of 2008' Is Better Than the Alternative
by Kevin Hassett
NOV 03 2008'
A panic occurs
when terror replaces thinking and reason, as happened
in mythology when Pan frightened the Titans in their epic
battle with the gods.
to the exits certainly looks like a panic. Markets are
pricing in catastrophes beyond modern experience. Corporate
bonds, for example, are trading at levels consistent with
default rates of about 50 percent. If half of U.S. firms
default on their debt, we might need to find a word that
is worse than ``depression''.
But the view
that these prices have been driven by a panic is really
quite hopeful. It suggests the truth can't possibly be
so bad, that sooner or later markets will wake up and
Such hope may
be misplaced. We should all pray that we are living through
a panic. It is far scarier if markets aren't panicked,
but rather are functioning well and properly discounting
the probability that the economy will be horrific.
Why might markets
be right? A look at the academic literature on the causes
of the Great Depression suggests a simple answer: If Democrats
actually adopt the policies they have advocated on the
campaign trail, they will be repeating with eerie precision
the mistakes made by both parties that gave us the Depression.
generally have concluded that, in addition to woefully
misguided Federal Reserve actions, two policy errors worsened
and prolonged the Great Depression.
The first was
the Smoot-Hawley Tariff Act of 1930, which imposed tariffs
on more than 20,000 goods and set off a trade war that
cut world commerce by about a third. The second was the
rapid expansion of unionization and cartelization that
followed the National Industrial Recovery Act (NIRA) and
the National Labor Relations Act (NLRA).
While the Smoot-Hawley
nonsense has been widely discussed, the impact of NIRA
and the NLRA has received less attention. That impact
can't be overstated. A 2004 study by UCLA economists Lee
Ohanian and Harold Cole found that 60 percent of the difference
between actual output and its long-run trend during the
Great Depression was attributable to NIRA and NLRA.
or the coordinated raising of prices by businesses that
Franklin Roosevelt allowed after unions organized an industry,
played a role in deepening the Depression. But perhaps
the key negative component was the massive increase in
unionization, from 13 percent of the workforce in 1935
to 29 percent in 1939.
led to a doubling of the number of strikes and an increase
in their effectiveness because new rules let workers use
``sit-down'' tactics that shut plants.
As we head
to the voting booths, two of the centerpieces of the Democratic
platform threaten to repeat these policy errors. On trade,
there is the Fair Currency Act. This legislation targets
the supposed currency manipulation of the Chinese and
empowers the president to ``proclaim increased duties
or other import restrictions'' to combat unfair trade.
Obama is a co-sponsor of this protectionist bill, originally
sponsored by Republican Jim Bunning, and has argued that
it is necessary to level the playing field: ``China has
competed in ways that tilt the playing field inappropriately
in its favor. China has followed the path taken by so
many other countries before it -- dumping goods into American
markets while failing to open its own; violating intellectual
property rights; and grossly undervaluing its currency,
thereby giving its goods another unfair advantage.''
One would guess
that a President Obama would happily impose tariffs mentioned
in the bill. If he does that, in these troubled times,
then a trade war could easily ensue.
The key labor
policy parallel to the 1930s is ``card- check.''
is a method by which union organizers can forgo standard
secret ballot procedures when they receive signed union-authorization
cards from a majority of employees. Although card-check
procedures for union formation are legal, current law
lets employers reject card-check petitions and require
secret- ballot elections instead.
Free Choice Act, which passed the House last year and
was defeated only by Republican opposition in the Senate,
would require employers to recognize card-check petitions
except when fraud or coercion is suspected. Opponents
of card-check argue that the new procedures wouldn't protect
employees against coercion from union organizers.
`Hard to Believe'
One such opponent
is former Democratic presidential nominee George McGovern,
who recently said: ``It's hard to believe that any politician
would agree to a law denying millions of employees the
right to a private vote. Quite simply, this proposed law
cannot be justified. Working families deserve a voice
and a private vote.''
the U.S. Chamber of Commerce, coercion attempts by union
leaders are numerous when card-check procedures are in
place, and include ``threats of termination, deportation,
and loss of 401(k) and health benefits for not signing
a card; and promises of green cards, termination of supervisors
and free turkeys for employees who did sign cards.''
of card-check are presumably willing to accept the possibility
of coercion because they believe the end -- a large increase
in unionization -- justifies the means. But if that end
is achieved, then it likely will lead to a surge in labor
costs and reduction in competitiveness for U.S. companies
at just the wrong time.
deliver on these promises, we will have a trade war and
a reorganization of the workplace on par with that of
the 1930s. If that occurs, then financial markets will
have been right all along.
director of economic-policy studies at the American Enterprise
Institute, is a Bloomberg News columnist. He is an adviser
to Republican Senator John McCain of Arizona in the 2008
presidential election. The opinions expressed are his