In our monograph, Economic Contractions in the United States: A Failure of Government, Nathanael Smith and I evaluate and categorically reject the hypothesis that a failure of laissez-faire capitalism caused both the Great Depression (1929-39) and the current financial crisis and economic contraction (2008-9) in the United States and that extensive government intervention by Presidents Roosevelt and Obama provided the essential bases for economic recovery. The Great Depression and the current economic contraction were both caused and accentuated by a failure of government and state capitalism, not by any failure of laissez-faire capitalism.
A detailed review of the Great Depression clearly demonstrates that loose monetary policy by the Federal Reserve created the stock-market and the housing bubbles that collapsed in 1929 and that the Fed’s failure to maintain an adequate supply of money (M1 and M2) over the period 1929 to 1933 turned a minor recession into a major contraction. Presidents Hoover and Roosevelt exacerbated the depth and duration of the economic downturn by fiscal policies harmful to the private sector – wealth-destructive tax increases, socialist increases in government spending and dangerously rising budget deficits – as well as by interventionist industrial and labour-market policies modelled on those of fascist Italy.
As our monograph shows, President George W. Bush learned all the wrong lessons from that historical experience. From 2001 onwards, his administration, together with the Greenspan-Bernanke Federal Reserve Board, pursued crudely expansionist Keynesian fiscal and monetary policies that fuelled stock-market and housing-market bubbles similar to those of 1929. When the Federal Reserve belatedly tightened monetary policy in 2007, the bubbles burst, and economic contraction quickly followed. Like Hoover before him, Bush and the US Congress reacted by dramatically increasing the level of government intervention and by resorting to a policy of overt budget deficits.
Like FDR before him, President Obama has ratcheted up the Bush doctrine, increasing budget deficits to levels unheard of since World War II, and pursuing socialist economic policies – trade protection, nationalisation of banks, nationalisation of automobile companies, nationalisation of health-care, an unconstitutional invasion of private contracts, an expansion of union power, and economically inefficient environmental policies – that are all wealth-destructive. The Obama doctrine, if it is not confronted and halted, is guaranteed to shift the US irreversibly away from its relatively laissez-faire capitalism yet further into the state capitalism that is central to the current downturn and that ends up as a simulacrum of the stagnant social market economies of continental Europe. The Obama doctrine is a doctrine of government failure that will not be expunged this time by outright victory in a major World War that left the United States hegemonic over the world economy.
As our monograph demonstrates, the path that Obama follows is not just the road to serfdom that Friedrich Hayek warned us against in 1944. It is the road to hell for an American people whose nation was forged on a Lockeian anvil of the inalienable rights to life, liberty and property. Our monograph clearly defines a better road – a road paved by free trade, balanced budgets, low taxes, secure property rights, and laissez-faire capitalism. This indeed is the road that reflects the wisdom of the Founding Fathers. It is the road suited to a free and a proud people, the road that is built on the unshakeable foundations of individual liberty, private property, limited government, and the rule of law.
Charles K. Rowley is General Director of The Locke Institute and Duncan Black Professor of Economics at George Mason University.