Don't Turn Panic Into Depression

National Review Online: The Dangers Of Blaming Free Trade, Low Taxes, And Flexible Labor Markets For The Current Crisis

(National Review Online)  This column was written by Phil Kerpen.

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Blame for today’s financial panic can be assigned to a Federal Reserve that kept interest rates too low while a bubble inflated; unscrupulous lenders; people who bought homes they couldn’t afford; Wall Street wizards who overleveraged and wrote derivatives they couldn’t pay; and a Congress that set the policy goal of universal home ownership and recklessly grew Fannie Mae and Freddie Mac to pursue that goal.

But with so many real culprits out there, we cannot afford to blame the fake culprits of free trade, low taxes, and flexible labor markets. These are the fundamentals of a free economy. If we undermine them in response to the panic, we risk repeating the mistakes that followed another great panic and ushered in the Great Depression.

First, trade. The Smoot-Hawley tariff was Congress’s first major policy blunder leading up to the Great Depression. Despite a warning from more than 1,000 prominent economists, Congress raised protective tariffs to record-high levels in June 1930. The result was that U.S. imports crashed while retaliation from abroad sunk U.S. exports. Some historians believe the political debate surrounding the Smoot-Hawley bill actually contributed to the initial stock market crash of 1929, and most believe it was a factor in turning that crash into the Great Depression.

The world economy is far more interconnected today. Trade volumes are much higher and large sectors of the U.S. economy are extremely trade-dependent. Thus, any protectionist response to the current panic would be even more disruptive.

Unfortunately, China-bashing has become a bipartisan pastime in Congress. And Sen. Barack Obama is campaigning on poison-pill labor and environmental standards that many of our trading partners can’t afford. It’s a sure way to sink free-trade agreements.

Obama also promises new non-tariff barriers to trade that could spark a global trade war, such as direct subsidies for companies willing to locate production in the United States. Under undivided Democratic rule it appears unlikely that there would be any progress on a new global trade agreement. And the existing World Trade Organization framework could unravel under so-called “fair trade” pressure, or even from a return to explicit protectionism.

Second, taxes. President Herbert Hoover’s infamous Revenue Act of 1932 was the biggest and worst-timed tax hike in U.S. history. The bill was a bipartisan “achievement,” a compromise between the Hoover administration’s plan to raise income taxes and the Democratic Congress’s plan to institute a national sales tax. The top marginal income-tax rate was raised from 25 to 63 percent. New excise taxes were put on everything from cars and trucks to refrigerators, chewing gum, soft drinks, and electricity. The death tax was doubled.

And the results were tragic. By raising taxes during an economic downturn, the economic pain of the 1930s was made deeper and more permanent. The higher Hoover taxes discouraged work, savings, and investment, prevented capital formation, and depressed consumer spending.

Today, even liberal congressman Barney Frank of Massachusetts has said there should be no tax hikes in the next year because of the current economic weakness. Yet Barack Obama remains committed to a program of raising the top marginal tax rate from 35 percent to 39.6 percent while also hiking capital-gains taxes, dividend taxes, and the death tax. All this will put the brakes on economic activity right when we need to hit the accelerator.

Third, labor. Economists at UCLA have determined that President Franklin Roosevelt’s anti-competitive, pro-union policies prolonged the Depression seven full years. In particular, those policies led to artificially expensive products that discouraged consumer spending and artificially high wages that prevented employment from recovering.

Despite this lesson, congressional Democrats, including Obama, are today poised to give unions their greatest power boost since Roosevelt’s 1935 National Labor Relations Act. The vehicle this time is the shamelessly named Employee Free Choice Act, which, among other pro-union legal changes, would abolish secret-ballot elections for union organizing.

By way of a new procedure called card check, workers will be openly pressured to sign union cards, after which, if a majority of workers sign, unions will be automatically certified. Coercive tactics by union bosses would run rampant if this policy is ever enacted. And as unions gain in power and force wages unnaturally high, mass unemployment could be the unintended result.

It’s important that we avoid all these policy errors - not just for the sake of our prosperity, but for our survival. The Great Depression, after all, didn’t end until the advent of World War II, the most destructive war in the history of the planet. In a world of nuclear and biological weapons and non-state terrorist organizations that breed on poverty and despair, another global economic breakdown of such extended duration would risk armed conflicts on an even greater scale.

