February 3, 2009

Econ 101: Don't repeat your mistakes

“You don’t ever want a crisis to go to waste; it’s an opportunity to do important things that you would otherwise avoid.”

— Rahm Emanuel

The more I watch our politicians duke it out on capital hill, the more I sense that there is a general misunderstanding of economics 101. Certain basics are simply missing from the corpus callosum (your brains superhighway). It’s not that we haven’t been through this before-just 70 years ago a recession was turned into a decade long depression because of government’s interference in the markets. Here’s 3 things we (should have) learned from that time period.

- Taxes: Don’t Increase them-rather cut them. Give people back more of their money and they will spend it! Ronald Reagan did this in the 80’s and the economic boom lasted a quarter century. The idea that government creates wealth has been one of the biggest misnomer’s ever believed. Productive working people create wealth—NOT the government.

+ Money Supply: It is estimated that close to 40% of the world’s wealth has been wiped out by this crisis. Money is disappearing faster than one can blink. In an extremely deflationary environment, the Fed needs to put as much liquidity into the market as possible.

- Trade Restrictions: In 1929 two senators, Smoot and Hawley, imposed massive tariffs—and many credit this policy to starting the great depression. After American started slapping tariffs on their policies, other countries did the same and the transfer of goods stopped flowing.

America's Demise in the 1930's can be traced back to failed government polices; the most prominent being the Smoot Hawley Tariffs and the National Investment Recovery Act. Here is a paragraph from a prominent UCLA economist on the effect of this policy:

The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation's antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression.

Will we learn our lesson? History repeats itself often, first 'tragedy, and later as greater tragedy.' One thing we can be certain of during this transition in America's history is that this 'opportunity will not be put to waste.'

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

The bigger the mess, the bigger the 'solution' for this current crisis. The problem is that for every government solution implemented---government creates a thousand problems right along with it. Take for example social security:

When the Social Security Act was passed in 1935, the program embodied new ideas on the role of government and engendered significant opposition. Yet one point remained clear: Social Security was not “relief,” what is today termed “welfare.” This new program, explained President Franklin D. Roosevelt, was to be an earned right by American workers, not a handout.

The justification was that it was not supposed to be a handout--rather earned by American workers. Hitler mastered this tactic of rationalization long enough to blind a whole generation of Germans into believing the Jews were not even human. Is America going to take this opportunity implement true reform? We shall see.

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