A Brief History of PANIC

I am reminded of 17th Century King Gustavus Adolphus of Sweden's flagship Vasa. In those days, the more cannon a ship carried, the more powerful she was. This being Adolphus' flagship, she had cannon in every available spot. While the addition of each cannon made sense on its own as it made the ship more powerful, the aggregate of them made it unstable, and the whole mess went to the bottom in a light breeze 5 minutes after launch in August, 1628. This is a pretty good metaphor for government intervention in the economy.

The Short Version:

I'm no economist, but Karl Marx was right about one thing: "Capitalism contains the seeds of its own destruction", though not for the reasons Marx thought. If you want to see how Capitalism devours itself, look at the history of the United States. Briefly, the advance of living standards makes the population less and less tolerant of hardship, and makes them look more and more to the government to smooth out the economic ups and downs (especially the latter) that are a necessary part of Capitalism. With each government intervention and its accompanying new bureaucracy, regulations, and taxes, a bit of the advantages of Capitalism that created the prosperity is surrendered. This is an insidious process mind you, and each government intervention, each new law, each new tax, each government infusion of capital in exchange for partial control of the company, is seen as logical and necessary at the time in view of the then-impending inconvenience or calamity (which always looks worse at the time than it does in retrospect); however, taken in aggregate over time, there is a relentless drift toward government control by which the country, in exchange for having avoided or minimized prior recessions, progressively surrenders the prospect of greater and greater prosperity.

The Rest:

In the early days of this country people were happy to put food on the table and live to 60. Such luxuries as indoor plumbing, vacations, private bedrooms, savings accounts, a box full of toys for a kid, multiple outfits and pairs of shoes, and other stuff that most Americans today take for granted, were unknown to 99% of the population -- and I'm not even counting stuff that technological developments have made possible. The infant mortality rate was horrendous by today's standards, which is the major reason couples had so many children -- that and there just wasn't that much else to do for entertainment. The vast majority of people never traveled more than 30 miles from their birthplace during their lifetime. Generally, expectations by today's standards were exceptionally low. If this is at odds with what you thought, it is important to understand that the vast majority of history is written by and about the upper classes, and does not reflect the condition of 95%+ of the populace -- one thing that makes Tocqueville so unique and interesting. One cause of the notion of the "good old days" is the misapplication of the condition of the few to the many.

History has pretty much proven that Capitalism is the best economic engine for achieving prosperity. It's not perfect, and that's where it runs into trouble. Throughout US history there have been repeated recessions and depressions -- 1792, 1819, 1837, 1857, 1873, 1893, 1907, 1921, 1929, 1958, 1974, 1980, 1990, 2001, and [ahem] 2008. You will notice a pattern of one occurring about every 20 years, give or take, except that the frequency is greater later. We could discuss each of them, but suffice for now to say that, while the immediate causes of each varied, they generally involved the lack of availability of credit. Sound familiar? The 1837 one was really serious and unfairly tarnished the Presidency of Martin Van Buren, but most people don't remember it . . . or Martin.

The basic point is that, prior to the Great Depression, they generally lasted 2-4 years, the exception being 1837, which the economy didn't really come out of until 1843. But the most important lesson is that recovery from all of them preceding the one in 1929 was driven by the private sector. The stock market crash of 1929 was the first that elicited massive government intervention in a vain attempt to end, or at least mitigate it. And, son-of-a-gun, that was the longest one of the bunch. Coincidence? Historians and economists (including FDR's Treasury secretary Henry Morgenthau) now generally agree that the massive government spending programs did little to end the Great Depression. We can thank the Japanese on 12/7/41 for that.

In the days when people didn't even have indoor plumbing and they were actually self-reliant, there was the expectation that if they wanted to improve their lives, they would have to do it -- the government wasn't going to do it for them. People in the cities and countryside had no expectation that the government would help them out in the event of natural disasters, crop failures, financial hardship, or pretty much anything else. The Federal government didn't help re-build Chicago after the spasm of Mrs O'Leary's cow, Galveston after the 1900 hurricane, San Francisco after the 1906 earthquake and fire, not to mention countless other smaller disasters. Can you imagine the havoc wrought by Civil War battles waged on private property (which most were)? Those property owners were on their own. The general attitude was that the more government stayed out of the way, the better. In fact, the US has historically enjoyed one of the highest standards of living in the world (indoor toilets or not), and the single biggest reason is the historically unfettered capitalist system it enjoys . . . or used to.

