Steve Forbes's latest column on the causes of the credit crises and its historical ramifications is enlightening. Though I don't agree with everything he says, his characterization of the Great Depression and the lessons to be learned from past mistakes feels right. I particularly like this pasasge:
The Depression was actually triggered by the Smoot-Hawley Tariff of 1929--30, which imposed massive taxes on countless imports. Other countries retaliated in kind. The global trading system collapsed. International capital flows dried up. The legislative history of Smoot-Hawley is instructive. When it first surfaced in Congress during the fall of 1929, the stock market cratered. When near the end of 1929 it appeared that Smoot-Hawley was being sidetracked, stocks rallied, ending the year almost where they had begun. But then in early 1930 Smoot-Hawley resurfaced, and stocks resumed their slide, which continued after Smoot-Hawley was signed into law that June. A devastating global contraction ensued.It's impossible to separate the political from the economic. Protectionism and isolationism have already begun to rear their ugly heads--Obama's posturing on Nafta and other free trade agreements is just one example.
Compounding that error was the U.S.' giant tax increase in 1932. President Herbert Hoover thought a balanced budget would restore confidence. The top income tax rate was raised from 25% to 63%. Hoover even legislated an excise tax on checks--you had to pay Uncle Sam a fee every time you wrote a check. Not surprisingly, strapped consumers withdrew massive amounts of cash from banks in order to conduct their business, which put even more stress on troubled banks. This check tax was one of the factors leading to the bank closures of 1933. The huge tax increase deepened the U.S. economic slump.
If not for the Depression, Hitler would never have come to power--the Nazis had carried only 2% of the vote in 1928.
And, lest you think it's nothing more than airy campaign talk, bear in mind that trade unions are some of his biggest financial contributors and supporters. They would like nothing more than to kill Nafta and impose protectionist measures all in the name of, as Forbes puts it, "better" labor and environmental rules. This is entirely disingenuous.
Rather, expanding free-trade--revisiting Doha and continuing to pursue bi- and multi-lateral free trade agreements (Colombia, South Korea, Pacific Rim)--is the answer.
"Free-market capitalism will save us, if we let it."
(h/t Matt B.)
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