A Recipe for the Next Great Depression

0:00I'm going to talk about a recipe for the next Great Depression, and I'm going to recommend a book, I'm not sure if it's for sale out there or not, but it's a friend of ours named Jim Powell, who wrote this book called FDR's Folly a couple years ago, and what Jim is good at is, and he was a student of Hayek, of Friedrich Hayek, back at the University of Chicago way back when, and what he's good at is he read about 50 years of academic research on the effects of the New Deal on the economy. and summarized it in very readable language in this book FDR is Falling and so it's a great resource if you want to know you know what was the effect of the Tennessee Valley Authority during the during the New Deal years in the Great Depression what was the effect of the creation of the FDIC and so forth you know chapter after chapter and at the end of the book the last chapter after summarizing 50 years of research and it's all footnoted there you know hundreds of footnotes to

1:00academic, you know, boring academic literature. And if you want to pursue that, the last chapter gives, you know, lessons we should have learned from the New Deal. You know, what mistakes were made in those days by FDR and his regime that we should not repeat. And so I'd like to talk about some of these. In lesson number one here is, and I'll quote Jim Powell, he The basic problem with central banks is that like socialist economic planners, they can never have more than a fraction of the vast knowledge needed to make a society work, knowledge that is dispersed in the minds of millions of people. In addition, when central bankers make mistakes, as they inevitably will, since they are human beings, these mistakes harm not just the economy in a city or a region, but the entire country.

1:54End quote. You know, we certainly know that now, in today's world. And he's basically parroting much of the life's work of Friedrich Hayek. This is the famous Hayekian knowledge problem that he's talking about. Hayek called it the pretense of knowledge. He believed socialism could never work because to have an economy operate, you need decentralized information in the minds of many millions of people all around the world who participate in the International Division of Labor. And it wasn't only Hayek's idea, but he was the most prominent spreader of that idea. And so, when I look at this, and I look at what Ben Bernanke has been saying recently about increasing the powers of the Fed, It makes me think that his years as a professor at Princeton were either a matter of academic fraud or gross incompetence. Because consider this, in 1990, the famous socialist Robert Heilbrunner wrote an article in the New Yorker magazine entitled Mises was Right. This was after the collapse of communism and Heilbrunner had been advocating socialism in America his

3:09his entire career. Those of you who are my age or older or maybe 10 or 15 years younger probably were subjected to reading his book The Worldly Philosophers in an economics class and it should have been called The Left Wing Worldly Philosophers and he left out Milton Friedman even, not to mention Mises himself. But he admitted, well, the great battle, the The Great Debate over Capitalism vs. Socialism is over. Capitalism has won the intellectual debate, and he didn't entirely get it right as to why Mises won, but he capitulated. Now, an academic, a professor at Princeton like Ben Bernanke, should know this. You know, he doesn't have to necessarily agree with it, but he should know this.

3:57But what is Bernanke doing now? Well, I caught his speech in front of the Council on Foreign Relations. It was on television a couple of weeks ago, and he's very smug and arrogant in his outlook, in his appearance. And he sat back and he said, well, you know, when I was a professor at Princeton, I was aware that there were a few people who did believe that markets could work in a situation like this. But I hope there isn't anybody out there like that anymore has any faith that markets can handle a disruption like this and the crowd all giggled and laughed. The Council on Foreign Relations all giggled and laughed. And then the main purpose of his speech was to advocate a new grand central planning authority called the Systemic Risk Authority that would regulate and control all risk taking by financial institutions in America. I don't think the Soviets were even that crazy to think that that would be be a good idea. And so that's why I said either it's academic fraud in that, you know, he knows this is a bad idea, but he does it anyway. But he doesn't know this at all. He doesn't know this. He doesn't know this literature at all about why socialism failed, or, you know, he's just incompetent as an economist. How could you ignore all the literature on the great debate over socialism that existed for the past hundred years almost, but he ignores

5:22There's all this in this speech before the Council on Foreign Relations. So there's lesson number one that Jim Powell said about the Fed during the Great Depression. We of course are going in exactly the opposite direction, giving the Fed more and more and more power. Lesson number two is, quote Jim Powell again, deposit insurance must be priced to reflect the risks of the banks that buy it. Providing the Federal Government provide deposit insurance inevitably introduced political pressures to offer deposit insurance at the same price for all banks, which regardless of risk, which meant subsidized banks engaging in risky practices and contributed to the instability of the banking system, end quote.

