Tuesday, October 27, 2009

More Protectionism Hurt Odds of Avoiding 1930s Redux

I said that the administration's awful protectionist decision on Chinese tires would encourage more companies to come forward and ask for protectionist measures. We've seen it with paper companies and now some steel products producers. They have asked and our government is obliging. Protectionism was one of the four critical policy mistakes that turned a routine recession in the 1930s into the Great Depression, which went on to spark already simmering grievances into a global war that killed 50 million people. While we have not resorted to protectionism on a significant scale this administration has been dabbling in small scale protectionism almost from day one with the Mexican trucking ban. Even if we don't resort to big-time protectionism, at some point the continuing small scale efforts add up to a significant protectionist stance for which we'll face the consequences; and, we will have thusly failed one test in our modern effort to keep a routine recession from becoming another Great Depression.

We have, fortunately thanks to Ben Bernanke, passed the first test - we have not contracted the money supply bringing on defaltion. If we we stop dead in our tracks on protectionist measures and tack backward toward freer trade we will stand 2 for 2 and have good odds of not repeating the GD. Taxes and massive regulation of the economy remain as the final two tests. Taxes are going up, that is certain, so we could be 2 for 3 going into the fight over massively regulating the economy represented by healthcare reform and cap-and-trade. If we fail that test and have close to 40% of the economy subject to nearly unlimited government interference, we will stand at 2 for 4 and, no surprise, I give us a 50-50 chance of avoiding another 1930s. But I am profoundly pessimistic that the administration's protectionist urge will subside, so we stand at 1 for 3 in my book. Healthcare "reform" and cap-and-trade are the last test. If we pass both measures as currently contemplated it will represent an unprecedented takeover of nearly the entire economy akin to Roosevelt's NRA, and we'll have gone 1 for 4. Not good enough, I'm afraid, and we'll see something quite similar to the 1930s.

Although, some think 1930s America is not the right comparison, not that this is all that much better.


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