're engaging in a very cruel act whereby they make individuals less mobile in pursuit of the best work possible irrespective of city, state or country.

In short, the rush to housing this decade was the recession because it drove limited capital into the ground, and away from the productive parts of the economy. If you buy a house, you're putting money into the ground, but if you save instead, your capital reaches businesses eager to grow, and if you invest in the stock market over the purchase of a home, you're providing capital to entrepreneurs as opposed to a housing investment that does very little to enhance productivity.

In that certain sense housing's moderation beginning in 2007 was a sign of an economy on the mend. Markets were signaling that too much investment had flowed into that sector, and that it was time for investors to reorient capital toward more productive pursuits. Our failure to let markets work their magic turned what should have been a light recession into something much worse.

The question is then one of why there was a housing boom. The broadly held view is that the Fed's decision to bring the Fed funds rate down to 1% in 2003 was the cause. The problem with this assertion is that there's very little evidence supporting the claim that housing does best when interest rates are lowest.

First off, empirical evidence produced by H.C. Wainwright Economics supports the opposite. Indeed, nominal home prices in the U.S. since 1976 have increased the most when interest rates have risen over 200 basis points, and they've declined the most when those same rates have fallen more than 200 basis points.

Looking at the 1970s in the United States, the Fed funds rate sat at 5.5 percent in August of 1971, but it reached a high of 10 percent by the end of 1973. Despite this substantial increase in the rate target, according to economic historian Allen Matusow's book Nixon's Economy, "Housing emerged as the most dynamic sector" in the early 70s.

Moving to Jimmy Carter's presidency, from a low of 5 percent in 1976, the Fed funds rate rose all the way to 13 percent by the end of the decade. But housing hardly faltered, as George Gilder found in his 1981 book, Wealth and Poverty. Describing the late ‘70s property boom that occurred amidst skyrocketing interest rates, Gilder wrote, "What happened was that citizens speculated on their homes...Not only did their houses tend to rise in value about 20 percent faster than the price index, but with their small equity exposure they could gain higher percentage returns than all but the most phenomenally lucky shareholders." Shades of this decade?

Some would blame Fannie Mae, Freddie Mac, or the mortgage interest deduction as the driver of the housing, and while I'd very much like to see all three abolished, England and Canada have none of the three, yet housing boomed in both countries at the same time it did here. So what really drove the recessionary rush to housing?

It's very simple, and it involves the dollar. The dollar collapsed this decade, and as global history reveals in living color, when currencies are debased limited capital flows into hard assets - Ludwig von Mises referred to this as a flight to the real - least vulnerable to devaluation. To put it simply, housing is the ultimate middle class hedge against inflation because it's a commodity-like asset that does relatively well during periods of currency devaluation, and even better, it's an investment that can be lived in.

So how did the recessionary rush to housing get us to where we are?

In inflationary periods, banks chase returns too, and housing was correctly seen as a safe haven. The problem there is that the money illusion can only last so long. That's the case because inflation is and always has been an economic retardant. When all manner of capital is flowing into the proverbial ground, that means there's a great deal less flowing into the entrepreneurial, or wage economy.

Looked at from a practical standpoint, individuals around the world, but most noticeably in the U.S., saw housing prices moving powerfully higher. Witnessing this, they borrowed from banks eager to lend toward a rising asset class in order to buy more house than they could afford on the assumption that if their mortgages ever became too hard to service, there would be a willing buyer ready to snap up the house for a higher price than the original purchase.

What the average person perhaps didn't foresee is that inflation is death by a thousand cuts. Not only does it erode the value of our existing wages (consider how gasoline prices have spiked since 2001), but since it creates massive incentives for people to invest in hard objects, there's less capital available for investment in the productive economy. Simplified, real wages were reduced in value, investment in the wage economy withered, and all of this occurred alongside rising mortgage payments that increasingly could not be serviced. All of this led to the defaults that eroded bank balance sheets, and those same balance sheets were made worse by government intervention that made it impossible for intrepid investors to price the assets.

Importantly, all of the above should have led to a brief correction. All manner of businesses make mistakes all the time, and historically, particularly in the United States, we've allowed businesses failures to have their assets swallowed by others. This is the price of prosperity, but it's a good price in that it shows that capitalism is working for it liquidating all the bad ideas that brought the pain to begin with.

To put it in a very basic way, the recession was once again the rush to housing due to capital flight away from the productive economy, so when companies and banks started to collapse as a result of this inflationary flight to the real, the collapses were a sign that the economy was healing itself. In short, the marketplace was fixing our economy by ridding it of poor banking and business practices that had for several years been camouflaged by a weak-currency money illusion. Had we allowed this necessary process to run its course, the recession would have been just that. Light and short.

