In their BusinessWeek column, Mr and Ms Welch respond to a reader’s question:
How does today’s financial crisis compare with the beginning of the Great Depression and the 1930s?
In response, the Welches say that while “real global pain” lies ahead, the situation is unlikely to wind up in a catastrophe on the Great Depression level. Their reasoning is interesting–basically, they offer 4 factors that differentiate the Depression era from our own:
1)”In 1930 the protectionist Smoot-Hawley Tariff Act ushered in years of international retaliation and discord. Today’s crisis is marked by a high degree of free trade and global cooperation.”
2)”In 1933 the National Industrial Recovery Act encouraged labor and industry cartels. The result was a decline in U.S. competitiveness—again, hardly the current case: American companies have never been in better fighting form.”
(The NIRA was passed in 1933 and was in force until it was found unconstitutional in 1935. It involved cartelization and extreme micromanagement of the economy, and is generally considered to have been one of FDR’s more unwise innovations, delaying rather than assisting the recovery from the Depression. Interestingly, NIRA was strongly backed by Gerard Swope, one of Jack Welch’s illustrious predecessors as head of GE.)
3)”Finally, a second Great Depression is unlikely because of the institutions created to prevent one, foremost being the Federal Deposit Insurance Corp., with its authority to insure deposits, critical to stabilizing the banking system.”
4)”Others say we’re marching into French-style socialism. Au contraire. The U.S. government has a century-long history of handling interventions with a fast-in, fast-out approach. In 1984, to take a recent example, it bought 80% of Continental Illinois National Bank but sold it just 10 years later to Bank of America. In 1989 it created the Resolution Trust Corp., which cleaned up the savings and loan crisis, then quickly packed up. TARP, the federal bailout plan, looks to be no exception, as its loan terms give banks flexibility and strong incentives to pay off the government within five years.”
I agree with Jack and Suzy Welch that we should not be panicking about the economy and that comparisons with 1929 are overdrawn. However, I also think that the economic future will be tremendously influenced by the election results–and that an Obama administration, combined with a strong Democratic congressional majority, would, very likely, dilute or negate three of the four factors that they list as separating us from the Depression era. While the result would probably not look as grim as 1929, it would still be pretty bad.
1)Smoot-Hawley: Of course, we are unlikely to see a replay of these tariffs in precisely the same form that they were enacted under the Hoover administration. But the generally negative attitude of today’s Dems toward international trade says to me that we are likely to see the erection of significant trade barriers, designed for the pleasing of particular constituencies rather than for overall economic rationality, with a negative impact on the entire global economic system.
2)National Industrial Recovery Act. From the Wikipedia article on NIRA:
The NIRA was famous for its bureaucracy. Journalist Raymond Clapper reported that between 4,000 and 5,000 business practices were prohibited by NIRA orders that carried the force of law, which were contained in some 3,000 administrative orders running to over 10,000 pages, and supplemented by what Clapper said were “innumerable opinions and directions from national, regional and code boards interpreting and enforcing provisions of the act.” There were also “the rules of the code authorities, themselves, each having the force of law and affecting the lives and conduct of millions of persons.”
Again, we will not see NIRA in the same form that it was implemented under the Roosevelt administration–but the kind of micromanagement described above is something with which Obama, Pelosi, and Reid are all very comfortable.
3)The FDIC point is a valid one.
4)”The U.S. government has a century-long history of handling interventions with a fast-in, fast-out approach”…true as far as the history goes, but subject to change–and I think the Dem leadership is much more inclined to view intervention as a good thing in its own right than as a necessary short-term evil.
Thus, while the Welch optimism about the economy would IMNSHO be valid if we could assume substantial continuity in the political environment, such continuity is not now something in which we can feel a great deal of confidence.
Note also that during the 1930s, America had tremendous energy reserves in the form of coal, oil, and hydropower–along with a political class that was not hostile to the use of these resources–although Dems and Republicans obviously differed considerably as to how these resources should be developed. Our energy situation today is not as favorable.
Again, even if Obama wins and we get a Democratic supermajority in Congress, I still don’t think we are looking at a 1929 scenario–I do think, though, that the harm to the economy would be deep and long-lasting.
To quote again from the Welch article: “America is loaded with energy and creativity; it’s a culture that exalts entrepreneurs, who drive every recovery.”
The entrepreneurial spirit is indeed critically important to America, and I think that under an Obama-Pelosi-Reid government, this spirit would be seriously damaged.