To be sure, Washington already has stoked the flames of the financial panic. The president and the Treasury secretary did the policy equivalent of yelling fire in a crowded theater when they insisted that Congress immediately pass a bad bailout bill or face financial Armageddon. Members of Congress splintered and voted against the bill before voting for it several days later, showing a lack of conviction that did nothing to reassure markets. Even Alan Greenspan is questioning free markets today, placing our policy fundamentals in even greater jeopardy.

But after the elections, all eyes will turn to the new president and Congress in search of reassurance that the fundamentals of our free economy will be supported. That will require the shelving of any talk of trade protectionism, higher taxes, and more restrictive labor markets. The stakes couldn’t be any higher.

[bm6005]

Perhaps a little personal time in the unemployment line would help this NEOCON ****** , who wrote this trash understand what being unemployed is really all about.

[andor3]

NRO: "These are the fundamentals of a free economy."

Like a free lunch, there is no free economy. Labels like Socialism and Capitalism make it clear: an economy is shaped by the framework created by the authorities.

[andor3]

some things never change--the guilty trying to shift the blame for example. and the people who pushed wrong ideas going through a period of denial. nope, the current meltdown is a result of Reagan/Bush deregulation, and letting the myth of the "free market" go wild.

unfortunately we do not have time for the NRO and their neocon conspirators to get a clue.

[ubrew12]

NRO: "we cannot afford to blame the fake culprits of free trade, low taxes, and flexible labor markets. These are the fundamentals of a free economy."

To the free market, a Big Mac and Fries is food, a Hummer is transportation, ''57 channels and nothin''s on'' is entertainment, and NRO is intelligent discourse.

Wouldn''t wanna lose that...

[omded]

This article notes concern over foreign countries "sinking" U.S. exports. What exports??? U.S. industry has shrunk so much that it can''t realistically produce a significant quantity of exports to make any difference. How many U.S. exporters are left?

[irreverent1-2009]

The only way we will learn from this economic freefall is to force this into a depression. We have had enough of corporate coddling welfare, credit card company abuse and Washington lobbying. It''s time for the have nots to rise up and shake up this nation!

[sst01]

I read with interest your comments regarding the Depression and onset of WWII; so that we might not re live that nightmare.

I would not spent a lot of time fretting over that.

Since we have now outsourced all of our manufacturing offshore, we could never again produce the equipment needed to conduct that war.

All the machinery is China , and the skilled labor
is now mopping up in isle 6 at Walmart.

But hey, what do you care? You increased profits for your company!

Hell, You even got a bonus, didn''t you?
You are probably pullin over 200K a year now,

Ya think?

[jimmyc1955]

Centerfall93 - can you site what policies and lending practices were "Neocon" inspired that created the problem? You''ve made an unfounded accusation - back it up with facts and data. I want to see it.

[jimmyc1955]

If you look at where the highest default rates are it''s not in the expensive neighborhoods but the urban, inner city neighborhoods. Cleveland, Detroit . . . those are the area''s where the highest percentage of bad mortgages are. Thats because Fanny and Freddie were mandated to get houses into the hands of people who in fact couldn''t afford them.

Now if your a bank or mortgage broker and know that Freddie and Fanny will back any load in run down neighboorhoods, you create instruments that let you sell to people who have no income, no assests and no prospects.

I am not saying this is the sole cause, but the Barney Frank defense of Fanny and Freddie at congressional hearings when republicans are trying to get more oversight into the process are clearly illustrating that the political agenda was over weighing traditional lending practices.

YouTube has hundreds of links about Braney Frank defending Fanny and Freddie less than one year ago.

[presseyr]

Oh yes of course, it was all those $300-600,000 loans taken by affirmative action poor minorities in California, Nevada, Arizona, and Florida that caused all the trouble. Everyone knows poor minorities are a huge percentage of the homeowners in these markets. Of course the CRA also FORCED banks to create and write Alt-A loans, 105% loans, 80/20 loans, option arm loans, no doc loans, and every other creative kind of financing they could think of. You are an idiot.

