Posted by: Yvonne | October 28, 2010

A Historical Economics Lesson

Reliving Failure

by Thomas Sowell

Songs that are “golden oldies” have much less pleasant counterparts in politics— namely, ideas and policies that have failed disastrously in the past but still keep coming back to be advocated and imposed by government. Some people may think these ideas are as good as gold, but brass has often been mistaken for gold by people who don’t look closely enough.

One of these brass oldies is the idea that the government can and must reduce unemployment by “creating jobs.” Some people point to the history of the Great Depression of the 1930s, when unemployment peaked at 25 percent, as proof that the government cannot simply stand by and do nothing when so many millions of people are out of work.

If we are going to look back at history, we need to make sure the history we look at is accurate. First of all, unemployment never hit 25 percent until after— repeat, AFTER— the federal government intervened in the economy.

What was unemployment like when the federal government first intervened in the economy after the stock market crash of 1929? It was 6.3 percent when that first intervention took place in June 1930— down from a peak of 9 percent in December 1929, two months after the stock market crash.

Unemployment never hit double digits in any of the 12 months following the stock market crash of 1929. But it hit double digits within 6 months after government intervention— and unemployment stayed in double digits for the entire remainder of the decade, as the government went in for one intervention after another.

The first federal intervention in June 1930 was the passage of the Smoot-Hawley tariffs by a Democratic Congress, a bill signed into law by Republican President Herbert Hoover. It was “bipartisan”— but bipartisan nonsense is still nonsense and a bipartisan disaster is still a disaster.

The idea behind these higher tariffs was that reducing our imports of foreign goods would create more jobs for American workers. It sounds plausible, but more than a thousand economists took out newspaper ads, warning that these tariffs would be counterproductive.

That was because other countries would retaliate with their own import restrictions, reducing American exports, thereby destroying American jobs. That is exactly what happened. But there are still people today who repeat the brass oldie that restricting imports will save American jobs

You can always save particular jobs in a particular industry with import restrictions. But you lose other jobs in other industries, not only because other countries retaliate, but also because of the economic repercussions at home.

You can save jobs in the American sugar industry by restricting imports of foreign sugar. But that results in higher sugar prices within the United States, leading to higher costs for American candy producers, as well as American producers of other products containing sugar. That leads to higher prices for those products, which in turn means lower sales at home and abroad— and therefore fewer jobs in those industries.

A study concluded that there were three times as many jobs lost in the confection industry as were saved in the sugar industry. Restrictions on steel imports likewise led to an estimated 5,000 jobs being saved in the steel industry— and 26,000 jobs being lost in industries producing products made of steel.

Similarly, the whole idea of the government itself “creating jobs” is based on regarding the particular jobs created by government as being a net increase in the total number of jobs in the economy. But, since the government does not create wealth to pay for these jobs, but only transfers wealth from the private sector, that leaves less wealth for private employers to create jobs.

Songs that are golden oldies bring enjoyment when they return. But brass oldies in politics just repeat the original disasters.

A statistical analysis by economists, published in 2004, concluded that federal interventions had prolonged the Great Depression of the 1930s by several years. How long will future research show that current government interventions prolonged the economic crisis we are living through now?



  1. Thomas Sowell gives excellent commentaries on all things about economics (and other subjects!). HE has been one of my favorite authors since I first started reading him in “Conservative Chronicle.” I highly recommend his book, “The Vision of the Anointed.” You won’t be able to put it down!


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