6:09Well, that's what happened with the creation of deposit insurance in the 30s. What are we doing today? Well, we just increased deposit insurance. The first things they did, and you know the short history of this too is some of you might remember the SNL crisis of the 1980s. Well there was a government regulation called Regulation Q. Bureaucrats are very innovative aren't they with language. What should we call this? Regulation Q. It placed a limit of 5% on the interest that savings and loans could pay on savings accounts. and so what was happening was what if you could put a thousand dollars in a mutual fund and make 17% in 1980 but you could only make 5% in a savings account you know money was you know flying out of savings accounts and so the the SNLs were in trouble and so when the bankruptcies were occurring and so forth so what does the government do they increase the amount of deposit Insurance from $40,000 per account to $100,000 per account.

7:12And that meant that the risk-taking of savings and loans was being subsidized by a much greater extent by the government. And so a lot of the SNLs that were in trouble financially decided, well, we'll take on more risk because if this risky real estate venture in the Arizona desert doesn't work out, well, the government will pick up the tab. It's a bailout. It was a form of bailout, privatized profits, socialized losses. And, of course, they did. They took on a tremendous amount of additional risk, thinking that it would be covered by these additional deposit insurance. And, of course, the whole thing led to a big collapse in the SNLs, and the bailout there cost about $500 billion or so back in those days.

7:58and so what do we do and not you know 20 years later some 20 years later the same thing the same the same same dumb thing and so you know we haven't learned anything there either lesson number two lesson number three is this about the Great Depression quoting Jim Powell again especially because taxes are the biggest burden millions of people face today it's crucial to cut taxes tax cuts What's mean expanding economic liberty? How about, you know, what a remarkable thought. But of course, we're moving in exactly the opposite direction. You know, government spending is a good measure of taxation, because every dollar government spends diverts resources from the private voluntary sector one way or another, regardless of how it's financed.

8:46And so, what are we doing? We're talking about trillion dollar deficits for the next 10 years. That's what they're talking about, and Obama who, I don't call him Abraham Obama, I call him Abraham Delano Messiah Obama, because before he was inaugurated, the Democrats couldn't decide whether he was more like Abe Lincoln or FDR or the Messiah, and he's called the Messiah in the Newsweek magazine, so I call him Abraham Delano Messiah Obama, but so he's He's promising to cut the deficit. Yeah, that's a promise I'd put money on. But he's actually proposing trillion-dollar deficits. And so government spending, of course, everyone knows is ballooning. And that's a tax because it might not be a direct tax today out of your pocket, but it's a tax to the extent that all of those resources that government is now directing by politics will not be directed and allocated by private individuals in the Free Market. And so there's a huge tax. And of course, he wants to raise taxes on the most productive people. He wants to raise the capital gains tax and all sorts of other taxes. State and local governments are all scheming and plotting to raise taxes, everything from cigarette taxes to in Maryland. Now they're putting more and more and more red light cameras up to take a picture of your license plate. If you happen to run a red light and they'll send you the bill with a picture of your license plate. And that's we already have

10:45and every dime raised by the federal income tax, that's what it would have been, but that was even assuming that there would be no good economic effect to eliminating the income tax. But of course the economy would grow very rapidly and unfortunately that means that the other forms of taxes would go up that are tied to income. So it would probably be more like the 2002 level of government. And of course that is totally unacceptable Lesson 4. Efforts to soak the rich will backfire because the investments of the rich are needed to create jobs. You may have noticed the rich now, a good way of learning how the Washington Establishment defines the rich is take a look at the alternative minimum tax was it was established in 1969 because there were a hundred and fifty nine taxpayers who are very wealthy who the government decided were not paying enough income tax and so they said there's a special tax for you and we're going to call it the

11:56alternative minimum tax and since it was not indexed for inflation today there So there are people with family income of under $100,000 who pay the alternative minimum tax. And so if you want to know how Washington defines wealthy, it's anybody who makes family income of about $100,000 or more. And of course Obama keeps saying $250,000, but really if he abolished the alternative minimum tax and supported that, then I would believe him when he said $250,000 is wealthy. One of my articles on lewrockwell.com before the election in November was entitled, Fascism or Socialism, Take Your Pick. It was about McCain versus Obama. We got the socialist.

