Latest economics column

The economic clouds are gathering. The storm is approaching to level a devastating disaster not only on America but the world. Soup kitchens will have lines going around the block. Now a once roaring decade has closed with financial turmoil and the aftermath is perhaps a decade or more of misery.

If you are confused whether this is 2008 or 1932 you are not alone. In 1932 the United States had to choose between two equally bad candidates Herbert Hoover and Franklin Delano Roosevelt. In 2008, did America again have a choice between two equally bad candidates? The history still hasn’t been written. Yet, the truth is we have yet to hit the depression everyone has been panicking about. The current economic climate is not just "a mental recession" as one foolish adviser to Sen. John McCain said. The recession is very real. However, it is time for the media's and the fatalist’s view of the economy to come to an end. The fact is we know what caused the depression and though the current solutions are not perfect, the economy will bottom out and turn around much sooner than we expect.

There are a whole host of reasons why the Great Depression occurred, yet what many of us fail to realize is during that horrible period people were learning what happened and how to avoid another depression. The economists now know why the Depression was so long and so devastating: government intervention in the economy.

Let's look at a massive government expansion program - the New Deal. Five years into Franklin Roosevelt's presidency the unemployment rate was still at a scary 19 percent, according to the Bureau of Labor Statistics. This is admittedly better than 24.9 percent in 1933, the first year of Roosevelt's presidency, but that means there are thousands and thousands of willing workers who still could not find jobs.

Unfortunately, Roosevelt made a massive blunder during the New Deal named the National Industrial Recovery Act (NIRA). This allowed business owners with government support to act as cartels, brush away antitrust laws, set price floors and raise wages. In some cases, economists put the wages 25 percent higher than they otherwise would have been. Most people would think there is nothing wrong with raising wages, however, this act of legislation was only beneficial to those lucky enough to have a job in 1933.

The main economic problem with the NIRA is business worked with the government in setting prices and wages too high. When employing high wage workers, businesses have to cut back on the number of jobs available and that is exactly what happened. Two economists, Harold Cole and Lee Ohanian, demonstrated through economics that Roosevelt prolonged the Depression not shortened it.

The fact is unemployment did not reach adequate levels until 1942, after the United States joined the Allies in World War II. Roosevelt thought excessive competition among businesses was causing Americans to work less. When the NIRA allowed for businesses to fix the wages of workers it reduced competition between employers to provide jobs. The politicians and populists fail to understand that when the labor market is restricted employers stop hiring employees. Competition is the workers friend not the enemy.

Not only did the New Deal not end the Depression but Americans worked less. Cole and Ohanian wrote, "Total hours worked per adult, including government employees, were 18% below their 1929 level between 1930-32, but were 23% lower on average during the New Deal (1933-39). Private hours worked were even lower after FDR took office, averaging 27% below their 1929 level, compared to 18% lower between 1930-32."

This does not mean that Herbert Hoover could have ended the Depression either. He raised taxes and tariffs because he thought the national debt was more important than unemployment. By raising tariffs this reduced trade and isolated Europe from the United States. When trade decreases there are less jobs because there are no goods and services being exchanged, therefore less workers are needed.

For those of you who thought there was little choice between Obama and McCain, you should look to 1932 when the only choices were: making the Depression longer with Hoover's high taxes and tariffs or Roosevelt's restrictions on prices and wages. We all should be thankful that employment hasn't hit 25 percent and that we did not have to choose between two evils of equal magnitude. A depression is still far away thanks to our grandparents’ efforts. But it is time for a more realistic and pragmatic approach to fixing the economic crisis and it is called letting the free market work.