SECOND OPINION
A new light on some economic myths

By Cliff Slater

With only a month before the opening of the Hawaii Legislature, it's a good time to visit some of the myths that misinform our voters' and legislators' thinking on economic matters.

The first myth is that only antitrust regulation kept Rockefeller, and the other "Robber Barons" of the late 1800s, from perpetuating monopolies and extorting money from consumers. While the so-called "Robber Barons" fought their competitors like junkyard dogs — some survived and some did not — their welfare should not be our concern. Our concern should only be how the general public gains or loses from the process.

General wage levels, allowing for inflation, began increasing markedly from 1880 on, which was the time of the rise of the corporations and the activities of the "Barons." That was a public gain. Rockefeller, who controlled 90 percent of the oil industry in 1880, lowered the price of kerosene, then the principal petroleum product and used by consumers to light their homes, from 58 cents to 8 cents per gallon over a 20-year period by ruthlessly cutting costs. Another gain for the public.

As for antitrust regulation protecting the public, the fact is that Rockefeller's Standard Oil was set upon by competitors and by 1911 its market share was down to 64 percent before being broken up by the courts into smaller units. When competition was already breaking the back of this quasi-monopoly, what was the point?

The general public also benefited from the activities of the other "Robber Barons." As examples, during this period, steel, transportation and fuel prices declined markedly all the while that wages were increasing. It was a significant rate of improvement from earlier times for the general public.

The second myth is that President Franklin Roosevelt rescued the country from the Great Depression of the 1930s by using government spending and "priming the pump." This myth has caused many to view similar actions as a panacea to cure all economic ills.

However, economists have come to recognize that far from being the fault of business, what could have been a normal recession turned into the Great Depression because of government incompetence. The Federal Reserve was unwilling to sufficiently boost the money supply. Congress passed depression-prolonging measures such as the National Industrial Recovery Act, with its many business-stifling requirements, and the Miller-Tydings Act outlawed discounting. As a result of these and a host of others, the economy stumbled along, with unemployment in 1938 still at 19 percent, until the buildup to World War II led the country into recovery.

In short, because the Roosevelt administration believed in cooperative national planning rather than competitive free markets, its attempts to change our economic system prolonged the Depression.

The third myth is that Reagan's tax rate cuts in the 1980s caused budget deficits unlike the Clinton administration, which did not cut tax rates and experienced surpluses.

However, under Reagan, tax collections during his eight years were 20 percent greater, even allowing for inflation, than under the eight years of the immediately previous administrations of Nixon/Ford and Carter. What caused the deficits was congressional spending; Reagan had to work with a Democrat-controlled Congress whose spending rose 50 percent faster than tax collections. That is what caused the large deficits.

While the economy grew under Clinton at the same rate as under Reagan (strange as that may seem given recent rhetoric), Clinton had to deal with a Republican-controlled Congress, and spending increased at only one-third the rate of tax collections. Thus, the crimp on spending is what caused Clinton's surpluses.

These three myths are the prevailing reasons that voters continue to approve of elected officials increasing business regulation, increasing government spending to "prime the pump" and keeping taxes high. Let's hope Hawai'i's lawmakers can debunk those myths.

Cliff Slater is a regular columnist whose footnoted columns are at www.lava.net/cslater.