I suppose it's human nature that, as prosperity increases and sight is progressively lost of the relative hard times of our ancestors, standards naturally rise and our tolerance for hardship decreases. The size of government grew considerably as a result of the Civil War -- the first military draft, the first income tax, and a general expansion which, in the heat of the moment, was deemed necessary. After the Civil War the economy was still largely unregulated and boomed with industrialization, westward expansion, etc. By the 1880's industrialization had created distasteful by-products such as child labor and bad working conditions for low wages. There had always been this sort of thing, but by now the populace was well-off enough that they no longer wanted to put up with it . . . even tho these conditions were largely borne by recent immigrants happily fleeing even grimmer ones and (by their standards) happy just to have a shot at the American Dream. So we began to have laws establishing labor standards (wasn't any longer good enough that if the workers didn't like it they could quit and take another job), anti-trust laws, etc.

By the time the 1920's rolled around and folks had a taste of unprecedented prosperity, there was no way they could tolerate the slide into Depression that ensued. While one cannot objectively fault FDR for most of what he did to help alleviate the suffering, it was ineffective in ending the Depression, and there is no doubt that the growth of government, regulation, and the birth of the nanny state had a long-term dampening effect on free, entreprenurial enterprise. The lesson is that we are better off taking our medicine and getting over it, than paying the long-term negative economic price.

Among the alphabet agencies creating by the New Deal were the FHA and FNMA (Fannie Mae), the purpose of which was to allow people to buy homes who otherwise couldn't qualify. The reason they couldn't qualify is that bankers, lending the money their depositors had entrusted to them, didn't find them to be a good credit risk. Hello? This was really the beginning of the credit economy and the problems we're having today. Thru FHA and FNMA the taxpayers, in effect, guaranteed those less-than-credit-worthy loans and, with several steps in between, it is now the taxpayers who are being whacked by them. "Big Government" essentially absolved the lenders of the risk as an inducement to them to make loans they wouldn't otherwise make, thus throwing the controls of the free market out of whack. I discuss the current crisis elsewhere, but this was the ultimate root . . . just like the Japanese kicking the Europeans out of Japan in 1621 was the ultimate root of the Pearl Harbor attack (see my article "The Other Reasons Japan Lost the War"). As Abe Maslow postulated, as standards rise, problems needing attention that have always existed, now appear serious enough to be addressed, mostly for lack of comparison with the previously-solved ones. Current examples that come to mind are "affordable health care for all" (the affordability problems with health care began with the government intervention of Lyndon Johnson), elimination of poverty, and "a college education for all" (a dumb goal on several levels). At some point, this implied pursuit of perfection becomes counter-productive. The US is past that point.

The United States has morphed into something approaching what the Founders would consider a nanny-state, where the Federal Government is expected to make everything nice -- hurricane in New Orleans, fires, floods -- heck, if you wake up with a hangnail you can probably get a Federal Disaster Declaration. In fact, the Founders would wonder why we think we have any problems, except that the taxes and regulations that result from a sprawling Federal government, which has its tentacles into every aspect of life for the ostensible purpose of eliminating the risk we run by being alive and driving to zero every perceived imperfection, are like a wet blanket on entrepreneurship, investment, risk, and free enterprise generally. After all if, having risked it all to produce that new invention and the thing actually succeeds, you're going to have to give half of what you make to the government to coddle those who have risked nothing, why bother?

As I pointed out earlier, I'm not sure that this progression is avoidable. For one thing, when the crisis arises, it always seems much more serious and “unprecedented” than it does in retrospect, and the addition of yet another cannon seems an obvious remedy; secondly, the politicians must be seen as "doing something about it". The notion of letting the system work itself out is anathema to them, as they must be in a position to take credit when the crisis ends (which it probably would sooner without them), in addition to which the public no longer has the patience to let the system work. It isn't clear to me that the public understands that the eventual price for the instant gratification of government tinkering with the Golden Egg is the death of the Goose.