But sadly, this time around, there was a collective blink on both sides of the U.S. political aisle in 2008, and I believe it explains what ultimately got us here. Horrific dollar policy led to the very malinvestment that would have given us a slowdown, but our bailout/stimulus culture truly tanked the economy on the way to a crisis.

To a high degree the capitalist consensus held until the spring of 2008. It was then that Bear Stearns, a fairly minor bulge bracket investment bank, ran into trouble. With its share price in freefall heading into the weekend, officials at Treasury and the Federal Reserve effectively blinked, and a forced marriage ensued in which J.P. Morgan purchased Bear for next to nothing in return for the Fed taking on the fallen investment bank's "toxic assets."

Even though Bear Stearns wasn't a bank in the traditional sense, government involvement was defended by some as necessary to avert a collapse of the financial system. Myriad other financial institutions had exposure ("counterparty risk") to trades entered into by Bear, and absent the infusion of government capital, our system of credit would supposedly have cascaded downward, Depression the certain result.

About the notion of bank "contagion" or a "banking domino effect", it should be noted that the only scholarly work ever done on the subject was written by none other than our present Fed Chairman, Ben Bernanke, back in the early '80s. But Bernanke's fears of a domino effect with regard to banks were then, and remain pure conjecture. And assuming the domino effect is real, when we consider how whole countries have bounced back from total economic and human destruction as a result of war, it seems a reach to assume that the world economy would fail to bounce back from the demise of one or many banks.

That is so because when businesses fail, they in no way disappear. Instead, an opportunity arises for competitors to quickly snap up market share, not to mention that capital previously misused by the failed business in question is quickly redirected to those with a stated objective to deploy it more wisely.

Had Bear simply been allowed to go under, there doubtless would have been turbulent markets, but it would be hard to presume any more turbulent than they were in the months and years after Bear's rescue. More important, had the Fed and Treasury simply stood aside, Bear's failure would have been a certain signal to other teetering banks to either find new capital, or quickly find a buyer.

More important, and as we've seen very clearly since the bailouts began, government aid meant to avoid "systemic risk" creates risks far worse for the banking system. Indeed, the acceptance of government aid, rather than a bank savior, is a death sentence for the weak and healthy alike.

Those that accept government money are no longer in business for profit. Instead, they're serving political masters who don't care about profit, but who do care about "social lending" practices at light rates of interest, do care about modifying interest rate on loans to bail out the irresponsible, and do care about restricting compensation despite these restrictions driving away top talent.

Worse, their existence is a cancer on the healthy firms in the banking system that must compete with financial institutions no longer serving profit-driven shareholders, and that must compete with fallen banks lending money not their own. Systemic risk was the excuse for shedding free-market principles, but the far more treacherous risk of government ownership was seemingly never considered by many.

Many people point to the subsequent collapse of Lehman Brothers as the true beginning of the financial crisis, but what's often forgotten is that a week after Lehman's bankruptcy, the S&P 500 was higher than it was before the bankruptcy.

Indeed, in considering the causes of the crisis, more likely culprits have been ignored. For one, was Lehman's death the driver, or was it more realistically markets having to price in even more uncertainty concerning a government that changed its stance on intervention/non-intervention on a weekly basis? Markets crave certainty, and the inconsistency offered by Leviathan drove the very uncertainty that has always scared investors.

Secondly, it must be remembered that around the time of Lehman's collapse, the SEC introduced a short-selling ban on the shares of 900 financial stocks. Hmmm. With the ban in mind, and with the "crisis" one involving financial firms, is it any surprise at all the markets cratered when a ban was put in place that would make it impossible for investors to get a credible read on the true value of financial shares? Would any of you want to own a firm the price of which did not include all information, including bearish opinion?

Isn't it also true that short-selling is often part of a "long" strategy whereby an investor buys one or many company shares long, but shorts other, somewhat similar ones as downside protection? Well, amid the "crisis", this strategy was abolished.

Lastly on shorts, it can't be stressed enough that short sellers are ultimately buyers. Indeed, in order to profit short sellers must re-enter the stock market to buy the shares they previously borrowed and sold short. Short sellers as a result frequently put a floor under downward trending markets for short-selling tautologically creating a growing reserve of buying power, they serve investors as a form of downside protection as a result, but they weren't allowed to play their vital role at a time when suitably scared investors paradoxically needed them most.

