GlobeAsia quotes Higgs on How Governments Cause Financial Crises

In an article in the December 2008 issue of GlobeAsia, economist Steve Hanke quotes Senior Fellow Robert Higgs and references Dr. Higgs’s monumental Independent Institute book, Depression, War and Cold War, to show how federal government policies created, deepened and prolonged the Great Depression, killing off the chances for recovery until after World War II.

The purveyors of Great Depression myths—such as this year’s Nobel laureate in economics Paul Krugman—assert that the fiscal stimulus which accompanied World War II rescued the economy from the Great Depression. In fact, the Great Depression was followed by a spontaneous recovery, with the unemployment rate falling from 24.7% in 1933 to 14.2% in 1937. This recovery was interrupted by a sharp slump in 1938-1939. It was concentrated in the manufacturing sector and was associated with a decline in gross private domestic investment. Even though a spontaneous recovery occurred before World War II, it is important to stress that scholarship by Robert Higgs, and other economic historians, shows that—contrary to legend—the New Deal held down the spontaneous recovery and contributed to the 1938-1939 slump. Indeed, Higgs’ evidence demonstrates that investment was depressed by New Deal initiatives because of regime uncertainty—‘a pervasive uncertainty among investors about the security of their property rights in their capital and prospective returns.’ (Robert Higgs, Depression, War and Cold War: Studies in Political Economy. New York: Oxford University Press, 2006, p. 5). In short, investors were afraid to commit funds to new projects because they didn’t know what President Roosevelt and the New Dealers will do next.

Hanke further correctly notes the following regarding the current, bi-partisan bailout scheme:

This brings us to the Troubled Asset Relief Program (TARP). This $700 billion bailout program is, among other things, a bureaucratic nightmare that is as confused as it is confusing. Add to that Treasury Secretary Henry Paulson’s major shifts in the TARP’s direction, as well as the circus on Capitol Hill, and we have all the ingredients for a royal case of regime uncertainty. It shouldn’t be surprising, therefore, that each time Secretary Paulson makes a pronouncement or the Congress performs another act, the stock market takes a dive.

David J. Theroux is Founder, President and Chief Executive Officer of the Independent Institute and Publisher of the quarterly journal, The Independent Review.
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