A Guy From Pittsburgh Knows Laissez-Faire Economics?

Laissez faire is best medicine
By Donald J. Boudreaux Wednesday, August 22, 2007
I'm writing these words only days after the Federal Reserve injected several million additional dollars into the economy. The recent steep decline in stock values, apparently sparked by the collapse of the subprime mortgage market, has lots of people plenty worried.
They worry not only that bears will populate Wall Street for an extended stay but that all this bearishness will drag the economy into a deep and long recession. And a recession -- with lots of unemployment and sluggish (or even negative) growth in output -- spells hardship for many ordinary Americans.
I, too, am a bit worried. But my worry is not about the market's ability to handle the consequences of bubbling housing prices and bankrupt mortgage lenders. It is about how government will react to these events.
The ever-present demand to "do something" is unfortunately immune to the wisdom counseling that there are some problems best left to sort themselves out. Government efforts to "solve" market adjustments and dislocations typically -- and at best -- supply only short-run relief while making the longer-run situation more dire.
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The most famous such intervention is Franklin Roosevelt's New Deal. Still commonly regarded as saving America from the Great Depression, this spasm of interventionist government did no such thing.
On the eve of entering World War II in 1941, America's economy was still quite depressed -- as it had been for more than a decade. And as economic historian Robert Higgs shows in his 2006 book, "Depression, War, and Cold War," New Deal policies and the prevailing climate of ideas from which they sprang suppressed investment.
The New Deal and the genuine risk of outright socialization of industry in the 1930s kept the American economy in deep doldrums for a much longer time than would have been the case if Uncle Sam just said "laissez faire" and had conspicuously ignored all the Very Smart People who clamored for socialism. No investor, after all, wants to put his assets at stake in a country whose government might tax away or outright confiscate these assets.
And just before FDR won his first term in the White House, Congress passed, and President Herbert Hoover signed, the now-infamous Smoot-Hawley tariff. This tariff hike in June 1930 raised tariffs to heights not seen before or since. The idea was to stimulate employment in America by making it much more expensive for consumers in the U.S. to buy goods from abroad.
It backfired.
Most economists agree that the Smoot-Hawley tariff deepened the Depression. It raised the cost to American factories of supplies bought from abroad, thus causing many factories to further reduce their outputs. It also prompted other governments to "retaliate" with their own substantial tariff hikes, thus reducing the demand for American exports. And Smoot-Hawley, like any tariff, forced domestic consumers to pay more for goods and services.
The extra dollars that consumers paid for the things they bought were dollars no longer able to be spent on other goods and services. The demand for these other goods and services fell, causing those industries to contract. Fortunately, Congress began to undue Smoot-Hawley just a few years later.
As soon as it became reasonably clear in the years immediately after World War II that America would not move down the road to fuller-fledged socialism, investors regained enough confidence in the U.S. to begin again to invest here. Only then can we say that the Great Depression was over.
While I don't see on the horizon any ideas as bad as those of the 1930s, there are nevertheless some troubling signs.
The hysteria over climate change is not good for investment, especially for investment in the fossil-fuel sector. (If you had a few dozen million bucks to invest, how eager would you be to build a new gasoline refinery when hordes of people today scream about how awful it is that consumers leave "carbon footprints"?)
Even worse is the distressing new rejection of free trade. The Democratic Party, with its new-found power on Capitol Hill, huffs and puffs about "fair trade" and "balanced trade" and other euphemisms for trade restrictions.
History is clear that freer trade means more opportunity and greater and more widespread prosperity. That Uncle Sam might be losing his taste for freer trade is very frightening.
Given the stock markets' wild swings lately, I have no idea what will happen by the time this column is printed. I'm confident only that, if government would find the resolve not to intervene, things will work out fine. Not so if Uncle Sam succumbs to the itch to meddle further.