But most of all, we must ask ourselves what's been the biggest economic theme of realistically the last thirty years? Easily the biggest one has been the triumph of free markets over markets overseen by governments from the Commanding Heights.

During this period, capital of the human, physical and financial variety has flowed to where economic freedom is most prevalent, and departed from where governments have played a more interventionist role. Stock markets have soared in countries moving toward economic freedom, and have been more flaccid to non-existent in those countries where freedom has been shunned.

In short, the crisis of four years ago wasn't the failure of banks that showed capitalism was indeed working, instead it was the natural result of a movement away from the free-market direction the world had taken, and which had delivered unparalleled prosperity wherever tried. The crisis, to put it simply, was government intervention that properly scared the daylights out of investors given the knowledge that government-led economies have regularly underperformed, while economies mostly free perform very well.

Investors had to price in a more interventionist future, and with the track record there negative, markets were necessarily in crisis. Goodness, countries around the world have recovered handily for centuries from the death and destruction of war, but a few bank failures were going to set us back? A more laughable notion would be hard to fathom, at which point the markets had to price in both a collapse of reason in concert with a rush to the "security" of government. I know, I'm being redundant there, because a rush to government IS a collapse of reason.

The Present and the Future

Looking at the present, the economy suffers first of all thanks to our failure in 2008 to let it be cleansed of the non-economic activity that resulted first and foremost from a weak dollar. Rather than allow homeowners to foreclose and banks to fail, government policy is propping up these failures which effectively means Washington is doubling down on what gave us a crisis to begin with in the naïve hope that what didn't work previously will drive economic activity this time.

Considering unemployment, it remains high because Washington is not allowing wages to adjust to present realities. This shows up most notably in unemployment benefits that Congress continues to extend, and that now cover the unemployed for 99 weeks. Thinking back to my earlier point about how businesses reduce the cost of goods to clear their inventory, we have a huge employment inventory that has not lowered its price thanks to jobless benefits that drive up the cost of luring workers from the sidelines.

In that sense unemployment is a misnomer, much as "economic recessions" are one. Caused by government meddling in the private economy, unemployment is high because government supports aren't allowing the cost of labor to reach the levels necessary for individuals to achieve gainful employment.

And then, much like in the 1930s, Washington is violating the basic inputs to a sound economy which are once again light taxes and regulation, the ability to trade freely, and a dollar that is stable in value today, tomorrow, and ten years from now. That these inputs are being violated explains with ease why our economic hardship continues despite the fact that what economists deem a recession is over.

The dollar is most important in this regard. Much like the Bush administration that preceded it, the Obama Treasury has made plain that it welcomes a weak and unstable dollar. For that alone, full economic recovery will remain a distant object.

The reasons why are basic. Indeed, imagine if the length of foot changed every single day, and every second of the day. In short, imagine if the foot were like the dollar, able to float in length much as the dollar floats in value. We could still for instance build houses, but we'd build a lot less of them, and we'd make a lot more mistakes in the process owing to the foot having no stable definition.

When the dollar is allowed to float in value, this instability changes the real value of all goods, services and investments. And then, for the goods least vulnerable in price to devaluation, their rise in concert with the dollar's fall leads to a money illusion that drives capital into hard assets, and away from the productive, wage producing economy. Once again, absent the dollar's devaluation, there is no recessionary housing boom this decade, there's no subsequent financial crisis, and there's no President Obama.

Considering unemployment yet again, all jobs and companies are the certain result of individuals saving first, and in doing so, supplying capital to entrepreneurs eager to offer new goods and services. But with policy strongly in favor of a weak dollar, the markets are complying, and the dollar's fall is telling investors not to delay consumption in favor of company and job creation. Why would they seek out risky investments if potential returns are to be eviscerated by the dollar's devaluation?

So while the dollar is most important, and its weak status is what is most delaying recovery, all the other concepts are similarly being violated.

On the regulation front, the Obama administration has sought to re-regulate healthcare, finance and energy consumption. Regulations don't allow businesses to avoid mistakes - figure the banking industry was and remains the most regulated in the country - but they do inhibit natural growth.

Instead of pursuing business plans that fulfill the need of customers, the rush by the Obama administration to regulate anything and everything has forced companies to redirect a lot of limited capital away from what helps them grow in order to pay for facilitator employees that merely help them comply with the myriad regulations being added to the federal register each day.

Perhaps worse, thanks to uncertainty in Washington about which regulations will stick, and which will be shed from future bills, businesses suffer what libertarian economist Robert Higgs refers to as "regime uncertainty." Unable to know with certainty what the future of regulations will be, businesses lie in wait, delaying growth initiatives until they know what they'll face.

