“What experience and history teach is this – that people and governments never have learned anything from history, or acted on principles deduced from it.”
– Georg Hegel

Many people are trying to figure out why the economy has not rebounded as quickly as in past recessions. Even though every recession is different, there are valuable lessons to learn from past recessions. Our most recent recession was different than any of our previous recessions, but the time period we believe it is most similar to is the Great Depression. In both periods the stock market crashed, real estate prices dropped, fear was rampant and the economy did not rebound as fast as in other recessions. Ben Bernanke did learn from the Great Depression that it is not wise to raise interest rates when the economy is struggling – this is why he is slow to raise interest rates now. It appears, however, that Washington has learned very little from the lessons of the past.

In our opinion, the main reason the economy has not recovered as rapidly as in past recessions is the uncertainty that exists in Washington regarding businesses – especially small businesses. Although the policy measures Washington is employing today are different from those used during the Great Depression, they are having the same effect. Some of the laws that were passed in the 1930’s which created uncertainty include such measures as:

– The Banking Act of 1933. This law was designed to secure the banking system, which had over 4,000 commercial banks and 1,700 savings and loans fail from 1929 to 1932. It worked in that bank runs stopped. However, it also added federal oversight to the banking system which in turn led to higher lending standards which in turn reduced lending.

– The National Industrial Recovery Act (“NRA”) was passed in 1933. In order to fight deflation which was being created by falling prices, this Act allowed industry leaders to set prices and write “codes of fair competition.” This effectively allowed large businesses to write regulations to enhance their business at the expense of small businesses. For example, Goodyear and Firestone wrote the retail tire code. This code destroyed smaller competition in the tire industry that competed on price – Ward’s Rambler Tire, Master Tire and Service and Toledo Tire Company – to name a few. All of these companies were run out of business. Employers that did not follow the NRA codes were pressured and some were even thrown in jail. Fred Perkins ran a small manufacturing company that made storage batteries. He was thrown in jail for paying his employees less than the 40 cents an hour demanded by the NRA code.

– The Agriculture Adjustment Act (“AAA”) was passed in 1933. The thrust of this bill was to set the price of agricultural goods in “parity” with prices of other industrial and consumer products. This caused domestic prices to far exceed overseas prices and became the overseas farmers’ best friend:

There were many other initiatives that helped create uncertainty and erode business confidence during the Depression. The rules of the game were constantly changing and the costs of regulation skyrocketed – especially for small businesses. That uncertainty caused the unemployment rate to remain around 20% until the beginning of World War II – it was 1% at the beginning of 1929.

So what is the lesson from the 1930’s that Washington is forgetting? Most certainly, the answer is that overregulation and uncertainty will thwart economic recovery. What follows is a list of things that Washington – including government agencies – is doing today to create uncertainty:

– The National Labor Relations Board (“NLRB”) filed a complaint against Boeing in an effort to force Boeing to relocate a new $750 million plant that already exists from South Carolina to Washington. Although the dispute will take years to decide, it sends a message to companies that the government can decide where you can operate facilities within the United States. (Note: the complaint was filed on April 20th of this year. The stock market’s peak came just a few days later).

– The Environmental Protection Agency (“EPA”) is implementing a strategy of cutting so called “greenhouse” emissions even though a proposed law doing the same thing did not pass in Congress. The EPA is proposing a rule that would lower the primary National Ambient Air Quality Standard for ozone from 75 ppb to 60-70 ppb. It is estimated that tightening ozone standards will cause up to 96% of all US counties to fail this new standard. According to the Manufacturers Alliance, it also would mean that 60 coal fired energy plants would have to be retired – thus ensuring higher energy costs to be absorbed by everyone and could result in the loss of 7.3 million manufacturing jobs by 2020. The EPA is pursing this strategy three years after its previous review, two years sooner than the normal time for a review.

– According to one of our clients in the transportation industry: “The federal government is in the process of implementing a program called CSA, which is the most sweeping safety regulation in the past 40-50 years. This program is expected to eliminate 10% of the drivers in the transportation industry. The other regulation that is expected to be announced yet this year is driver hours of service. Today, a driver can drive 11 hours a day. The regulation expected to be announced later this year will restrict drivers to 10 hours a day. Both of these regulations will reduce capacity in an already challenged market.” The net effect of this regulation is higher transportation costs for everyone.

– ObamaCare, the Dodd-Frank banking bill and lack of clarity regarding future tax rates. These all have created uncertainty for many small business owners.

We are not advocating a complete lack of regulation. Some regulation is needed to ensure a fair playing field. However, we believe regulations should take into account their impact on the economy. The uncertainty that pervades the economy now has caused both large and small businesses to sit on a lot of cash. The fastest way to improve our economy is to get these businesses to invest their cash – to do that the uncertainty must be taken away. That, in our opinion, is what Washington should be concentrating on.