Government Spending Didn’t End the Great Depression

Given that our country is mired in a severe recession, the history of the Great Depression — especially the history of how we got out of it — is rightly regarded as relevant to fixing today’s problems.

Some popular accounts would have us believe that the Great Depression ended via a) FDR’s New Deal and/or b) World War II. Translation: it was ended via a) a veritable government takeover of the economy, including massive wealth transfers to pay for make-work projects and/or b) an extremely costly war, both in money and in lives. Keynesian economists (and the politicians they influence) have used this supposed history to justify claims that more government spending, no matter what form, is the key to economic recovery.

But economic historian Burton Folsom and his wife, Anita Folsom, have written a forceful Wall Street Journal piece debunking the popular mythology of the Great Depression.

Here are some excerpts:

Let’s start with the New Deal. Its various alphabet-soup agencies — the WPA, AAA, NRA and even the TVA (Tennessee Valley Authority) — failed to create sustainable jobs. In May 1939, American unemployment still exceeded 20 percent. European countries, according to a League of Nations survey, averaged only about 12 percent in 1938. The New Deal, by forcing taxes up and discouraging entrepreneurs from investing, probably did more harm than good.

What about World War II? We need to understand that the near-full employment during the conflict was temporary. Ten million to twelve million soldiers overseas and another ten to fifteen million people making tanks, bullets and war materiel do not a lasting recovery make. The country essentially traded temporary jobs for a skyrocketing national debt. Many of those jobs had little or no value after the war.

What was the solution? In large part, for the government to substantially reduce its intervention, especially through taxes and wealth transfers. After the war, Folsom writes,

Congress reduced taxes. Income tax rates were cut across the board. FDR’s top marginal rate, 94 percent on all income over $200,000, was cut to 86.5 percent. The lowest rate was cut to 19 percent from 23 percent, and with a change in the amount of income exempt from taxation an estimated twelve million Americans were eliminated from the tax rolls entirely. Corporate tax rates were trimmed and FDR’s “excess profits” tax was repealed, which meant that top marginal corporate tax rates effectively went to 38 percent from 90 percent after 1945.

[…]

By the late 1940s, a revived economy was generating more annual federal revenue than the United States had received during the war years, when tax rates were higher. Price controls from the war were also eliminated by the end of 1946. The United States began running budget surpluses.

A lesson of this is that government spending is not economically necessary to end a downturn or depression; it is economic poison. In today’s economic context, the antidote is first and foremost a massive reduction in government spending (tax cuts are desirable, but only once our deficit is cut) which must include a phasing out of the welfare and regulatory programs that so much of government spending pays for.

This story first appeared on Voices for Reason, April 20, 2010.

Punishing Google for Its Success

The Obama Administration’s Department of Justice recently announced that it will dramatically increase enforcement of antitrust laws against successful, dominant companies who allegedly harm competition by wielding too much “market power.” What sorts of companies? Experts agree that the first targets might include one of America’s most beloved. “This will be bad news for heavyweights in the tech industries,” a leading scholar told The New York Times, “companies like Google.”

But wait: Isn’t Google a company whose products and services, centered around its fabulously popular search engine, benefit millions of Americans and businesses? Shouldn’t Americans be celebrating Google, and shouldn’t the government be leaving it alone?

No, antitrust enforcers say. Google has become too “dominant” in the search engine market — that is, too many of us choose to type in http://www.google.com/ instead of http://www.yahoo.com/ or http://www.live.com/. This allegedly gives Google too much power over those who wish to buy its coveted, keyword-based advertising. In an influential article on leading technology blog TechCrunch, Wharton professor Eric Clemons argued that “Google enjoys monopoly power over corporations that participate in its keyword auctions” and “Google is abusing its monopoly position by overcharging corporations for access to consumers.”

But what does it even mean to have “abusive monopoly power?”  Well, consider what the “power” of Google — a company no one is forced to deal with and anyone is free to compete with — really amounts to.

Through incredible technical innovation and brilliant management and marketing, Google has created by far the most popular search engine on the planet, attracting hundreds of millions of users. Through additional innovation, it has created the AdSense program, which offers advertisers the ability to reach users whose searches contain keywords associated with the advertisers’ products. Millions of advertisers eager to reach that Google user-base are willing to pay substantially higher rates than less-popular search engines can charge. Google even holds expensive auctions for top keywords.

Google’s prices and terms, often denigrated as “overcharging” and “unfair,” are in fact earned. And Google’s power to attain them exists only as long as it continues to offer superior value to its advertising customers. The minute AdSense’s rates stop making financial sense to advertisers, Google will see its dominance disappear. Critics bemoan the difficulty faced by competitors trying to overtake Google in search and advertising revenue — but that just proves how much value Google brings to the table, relative to anyone else. This is grounds for admiration of a superior competitornot prosecution for being “anticompetitive.”

Google has no power to force consumers to use its products and no power to prevent competitors from offering products of their own. Consequently, it can pose no threat to anyone’s rights or to the competitive process. (If Google ever does use coercion, as is alleged in a copyright case against the company, it should be prosecuted — but this has nothing to do with antitrust.)

There is, however, one player in today’s market that can thwart competition: the government. By using the vast and arbitrary political power given to it by antitrust law, the government can forcibly control successful companies such as Google and Microsoft, telling them what products they cannot sell, what markets they cannot enter, what prices they cannot charge. Obama’s new push to “protect competition” is the real threat to competition. Under the reign of antitrust, any superior company can be stopped in its tracks because some bureaucrat, company, or academic decides that the prices in its voluntary contracts are too high, or its voluntary terms are too onerous, or evento take another common accusation against Google — that its stable of free products is too large! In other words, Google is to be shackled so that future competitors can catch up to Gmail, Google Maps, and Google Books.

Success earned in a free, competitive process is an achievement. Our Department of Justice regards it as a crime. Thus, we may well see Google undergo the fate of Microsoft, which has been tortured, drained, and shackled by more than a decade of antitrust persecution — for adding a web browser to its fabulously successful operating system. Google famously encourages employees to devote 20 percent of their time to creative projects of their own choosing. An antitrust case could effectively force much of that precious time and energy to be devoted to mollifying and obeying Washington’s economic little Caesars. Let’s challenge this travesty-in-the-making, along with its underlying theory that successful companies possess “monopoly power,” before America commits yet another sin against capitalism.

This story first appeared at the Ayn Rand Center for Individual Rights and was published in Investor’s Business Daily, June 4, 2009.