By Anthony Gregory View all 19 articles by Anthony Gregory Published 02/09/09  
Printer-friendly version
One of the most pernicious misconceptions of our time is that the Bush administration represented an era of free-market capitalism. By wrongly blaming the financial crisis and economic woes associated with Bush on his alleged devotion to laissez-faire, many in the mainstream press, academia and political life are misdiagnosing the problem and prescribing the wrong solution: More government, which will in reality only make things worse. Big-government Republicans like Bush have done more than their part to encourage the confusion. By branding themselves as friends of the free market, budget hawks, tax cutters, deregulators and champions of constitutionally limited government, all while pushing the opposite agenda, they have helped create the impression that the disasters resulting from their interventionist meddling are the consequence of free enterprise. Even some officials whose entire public policy legacy was one contrary to free-market principles often convince the public that they are among the market's great defenders. Alan Greenspan, longtime head of an agency inherently hostile to economic liberty -- the Federal Reserve, which regulates credit and money itself -- long professed to embrace free enterprise, only to say last October that he had been wrong in this judgment. "I made a mistake," said Greenspan, "in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms." Despite having spearheaded major monetary interventions and disruptions into the economy for years, with a straight face he claimed he had been too loyal to the free market. Meanwhile, liberals have mistakenly or disingenuously characterized every huge governmental catastrophe as the doings of a hands-off attitude, concluding that we must trust government to manage the economy. Bush responded to Katrina with federal intervention that obstructed relief efforts while trampling on civil liberties, but he was blamed mostly for not doing enough. His health care policy has been attacked for being too free-market, but it was his prescription drug plan, the largest welfare state program in 35 years, that has contributed to the spike in pharmaceutical prices. Even on foreign policy issues, Bush spent hundreds of billions on and conducted central planning in Iraq, but Democrats have criticized him more for mismanaging the war than waging it in the first place. As for Afghanistan, he has always been accused of neglecting it rather than continuing the occupation for so many years. Although Bush did perhaps administer the government less adroitly than other politicians might, his record was overall the reverse of what is often claimed. He made government much bigger and increased spending on virtually every program more rapidly than Bill Clinton did. He responded to Enron with Sarbanes Oxley, a significant aggrandizement of the regulatory state, bragging in March 2004 that "[w]e passed the strongest corporate reforms since Franklin Roosevelt, and made it clear we will not tolerate dishonesty in the boardrooms of America." The financial crisis is blamed on an "atmosphere of deregulation" even though it came after years of intervention, specifically easy credit and big-government promotion of homeownership. A growing literature makes the case that intervention, not free markets, was the culprit behind the current economic troubles. For a book-length treatment, see Tom Woods's new contribution, Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. Despite such evidence, the market gets the blame. Historically, government interventions in the market have caused disruptions often wrongly blamed on economic freedom. Progressives blamed the ungainly growth of big business in the late 19th and early 20th centuries on laissez-faire. As leftist historian Gabriel Kolko and others showed, however, this was an incorrect reading. In The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916, Kolko documented how the relative free market of the late nineteenth century allowed for robust and increasing competition. Big businesses were losing their market share to smaller ones and prices were plummeting. The wealthiest players from the railroad, coal, meatpacking, communications, finance, insurance and other industries were watching their profits dwindle, so they called upon government to enact regulations to entrench and preserve their economic power. The most significant Progressive reforms -- the Pure Food and Drug Act, the Meat Inspection Act, the Clayton Antitrust Act, the Federal Reserve Act -- were all championed by the exact big business interests that they were charged to regulate. To this day, big business interests have often favored a robust regulatory state, despite the common assumption that the free market is the rich man's best friend. The clearest historical parallel to the Bush laissez-faire myth is the case of President Herbert Hoover. The media have been calling Bush the new Hoover for months. The idea is that just as Hoover's policies of laissez-faire left President Franklin Roosevelt with a Depression that only the New Deal could remedy, Bush's laissez-faire governance brought on a financial crisis that demands a second New Deal under President Barack Obama. But this historical narrative is backwards. As economist and historian Murray Rothbard showed in America's Great Depression, not only did the crash result from a 1920s interventionist monetary policy rather than the free market, but Herbert Hoover's response to it was one of the most interventionist programs in American history. Rothbard writes, Before the great depression struck, Hoover vowed that in any such economic crisis, he would immediately deploy the massive powers of government to end it. He put that vow into effect as soon as the stock market crashed in October 1929, and he invoked every measure that would become even more visible in the New Deal: propped-up wage rates, massive public works, heavy federal deficits, huge federal loans to shaky businesses, unemployment relief, inflationary monetary policies, etc. There was no need for FDR to install a farm price support program to combat the Depression; Hoover had already carried out his pledge to the farm bloc to establish one as a permanent fixture of the economic scene, a fixture that would generate huge and unusable food surpluses in the midst of starvation. Hoover also signed off on the Reconstruction Finance Corporation, the Federal Home Loan Bank Act and Smoot-Hawley Tariff; attempted to shut down the banks; and signed one of the biggest tax increases in U.S. history, raising the top income tax rate from 25% to 63%, doubling the estate tax and increasing corporate taxes by about 15%. In fact, it is uncommonly known that FDR loudly attacked Hoover for spending too much and ran against him on a small-government platform, promising to cut government, taxes and tariffs, preserve sound money, and allow for the liquidation of bad assets. Once in power, FDR broke his campaign vows and instead continued and expanded upon Hoover's interventionist policies, just as Obama is expected to do with Bush's interventionist response to the financial crisis. And despite the conventional wisdom, Bush, like Hoover, did not warm up to intervention late after events compelled him. Bush did not "abandon. . . free-market principles to save the free-market system," as he claimed in December. Rather, he was always a big-government president whose policies helped bring about the crisis. Although Bush's mythical laissez-faire agenda did not cause the crisis, true laissez-faire is the best response. In 1921 to 1922, after years of President Woodrow Wilson's expensive World War I disruptions of the free market, America suffered a Depression as sharp as the one after the 1929 crash. President Warren G. Harding did not respond with new public works programs or regulation or an expensive "stimulus" spending bill, though he did significantly cut taxes under the advice of Treasury Secretary Andrew Mellon. The Depression was painful, as all corrections to a government-created bubble and bust must be, but it ended quickly. Hoover and FDR's New Deal, in contrast, prevented a quick recovery and prolonged the Great Depression for more than a decade, by keeping prices high, discouraging investors with over-regulation, interfering with the labor market and forcing the cartelization of businesses. In 1946, although politicians debated about how to deal with the millions of Americans coming back from World War II, they failed to conjure up any grand plan. Instead, their loosening of the strangling wartime economic controls allowed for a quick adjustment, and finally, seventeen years later, the economy was on the path of steady civilian economic growth that it had followed until 1929. For more on this, see the work of economist Robert Higgs, especially his book Depression, War and Cold War. For Americans to resist the temptation of more spending, inflation, regulation and costly "stimulus" packages, they need to understand what caused our current financial collapse and what the best remedy is. They must learn the right lessons from our history to avoid repeating it. Yes, Bush is a lot like Hoover in terms of economic policy. But the idea that the economic trouble they caused was a consequence of not enough government is a dangerous myth, the exact opposite of the truth. |
Also by Anthony Gregory:
The Audacity of Obama's State of the Union 01/29/10
The First Anniversary of Hope and Change 01/20/10
The Drug War vs. the Bill of Rights 01/14/10
Corporatism and Socialism in America 12/31/09
Happy Bill of Rights Day 12/15/09
View all 19 articles by Anthony Gregory
Discuss this article (13 comments)
