Economist Arthur Laffer warned the Federal Reserve and the government may have avoided financial disaster last year current policies may be leading us into a second Great Depression. Laffer believes Federal Reserve Chairman Bernanke desperately wanted to avoid the mistakes of the 1930s by not creating a “tight money” economy which prolonged the Great Depression.
Laffer credits the Fed for keeping Fed Fund rates close to zero, but warns that is was not tight money and higher interest rates alone that caused the Great Depression to become so bad and last so long. Laffer said in a Wall Street Journal article this week that protectionist trade policies and big tax hikes are what ultimately turned a recession into the Great Depression.
It began with the Smoot–Hawley trade legislation that slapped tariffs on foreign goods, which quickly triggered a huge response of trade retaliation by the United States global trading partners. This trade war paralyzed U.S. and global economies. Then, States enacted big domestic tax hikes that further slowed the economy.
Laffer thinks the current Obama Administration is already sparing with China over trade and tariffs (tires and chicken), and starting massive government programs that will require increased taxes to pay for them. Adding to the tax hikes is he possible ending of the capital gains and dividend tax cuts in 2010, and you can see why Laffer is worried about a repeat of what he thinks made the Depression worse.