Looking at trade, the Obama administration has slow-footed free trade pacts with other countries, all the while bashing the Chinese for providing American consumers with what they want at a low price. China's economic rise has been nothing short of profoundly brilliant for the world due to the Chinese producing for the average American low value goods not in their economic interest to make, and as reward for them making us exponentially better off in terms of efficiency and standard of living, we bash them as currency manipulators.

The above not only isn't true, but it's yet another signal that the Obama administration prefers a weak dollar, and the debased greenback is killing investment in the U.S. Considering the bailouts of GM and Chrysler, both are protectionist acts for us subsidizing failed concepts here at the expense of foreign producers of autos. Obama et al have added a tire tariff, which merely ensures that limited labor here will continue to produce low value goods that in a free economy, would occur overseas to our benefit.

On taxes, the 2010 elections meant that the 2003 tax cuts - President George W. Bush's only sound economic decision - are extended through year's end, but uncertainty there has surely harmed productivity. Unaware of how their labor will be taxed in the future, productive Americans lie in wait to see how much of the fruits of their labor will be taken.

Importantly, it must be remembered that high rates of taxation are what keep tomorrow's entrepreneurs from achieving on the way to knocking the existing business establishment off of its perch. The narrow-minded among us say we should tax the rich to reduce the alleged "wealth gap", but the simple truth is that the rich by virtue of being so have excess capital that they need to invest; often in start-ups headed by those not yet rich. When we tax the wealthy, we reduce the amount of capital available to entrepreneurs, and in reducing the amount of investable capital, we necessarily reduce the wages of the non-rich.

A delay in the abolishment of the '03 tax cuts will surely help, but the tax system itself is incredibly complicated, and for being that way, it costs the economy enormous amounts of growth for businesses and individuals spending incalculable hours figuring it out. Under Obama individuals and businesses have suffered the possibility that the cost of work will rise in concert with growing complexity.

Government spending is a tax like any other for governments vacuuming up limited capital from the productive private sector in order to fund wasteful government initiatives. Bastiat used to say that what makes a good economist better than a bad one concerns the former's ability to see what isn't immediately visible. Considering government "stimulus", what's visible is the employment of individuals carrying out government projects, but what's not visible is how much more productive their doings would be if that money remained in the private sector funding real economic growth.

Lastly, the Fed's continued rate machinations penalize the savers so necessary for economic revival, and almost as bad, the central bank's purchases of mortgage and Treasury securities - what we know as QEII - are essentially telling investors that if you redirect limited capital into even more government and mortgage debt, we'll protect you. Ben Bernanke is said to be the Great Depression's foremost scholar by those who should know better, but his every action speaks to someone who learned all the wrong lessons from the 1930s.


At this point I'm sure you're ecstatic to know that my prepared remarks are over with. In a speech meant to show how government barriers retard economic productivity, hopefully I've shown how these barriers elongated a Great Depression that never should have been, and that similar interventions are strangling today's nascent recovery on the way to what I think could be a second straight lost decade.

The mistakes here are obvious. For one, never should we be fooled by government bureaucrats offering us economic security through their intervention in same. As John Stuart Mill once wrote, "The only insecurity which is altogether paralyzing to the active energies of producers, is that arising from the government, or from persons vested with its authority. Against all other depredators there is a hope of defending oneself."

Our acceptance of government security has strangled our recovery because it's disallowed the cleansing effect of recessions, which by definition author future recovery.

Worse, not wanting to allow a crisis caused by government intervention to go to waste, the Obama administration, much like the Hoover and Roosevelt administrations, is violating the four basic inputs to economic growth through barriers that are putting a wage between productive work and reward. We have problems today, and Washington, as is always the case is the author of those problems.

All that said, I want to end this speech on a good note. Not long ago I wrote a piece for Forbes saying that the U.S., despite this rush to tax, regulate, raise tariffs and devalue the dollar would not go the way of Europe. I remain of that view.

As bad as we may feel now, we will emerge from this in time. We will because as Americans, we're descended from individuals who escaped tyranny overseas in order to participate in what was a libertarian experiment: the United States. In short, Americans don't like big government, and the recent elections have revealed that in living color.

We were born to be free, and if there's a silver lining to the Bush/Obama disasters, it's that Americans have been reminded yet again how bad things get when governments grow. We're revolting right now, and our revolt promises that the hardship authored by Washington will end. Let's just hope it's sooner rather than later. Thank you very much.


John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading ( He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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