Thursday, July 21, 2011

When government made things worse

By Elaine Justice

Government wrangling over raising the debt ceiling, cutting spending and raising taxes has a familiar ring to Emory economic historian Leonard Carlson, who says that throughout the nation’s history, colliding economic philosophies have produced mixed or even negative results.

During the Great Depression, he says, “a couple of really stupid policy decisions come to mind.” Herbert Hoover, who ran for president during a period of prosperity, promised tariff protection if elected. Then, despite the devastation of the 1929 crash, the Smoot-Hawley Tariff Act was passed in 1930.

“Every economist advised against the idea,” says Carlson, adding that leading economists even petitioned the government to no avail. International trade plunged even further as a result.

In 1937, in the midst of the Depression, Congress, increasingly antagonistic to then President Franklin Roosevelt’s New Deal initiatives, pushed to cut government spending and raise taxes, causing unemployment to spike again briefly. Looking back, says Leonard, “it’s another example of a move that nobody thought was a good idea at the time, but government went ahead and did it.”

He cites other 1930s Depression examples, such as the Fed’s tightening of monetary policy and the reserve ratio at a time when banks were still reeling from the aftershocks of bank runs after the crash. Banks, nervous about their cash reserves, stopped making loans, further slowing the economy.

“Right now,” says Carlson, “almost every economist is saying don’t default on the national debt, and we still could do it.”

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