12:46The argument I made was, if you look at Abraham Delano Messiah Obama's career, he was a lawyer for Acorn. Of all the things, he gets a Harvard Law degree. What does he do? He goes to Chicago and Works for ACORN, Association of Community Organizations for Reform Now, right now, they want to reform right now. That's where the N comes from, on ACORN. And I wrote about ACORN 25 years ago. I co-authored a book entitled Destroying Democracy. It was about the phenomenon of government funding, government writing checks to special interest groups of all kinds who use I used the money to lobby for bigger government and I had maybe 7 or 8 pages on ACORN because I had a big file of data on government grants to all these groups and ACORN was one of them back 25 years ago and so I got a research assistant to look into this and say what the heck is ACORN? What do they do? What do they believe in? And they're some of the most extreme, hardcore, left-wing communists in America. If you look, they want to nationalize all the energy industries, they want to nationalize the housing industry,

13:53They want to nationalize healthcare. They want to destroy capitalism. You read their literature from 20 years ago. That's what they were saying was their objective. And these are Obama's people. This is where he comes from. He was their lawyer. And so I would think you can make a good argument that he must agree with their basic philosophy. If that's where, after he left Harvard Law School, that's where he chose to go and start a political career, working with these people. So yeah, Soak the Rich is built into Abraham, Delano, Messiah, Obama's psyche. That's what he's devoted his entire political career to, to espousing, and we'll see if he gets away with it. Lesson number five is this. Public works and other jobs, quote, jobs programs, must be avoided because they increase the cost and burden of government, making it more difficult for the private sector to function.

14:48Well, of course they do. They divert billions of dollars away from the private sector to let politicians handle this, handle the money. In my book, How Capitalism Saved America, I surveyed some of the research on how FDR spent his money. You know, Herbert Hoover started tremendous public works spending projects to try to end the Great Depression. 13% of the federal budget in one year was toward Herbert Hoover's stimulus bill. 13% of the budget, Obama's is only something like 5 or 6% of the budget. And so Obama is stingy compared to Herbert Hoover in terms of stimulus bills, as far as that's concerned.

15:34And of course that didn't work because of the principle of opportunity cost. It's just simply taking money out of one pocket and putting it in another pocket, Letting politicians allocate resources rather than private individuals. And another thing that comes up in this literature is that the main criterion that FDR used for determining how this money was to be spread around was how big his vote margins were in the last election. Everywhere he had small vote margins in 1932, that's where the biggest chunks of money were were spent. Whereas he had big electoral margins in the South, because the South didn't really vote for a Republican until Reagan, because of the Abe Lincoln phenomenon. And so, Roosevelt didn't have to worry about buying votes in the South, but the South, the Deep South is where the Great Depression was absolutely the worst. And if you can make a case that there was a need for government help, certainly Mississippi and places like that, the Mississippi Delta would have been spot number one where you'd want to send money but no

16:38it would be places like Montana and California where there were small vote margins and so there was a big pork barrel during the 1930s. I also cite a report by the US Senate that showed that people who had public works jobs in many states were told you have to re-register as Democrats if you're a Republican or for No Job for You. And so it was used as one big giant political pork barrel. And I think it's kind of naive to expect that this pork barrel, the so-called stimulus bill, will not be used primarily as a vote buying gimmick rather than some attempt to make us prosper, which it couldn't anyway in any way because it diverts resources from the private sector.

17:24So that won't work. We haven't learned anything there in terms of economics, But it's a good political gimmick. Lesson number six is that, quote, especially during a recession or a depression, the government must not enact laws preventing prices from adjusting to circumstances. Prices are vital signals that help people decide what to produce and consume, end quote. That's Jim Powell saying that. And of course, the whole purpose of the Fed's tremendous inflation of the money supply is to attempt to keep prices from falling, to keep the market from working. You know, we can't do that at all. So we're not learning that lesson. We're doing the opposite. Lesson number seven of Jim Powell's book is quote, government must not enact laws preventing wages from adjusting to circumstances.

