RALEIGH – Here’s the scenario. See if you can guess the names of the people involved.
America experiences nearly a decade of robust economic growth. Some of the growth is real, reflecting the revolutionary effects of new technologies on the nation’s manufacturing, information, and distribution systems. Some of the growth, however, is artificially induced by overly loose monetary policy by the Federal Reserve. The extra dollars help to create asset bubbles, both in housing and on Wall Street, in part by enabling investors to become increasingly leveraged with easy credit.
This unsustainable boom cycle reaches its inevitable bust. The stock market crashes. Some U.S. industries, already weakened by growing competitive pressures from newly developing industrial economies overseas, go into a death spiral. Others shed inefficient firms and remain viable. The country’s supposed economic “experts,” inside and outside of academia, can’t seem to settle on a coherent response to the monetary crisis. Some come to believe the real problem is market capitalism, not Fed mismanagement, and urge policymakers to flirt with elements of central planning imported from Europe.
The president, a legend in his own mind, believes that his personal charm and intellect will be enough to calm the panic and lubricate the gears of high finance. His administration jawbones banks and big businesses to coordinate responses to market turmoil and keep overextended firms from sliding entirely into bankruptcy. He takes the federal government greater into debt – a four-fold increase in just a single fiscal year – to finance public-works projects and create new federal welfare programs.
He fails.
Rejecting the advice of his market-oriented advisors, the president reverts to the political progressivism of his youth. He and a like-minded Congress enact one of the largest tax increases in American history, albeit a package primarily focused on reinstating high estate taxes and jacking up income-tax rates on high-earning professionals, investors, executives, entrepreneurs, and corporations. The president and Congress also lurch into protectionism, enacting “fair trade” legislation that provokes retaliation around the world.
Taxes and trade barriers go up. The world economy, with few exceptions, goes down. A boom-and-bust cycle, created largely by faulty monetary policy, turns into a lengthy depression.
The president I’m talking about was, of course, Herbert Hoover. His was a failed presidency, though for reason entirely different from the popular image of a free-market ideologue who refused to take robust federal action.
His successor, Franklin Roosevelt, proved even more disastrous on economic policy. Roosevelt ran his 1932 campaign as a fiscal conservative, railing against Hoover’s budget deficits, tax increases, and overall fecklessness (as well as against alcohol prohibition). He accused Hoover of “reckless and extravagant spending” and of thinking that “we ought to center control of everything in Washington as rapidly as possible.” His platform called for reductions in federal spending and tariffs, a balanced budget, removal of government from private enterprise, and a sound currency. “I accuse the present administration of being the greatest spending administration in peace time in all our history,” he thundered. “It is an administration that has piled bureau on bureau, commission on commission.”
After the election, FDR wandered off in an entirely different direction, prolonging the depression and eviscerating America’s founding principles and constitutional traditions. But as a president candidate, Roosevelt was remarkably insightful.
How do these events compare to the current economic and political crisis? Many pundits are having a field day with such comparisons, but most have no idea what they’re talking about. The candidate whose stated policies appear closest to Herbert Hoover’s is Barack Obama, who promises to hike income taxes on high earners and corporations, expand federal intervention in the economy, and steer American trade policy back towards protectionism (the world will, no doubt, love us for that). But the late Bush administration also parallels the early Hoover administration in some respects, particularly in the desire to “save” poorly managed companies from bankruptcy – a desire that, if acted on with federal cash and credit, only delays the inevitable reckoning and makes it far worse.
I’m not entirely sure how John McCain fits into the picture. At times, he also seems to have contracted the government-as-social-engineer disease. At other times, he sounds a bit more like Calvin Coolidge.
That’s a good thing, in case you didn’t know. And if your understanding of the period comes from reading the likes of Keynes, Schlesinger, or Galbraith, you probably don’t know.
Hood is president of the John Locke Foundation.