NCPA - National Center for Policy Analysis


February 14, 2007

A booming economy has done nothing to soften the pessimism of many pundits and politicians who are either unimpressed or expect the whole thing to come crashing down any minute.  That is, unless the government firmly grabs the reins of the global economy and steers it clear of disaster, says Brian S. Wesbury, the chief economist at First Trust Advisors L.P. in Lisle, Ill.

Forgotten in this rush to pass judgment on capitalism is the fact that the last two times government seriously tried to control the U.S. economy -- in the 1930s and in the 1970s -- they made a terrible mess of it:

  • In the 1930s, the Smoot-Hawley Tariff Act caused a collapse in global trade, while the Fed allowed the money supply to shrink by one-third.
  • Government regulation in the 1920s prevented banks from branching, which caused more than 10,000 to fail in the 1930s, deepening and prolonging the Great Depression.
  • Herbert Hoover's tax hikes were icing on the cake, capping off a perfect storm of D.C. policy mistakes.

It took another 35 years, and a nice run of prosperity, but Washington finally gathered the courage to try this again:

  • Between 1965 and 1981, Great Society welfare and health-care programs, wage and price controls, inflationary Fed policy, 70 percent marginal tax rates, 50 percent capital-gains tax rates, and highly regulated energy, airline, banking and trucking industries created severe problems.
  • The Misery Index (calculated by adding inflation and unemployment) rose to 21.9 percent in 1980 (today it is 7.2 percent).
  • One of the worst mistakes of the 1970s was a National Energy Plan; the Department of Energy (DOE) was created while the Congress and President Carter pushed forward windfall profits taxes, price caps, subsidies for solar energy, tax breaks for using coal and direct spending on synthetic fuels.

Source: Brian S. Wesbury, "A Portrait of the Economy," Wall Street Journal, February 14, 2007.

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