Policy Errors Of The Great Depression

Imagine a policy maker whose policies don't work.  He resembles Euclidean Geometers in a non-Euclidean world who discovers that straight lines, apparently parallel often meet.  He then rebukes the lines for not keeping straight only to soon witness more collisions.  This is precisely what the government policy makers do when their solutions fail.  Faced with failure, government then tends to blame the market rather than itself, and intervenes more!  Feeling that they just haven't intervened enough, they try more...followed by more failure.  If this process is not interrupted, the price and profit system will break down and government control ensues. 

This is clearly demonstrated in the serious policy mistakes by government in attempting to bring an end to the Great Depression.  Here is a list:

1.  Wagner Act --  This basically kept wages from falling for union labor.  In fact it went up 24% during the depression.  But non-union workers were basically cast to the wolves.  Since wages are just one of many prices, this meant that unemployment is caused by an imbalance of prices.  Since the primary function of markets is to bring prices into balance, it makes no sense that markets cannot correct unemployment. 

2.  High Taxes On The Rich -- The rich are primarily the investors.  They risk their capital in new ventures.  If the risk pays off, it means jobs.  If you heavily tax the risk takers, they will not change their consumption, but they will reduce their investing.  We should be encouraging saving and investing, not discouraging it.

3.  Excise Taxes on Everyone -- This took money out of workers pockets.

4.  Social Security Tax -- This was implemented in 1935....right in the middle of the Great Depression!  Withholding funds from the workers during a crisis was a clear policy error.

5.  Corporate taxes raised --  To take money away from the very ones who could potentially hire workers was another policy blunder.

6.  Deficit spending went on too long.  John Maynard Keynes advocated deficit spending.  His view was that in periods of high unemployment, it would not be inflationary, and it would stimulate overall demand in the economy.  To some extent he was correct.  But he never implied that it should go on indefinitely.  He was a deflation hawk, and by 1937 deflation had been quelled, and he told policy makers to return to the classical economic model of budget balancing.  He was, of course, ignored, and the depression continued.

7.  Trade Protectionism -- The Smoot - Hawley Tariff  changed a recession into a depression. Today,  even left leaning economist Paul Krugman stated, "Opponents of global trade, whatever their intentions, are doing their best to make the poor even poorer."  -- NY Times; April 22, 2001