> designed for the pleasing of particular constituencies rather than for overall economic rationality,
Indeed, Obama’s responses to points that higher taxes don’t mean higher revenues, to the effect that “it seems fairer”, also point to this sort of “screw the economy” attitude.
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To the above points, I would add that, in an IP & Services economy, wealth creation is much more widely dispersed than it was in the Industrial economy. You don’t have to have the capital needed to build a production line or a factory. The creators of ideas are much more able to implement them, to their success or failure. This means that the ingenuity of humans has much more of an opportunity to find a toehold, to make everyone richer.
And that leads into…
> The entrepreneurial spirit is indeed critically important to America, and I think that under an Obama-Pelosi-Reid government, this spirit would be seriously damaged.
I fully agree. They are very much the enemies of entrepreneurialism. I predict that if McCain wins, the DJIA will be back to 10k, maybe even 12k, within 3-odd years. If Obama wins, it will drop below 5k in the same time-frame.
The biggest fear is that, with the media in their pocket, the fall will be blamed for far too long on “the free market” and “lack of regulation”. With their penchant for revisionism, they’ll do the best to make sure that none of it comes under serious public consideration for a lot longer than it ought to.
I would suggest a fifth factor differentiating our situation from the 1930s: We now have the social institutions and technical infrastructure to develop and disseminate alternative viewpoints to a far greater extent than the Gutenberg-style presses and Marconi-esque wireless sets of that era allowed. New Deals and five year plans will not long stand the scrutiny of the new national dialog.
I have no doubt that we who will likely form the new loyal opposition will be far more graceful and persuasive in our exile than those who preceded us.
BTW, you folks might like this
Explaining Our U.S. Tax System with Beer
A nice little description of how taxes and tax cuts work.
While Welchs’ argument may be correct domestically, in addition to the yet ill-defined Obama-Pelosi-Reid threat it suffers from the same parochialism we decried a few posts ago. The impact of the current dislocation on other parts of the world will be immense and will redound to our detriment.
History does not repeat itself, but it rhymes, someone said. As the GD led to the end of the Weimar Republic and the rise of Nazi Germany, so this dislocation and our reaction could easily lead to significant changes throughout the world. China’s fragile economy could truly collapse with significant political, and ultimately economic, impact. The same holds true for a Mexico, directly on our border, dependent on oil and now under attack from drug cartels. And South America may find Chavez looms larger in its future than did Castro.
The west is also under attack from fundamentalist Islam, both through invasion via migration and vulnerable from a spiritual vacuum that is the result of a two century long abandonment of Christianity and experimentation with state socialism. There will be no British Empire to protect us or to stand shoulder to shoulder with us in a coming crisis. The EU is unlikely to provide a satisfactory substitute. And Russia, as a failed petro-state, could easily fall into further disarray, together with its still substantial stockpile of nuclear weapons.
So Neutron Jack and the trophy wife can easily brush off the coming pain as they happily jet off to their next place in the sun. But having deindustrialized General Electric and turned it into a bank that needed federal protection from short sellers, he’s much more deserving to be a poster boy for this problem than was Andrew Mellon. And his prognostications will prove to be even less valid than Mellon’s.
I think “deindustrialization” is an overstatement of the changes at GE during Welch’s tenure. GE still makes an awful lot of stuff, including gas & steam turbines, locomotives, jet engines, oil & gas equipment, and a whole range of medical systems such as CAT scanners and MRI machines. It also still has a renowned research center (which, BTW, has an interesting blog.)
Welch overemphasized the financial business, but he also held on to core industrial businesses such as rail, which many analysts at the time would have liked to see divested. (For contrast, GM *did* divest its locomotive business, just in time to miss the railroad renaissance.)
I think the business media was overenthusiastic about GE during the last part of Welch’s tenure and the $60 stock price, and is probably too negative about the company now.
(Disclosure: I’m presently a GE stockholder)
In addition, we are currently in a war (though you wouldn’t know it by the limited coverage its been getting since Obama got the nod). This is generally good for companies like GE, Pratt, and many companies in the US that manufacture items used by the military and its support arms. I bet if the illuminati media focused one or two stories about Iraq that Obama’s poll (cough) lead would be down another 2 – 3%. (wink, wink)
The good news, if there is any, is that the democrats will be highly constrained by the deficit and by their inability to get more revenue by repealing the 2001-2002 tax cuts. A soggy stock market will not produce the capital gains required to make ends meet.