Note: only the first part of the book (Contents, Preface, Foreword and Introduction) is currently available to download.
The economic policies of the Obama administration are repeating many of the mistakes made during the Great Depression, according to a study* released today by the Institute of Economic Affairs, and endorsed by Nobel-Prize-winning economist James M. Buchanan.
The authors** argue that there are "troubling similarities" between the approach of the current US government and the disastrous economic policies of President Roosevelt during the 1930s.
By trying to revive the economy with profligate deficit-spending and increased state intervention, Obama is undermining the long-term growth potential of the US economy and risks delaying full economic recovery by several years.
Examining the economic evidence, the study challenges the widely held view that conservative fiscal policies caused the Great Depression and Keynesian fiscal policies brought recovery. Rather, excessively loose monetary policy was the cause of the stock market bubble that burst in 1929, while excessively tight monetary policy was the principal reason that a normal recession turned into a deep depression.
Relaxation of monetary policy was the main reason for a brief and limited recovery after 1933. But, argue the authors,
"FDRs interventionist policies and draconian tax increases delayed full economic recovery by several years by exacerbating a climate of pessimistic expectations that drove down private capital formation and household consumption to unprecedented lows."
As a result, the US had arguably the deepest and longest-lasting depression of all the major industrial countries in the 1930s.
While this recession appears to be far less severe, current US policies are likely to hamper recovery by crowding out investment and leading to much higher taxes and interest rates in the medium term.
In a damning indictment of Obamas economic programme, the authors conclude that:
"Now is a particularly bad time to enact socialistic reforms to the market for healthcare, pursue wealth-destructive cap and trade environmental programs, or force additional federal tax dollars into state and local education markets. Such policies imply higher government spending and, eventually, either higher taxes or runaway inflation, thus depleting taxpayer and business confidence in the economy "
In their recipe for recovery, the authors suggest, that whilst expansionary monetary policy is appropriate to avoid the main mistake in the US in the 1930s, on the micro-economic side there should be a return to the policies of laissez-faire capitalism from which George W. Bush departed in the early years of the twenty-first century: tariffs and other trade barriers should be repealed unilaterally; a Right-to-Work Act should reduce the minimum wage and curtail the powers of unions; there should be a return to fiscal conservatism; and business regulation should be reduced. Furthermore, there should be a reform of the approach taken to insolvent banks. Individual banks and their counterparties should not be bailed out, although the system should be protected by ensuring that failing banks are wound up in an orderly fashion this is the only way to restore market discipline.