The Next Great Depression, Updated

By Dr. Mark W. Hendrickson

“There is nothing inevitable about another depression. We have a simple choice: We can repeat the errors of the past or we can avoid them.”

Those were my words, Feb. 8, 2008. It’s time for a “depression watch” update.

Unfortunately, it’s mostly bad news. While another 12-year depression still isn’t inevitable, the post-financial-crisis policy blunders of Presidents Hoover and Roosevelt are being re-enacted with eerie similitude by the current president.

Hoover devastated America’s exporters by signing the Smoot-Hawley Tariff Act, triggering a devastating trade war. President Obama triggered retaliatory tariffs from Mexico when he appeased his Teamster supporters by blocking Mexican trucks from entering the United States, unilaterally repudiating NAFTA. He also elicited retaliatory tariffs from Canada (other countries will follow) by inserting a “buy American” clause in his “stimulus” bill. As in the 1930s, international trade is collapsing today. Foreigners suddenly find themselves earning fewer dollars to buy American products. Nor can they buy as much American government debt as before.

Hoover’s Reconstruction Finance Corp., which interfered with needed economic adjustments by channeling federal dollars to various money-losing businesses, was reincarnated as the Bush/Paulson TARP program, which continues under Team Obama.

Both Hoover and Roosevelt crippled economic activity by raising income tax rates. In addition to the massive tax hike already scheduled for next year when Bush’s tax cuts expire, Obama seeks additional tax hikes on higher-income taxpayers.

FDR burdened poor and middle-class Americans with higher excise taxes on everyday purchases—milk, gasoline, check-writing, stamps, beer, etc. Today, Obama wants to saddle Americans with the mother of all excise taxes—the cap and trade tax on coal, oil, and natural gas. This will raise the price of driving cars, heating and cooling homes, and powering businesses. Most other prices will rise, too, since energy is used to produce almost everything we consume, including food, clothing, and shelter.

During the Great Depression, runaway federal spending and ballooning deficits diverted capital from private investment into government programs. Today, private credit is again contracting as the U.S. Treasury absorbs capital (an astounding $1,442.8 billion in recent months). In the name of “stimulus,” Obama is asphyxiating the private sector by hogging all the economic oxygen—capital.

Obama shares FDR’s overt hostility to private, profit-making firms. FDR forced businesses into government-regulated cartels. Obama simply nationalizes them. FDR plundered corporate treasuries with his “undistributed profits” tax; Obama is targeting corporations’ offshore earnings. FDR persecuted successful businesses by threatening them with criminal prosecution for alleged antitrust violations. Obama’s Assistant Attorney General for Antitrust, Christine Varney, is making similar noises today. FDR crippled economic expansion and job creation by creating a climate of fear and uncertainty among the business community. Obama’s unfortunate diatribes against profits are having the same chilling effect today.

Like FDR, Obama doesn’t trust or doesn’t want the private sector to create jobs. The only “good” jobs are government jobs, such as low-paying, taxpayer-funded, weather-stripping jobs instead of high-paying, private-sector, oil-extraction jobs. Obama is replicating FDR’s strategy of adding workers to the federal payroll (Civilian Conservation Corps, Works Progress Administration, etc.) through such measures as tripling the size of AmeriCorps and adding the Serve America Act. Just as FDR’s New Deal programs failed to reduce employment below 14 percent throughout the 1930s, Obama’s federal jobs will siphon resources from the private sector, thereby exacerbating overall unemployment. Team Obama even wants to regulate, control, and stifle those great incubators of private jobs—venture capitalists—even though the VC firms did nothing to cause our country’s financial mess.

FDR discouraged business activity by ignoring contract law when he unilaterally voided the gold clause in private contracts. Recently, Obama made corporate bonds—an important source of business financing—less attractive by abrogating bankruptcy law when he expropriated the property of secured creditors and gave it to his UAW allies.

Like FDR, who championed the 1935 Wagner Act (which led to massive work stoppages, lost profits, and fewer jobs), Obama seeks special privileges for labor unions. In addition to the UAW handout and the Teamsters favor, Obama supports the Employee Free Choice Act that would scrap secret ballots and make it easier for union-organizing intimidators to “persuade” workers to unionize. He even threatened California Gov. Schwarzenegger with withholding $7 billion in federal stimulus money unless legislated wage cuts for unionized health-care workers were restored. To the degree that Obama strengthens unions, the result will look like the ‘30s—higher unemployment.

President Obama seems determined to be the second coming of FDR. This is economically irrational. Government couldn’t spend us out of economic depression in the 1930s, nor can it today. But runaway government spending and intervention do have the potential to create the worst depression that money can buy.

For the Obama/Pelosi/Reid axis to ignore history, and instead repeat the policy errors of the ‘30s, brings to mind Einstein’s remark about the insanity of doing the same thing over and over and expecting different results. If Team Obama persists in defying the inexorable laws of economics, it will inflict great hardship on Americans. This unnecessary tragedy is still avoidable, but only if we wake up in time and alter our course.

Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and contributing scholar with The Center for Vision & Values at Grove City College.