18:12Labor union monopolies have been major obstacles to adjusting wages, end quote. During the Great Depression, wages rose in 1937 by about 15%. So at a time when the only really hope you had to have a job in the depression was to say, okay, before the depression, I was being paid $5 an hour, I'll work for $3 an hour, but at least I have a job. Here comes the government enabling unions to push up wages to say $7 an hour, and the end result was very predictable to any economist, and you don't have to be an Austrian school economist, is more unemployment. Our friends Richard Vetter and Lowell Galloway published an excellent book called Out of Work, It's a History of Unemployment in America. They estimated, I think the number they gave was that the unemployment was eight percentage points higher than it would otherwise have been because of the empowerment of unions and other means by which wages were pushed up during the Great Depression.

19:08That was basically FDR's basic philosophy. If the government could somehow force up prices and wages, the Great Depression would end. He believed the cause of the Great Depression was low prices. Therefore, if we could get the government to push up prices and wages, we'll end the Great Depression. Of course, that was foolish and it never worked, but that was his basic operating theory for the whole duration. And it seems to be what we're still operating by today in the government anyway. And as Walter Block mentioned, one of Abraham Delano Messiah Obama's campaign promises was to do away with secret ballot elections with unions. Unions, so that they could intimidate workers more when they have a representation election and repeat this, increase private sector unionization and increase wages and that will create more unemployment.

20:06Lesson number eight is, quote, only if investors feel private property is secure will they be willing to make long-term financial commitments needed to spur recovery and boost employment, Well, announcing a new kind of bailout scheme, a new systemic risk authority, and all these different government regulatory authorities day in and day out creates tremendous uncertainty and makes it impossible for any kind of long-term planning. Not to mention the hyperinflation we're going to get that will make economic calculation very difficult if not impossible for any rational business person coming down the pike. And so we're moving in the opposite direction there. And not only has the government been proposing more and more different kinds of regulations and controls and nationalizations, threats of nationalizations, I heard Obama himself a couple of days ago on television say the cause of the crisis is not enough regulation. We don't have enough regulation. Laissez-faire has run wild once again. It's sort of like the dumbest explanation I've heard of this, and it's probably the majority of academics who will believe this,

21:20is that greed is the fault. All of a sudden, greed popped up on Wall Street like that. It never appeared before, but all of a sudden, like in the movie Ghostbusters, there it is. It vaporizes out of thin air, greed, all of a sudden. But there's not enough regulation. Well, you know, we have 15 cabinet departments devoted to regulating different aspects of the economy. There are over a hundred federal regulatory agencies. There are 73,000 pages of regulations in the Federal Register. And not to mention state and local governments that have hundreds and hundreds of more of government agencies that regulate everything from zoning to antitrust to everything else, to home building, a lot of you who are business people in the audience know all about this, and so, you know, we have nothing like a capitalist economy, there might be a few little tiny oases here and there, but this is economic fascism, pure and simple, which was, yes, we allow private property, but it is strictly regimented and controlled and regulated, supposedly in the public interest by the regulators.

22:32We have hundreds, maybe thousands of regulatory agencies, certainly tens of thousands of regulators who enforce all of this. And so talk about uncertainty. And so the direction we had to be moving is exactly the opposite of what we're doing now. And what happened during the New Deal is that everything Roosevelt did economically made the New Deal longer and worse. And we're doing the exact same things today, from Fed policy to regulatory policy to everything else. And one myth that you should not believe in any longer after you leave this room, is the myth that World War II ended the Great Depression. There were about five to six million people unemployed during the Great Depression.

23:18When World War II came, the military, the government drafted 11 million people, 11 million, sent them overseas. That is not how you return to economic normalcy. You don't send somebody to sit in a foxhole and get his head blown off and call that the same as having that person working at a job and having dinner with his family every night. And the Great Depression didn't end, really, until after World War II ended. The federal budget in 1945 was 95 billion. In 1948, the federal budget was about 35 billion. So there was a two-thirds reduction in federal government spending from 1945 to 1948. That, coincidentally, was when the economy took off and also the Roosevelt regime was gone.

24:07Truman was not demonizing business every single day on television, like FDR and all of his cronies were constantly blaming everything on capitalism and capitalists and economic royalists and all this, creating tremendous uncertainty in the minds of business people. And so that's one lesson I think everyone here ought to learn, that it's a myth that World War II ended the Great Depression. Even though Paul Krugman in the New York Times big mouth says it every time he gives a speech almost, thank goodness for World War II, it ended the Great Depression, but it just goes to prove that winning the Nobel Prize doesn't mean you know a damn thing about economics. And that's it for me. Thank you very much.