[markangeloo]

Interest rates were kept artificially low so in the bubble frenzy no one would notice we were fighting the WAR.

No money down
No military draft
It was a Roman Circus

[hedonist3]

"paradym" - ????

Your point could be taken more seriously if you could spell.

[omnibus66]

Oh, no, don''t blame the foxes for all the dead chickens.

[tallyman2008]

NRO - good observations

But

You are about 80 years too late

[juwboy]

The blame for today`s financial panic can be blamed directly on affirmative action, Bill Clinton and the Reno-Achtenberg Odd Couple.

Before the Clinton administration, banks used a sensible, prudent set of criteria to determine eligibility for home loans.

Result: a disproportionate number of low-income members of minority groups were turned down.

In order to remedy this "injustice", Bill Clinton and the Reno-Achtenberg Odd Couple decided to use affirmative action to encourage banks to make risky loans to minorities with low incomes.

Banks which initially refused to comply with this policy were denied participation in lucrative federal contracts so it wasn`t long before all banks were making these risky home loans.

We are now reaping the "benefits" of this policy of providing home loans to affirmative action imbeciles, that was imposed on us by the Clinton administration and its Reno-Achtenberg Odd Couple.

Millions of questionable loans that should never have been approved are now in default.

Result: today`s financial panic.

[jsutaguy]

I completely disagree with this article, both about the causes, and the cure for the economic crisis.
Skipping the debate about the causes, this article''s claim that ''free trade is good for us!" is simply cr ap. Every other country has startlingly steep protectionist language which stifles US labor and corporations from participating in those economies...and the tax revenue generated there disappears from the US coffers, except for the already-inflated personal earnings of the US based execs.
Jobs, the lifeblood of America, are being POURED out of this country to artificially stunted wage-states like India, again, enriching only a tiny, overpaid group of US executives who like the roads, the freedom, and the safety of the USA, but who work overtime to throw US workers out of jobs. "NOT MY PROBLEM" is the typical US executive response to the fatally high levels of unemployment and underemployment of US citizens.."It''s not ILLEGAL!" they say.

SC REW THAT! Make these overpaid jack a sses actually work for a living, and require them to hire US labor to produce US goods of high quality. It can be done, but not by the stupid, incompetent, greedy and manipulative people who currently inhabit the corner offices at every Wall Street firm, major US technical firm, and most US manufacturing firms.

Protectionism is good for America, even if it''s hard on executives.

[ubrew12]

For 30 years, Republicans can replaced the old Democratic populist ''charge the rich'' paradym, with a new populist ''charge the children'' paradym.

Think what you like: the rich can afford it, and in fact STILL remain rich, much richer than most Americans could EVER hope to be.

Can the children afford it? That''s what we must eventually ask, as 30 years of Republican populism grinds to a close and we are left with the $10 trillion bill.

Reagan could not possibly have imagined the ''War on Terror'' that''s taken $1 trillion from us already, and another $1 trillion before its done. He could not possibly have imagined that SocSec and Medicare would just keep on getting put off, until todays wage earners are facing bankruptcy paying for it all. Bottom line: the children are no richer than we were when we were their age. They CANNOT afford the burden we''ve placed on them.

''Charge the children'' was ALWAYS an unethical choice. Its just obvious now, and the NRO is p*ssing in the wind, arguing against it.

[susanhelit]

OK - so - unions bad, and a 40% tax increase is just the same thing as a 4% tax increase back to a level that served us well in the 90''s. How do you guys expect anyone who thinks for an instant to buy this garbage?

[incog-nito]

And what is the NRO''s prescription? Continue the same policies of the past 8 years? The fact is Americans can readily see with their very own eyes, at their own workplace, the steady job loss and closing of factories--most of which have moved to other countries. This has been going on for years (and is still ongoing), long before the current credit crisis. Americans can readily see that their wages have not kept up with inflation, while price of health care, education, etc. have gone through the roof. And what do they get in return? Cheaper trinkets at the local Wal-Mart.

The NRO offers no prescription other than "stay the course", which has been proven disastrous for the country.

Gee, your economic charade is over and you cry what a success it has been...grow up and get out of this lie. It has been nothing but a credit-card economy from the git-go. These types produce nothing of true value and suck the money of what others produce just like vampires.