Sowell on Interventionist Policy

Thomas Sowell is a great writer and one of my favorite economists. His latest book is "Intellectuals and Society." In "Massive Government Intervention Drove U.S. Deeper Into Depression," an Investors Business Daily editorial, he offers the hypothesis that government intervention may deepen and lengthen economic downturns. He presents historical evidence to support his position comparing the stock market crashes of 1929 and 1987. His hypothesis is similar to Higgs' "Regime Uncertainty" (see "The Crisis Paradox). Key sections of Sowell's article articulating the conventional wisdom concerning Roosevelt's interventions and Sowell's dissent read

Many saw in the Great Depression the failure of free market capitalism as an economic system and a reason for seeking a radically different kind of economy — for some Communism, for some Fascism and for some the New Deal policies of Franklin D. Roosevelt's administration.

Whatever the particular alternative favored by particular individuals, what was widely believed then and later was that the stock market crash of 1929 was a failure of the free market and the cause of the massive unemployment that persisted for years during the 1930s.

Given the two most striking features of that era — the stock market crash and a widespread government intervention in the economy — it is not immediately obvious which was more responsible for the dire economic conditions. But remarkably little effort has been made by most of the intelligentsia to try to sort out the cause or causes. It has been largely a foregone conclusion that the market was the cause and government intervention was the saving grace.

While unemployment went up in the wake of the stock market crash, it never went as high as 10% for any month during the 12 months following that crash in October 1929. But the unemployment rate in the wake of subsequent government interventions in the economy never fell below 20% for any month over a period of 35 consecutive months.

In short, though the stock market crash has been conceived of as the "problem" and government intervention as the "solution," in reality the unemployment rate following the economic problem was less than half of the unemployment rate following the political solution.

He enumerates how bad monetary policy, protectionist trade policy, doubling taxes on high income earners, and price fixing stifled economic recovery.

Next, Sowell describes Reagan's benign response to the 1987 stock market crash, the media's harsh criticism and the ensuing economic recovery.

There is of course no way to rerun the stock market crash of 1929 and have the federal government let the market adjust on its own to see how that experiment would turn out. The closest thing to such an experiment was the 1987 stock market crash, similar in size but not in duration to the 1929 collapse. The Reagan administration did nothing, despite outrage in the media at the government's failure to act.

"What will it take to wake up the White House?" the New York Times asked, declaring that "the president abdicates leadership and courts disaster." Washington Post columnist Mary McGrory said that Reagan "has been singularly indifferent" to the country's "current pain and confusion." The Financial Times of London said that President Reagan "appears to lack the capacity to handle adversity" and "nobody seems to be in charge."

A former official of the Carter administration criticized President Reagan's "silence and inaction" following the 1987 stock market crash and compared him unfavorably to President Franklin D. Roosevelt, whose "personal style and bold commands would be a tonic" in the current crisis.

The irony in this was that FDR presided over an economy with seven consecutive years of double-digit unemployment, while Reagan's policy of letting the market recover on its own, far from leading to another Great Depression, led instead to one of the country's longest periods of sustained economic growth, low unemployment and low inflation, lasting 20 years.