November 22, 1978

Anti-inflation Czar Speaks Dreadful Word

"Depression:"

There -- that dreadful word has been kicked into the spotlight for all to see and shudder over by no less an authority than Alfred Kahn, head of President Jimmy Carter's new anti-inflation program.

Speaking to a group of U. S. retailers, Kahn said the unsayable:

"If inflation accelerates, sooner or later we will have such a total breakdown of the organization and morale of our economy that we will have a deep, deep depression."

His audience went home with a bad case of the shakes, but the stock market stage: a small rally the next day.  Kahn's tough talk was welcomed by investors.  Perhaps Carter understands the problem and is serious about biting the bullet.

Kahn is only nibbling around the edges of inflation, so far.  But his tenuous "consideration" of cutting the minimum wage, Social Security benefits, and the wage guideline portends serious belt tightening.

Of course, this kind of talk from such a high level official may be only sales talk to scare unions and business into compliance with "voluntary" wage and price guidelines.  Certainly the government today knows more about fiscal management than it did back in 1928 and 1929 when the seeds were sown for the Great Depression.

Nevertheless, it is unnerving for those of us who started our careers during the economic catastrophe of the 30's.  Kahn's public discussion of depression comes after a record plunge of the stock market matching the "crash" of 1929.  And exactly on the 49th anniversary of that stupendous event.

Stock brokers term the recent decline in the Dow Jones Industrial Average of 35 points in a single week a "free fall" rather than a crash.  Even the terminology for gloomy news has become more sophisticated.

Just about all economists predict a "recession" late next year or in early 1981.  Their debates center only on the time and extent.  They believe President Carter has decided to accept a mild shakeout now, rather than risk severe depression later.

A recession is defined as two successive quarters of declining demand and increasing unemployment.

A depression is generally conceded to be four quarters or more of the same imbalance.

The recession of 1973-74 hit 9.1 percent unemployment, and we are now approaching 8 percent.

At the depth of the Great Depression, the unemployment rolls reached a staggering 25 percent and stumbled along, at the double-digit level for three years.  In fact, the number of unemployed in the United States was greater after 10 years of the Roosevelt New Deal than when Franklin D.  took office.

It doesn't seem likely that this kind of downturn is possible.  Yet we cannot dismiss Kahn's warning out of hand.

The real cause of the Great Depression was not overextended credit or a stock market crash.

Jude Wanniski, author of a provocative book titled "The Way the World Works," contends the real depression trigger was taxes and tariffs.  As associate editor of the Wall Street Journal, Wanniski has more than a passing knowledge of shirt-sleeve economics.

Excessive income taxes, coupled with protective tariff taxes on imported goods, were the deadly parlay, Wanniski declares.

The boom of 1924-29 was set off when Presidents Harding and Coolidge instituted sharp tax cuts after the heavy income needs of World War I had abated.  Productivity soared.

Though American industry prospered under favorable taxes, the lack of world markets for agricultural products hurt farmers.  Government saw this phenomenon as something to be corrected by government action.  The remedy selected was a protective tariff tax against foreign agricultural products.

By restricting the ability of foreigners to sell their goods in the U. S., their reciprocal purchases of our industrial products were curtailed.  Tariffs have the same impact on investment and commerce as an increase in income taxes.

The stock market anticipates future events - by six to 12 months.  Investors saw the farm tariff as an inhibiting factor on the world economy, including the United States.  The boys started to sell.  Novice stockholders on large credit margins were wiped out.

Events were to prove the market accurate in its perception of the future.

At this point, Congress enacted what Wanniski calls "the century's most disastrous piece of economic legislation."

That law, adopted under the very best of intentions, was the Smoot-Hawley Tariff Act of 1930.  It threw up additional walls of "protective" tariff taxes around more than a thousand U. S. products threatened by foreign production.

It was like trying to put out a fire with gasoline.

Under this double dose of inhibiting taxes, the U. S. followed the rest of the world into economic collapse.

The parallels with today's events are striking.

A substantial tax cut is enacted amidst general hurrahs.

But a protective tariff is established for the steel industry.  Pressure for similar treatment builds in the electronic and garment industries.

The stock market reaction is a 1929-type sinking spell.  The dollar cheapens abroad.  Unemployment edges up.  Inflation soars.  Productivity falls to half its pace of last year.  Farmers struggle.

One cannot help but wonder - do the White House and the stock market know something we don't?

Author: Lindsey Williams