Don't Make Matters Worse

Amity Shlaes, author of The Forgotten Man: A New History of the Great Depression, writes in today's Wall Street Journal (Taking Revenge on the Rich Will Not Bring Recovery):

Police short sales and block them, says Securities and Exchange Commission Chairman Christopher Cox. Fire the SEC chairman, says John McCain. Investigate those short sellers, say state attorneys general. Hold hearings to grill Wall Streeters says Nancy Pelosi. "Fire the whole Trickle-Down, On-Your-Own, Look-the-Other-Way crowd" says Barack Obama, and "get rid of this whole do-nothing approach to our economic problems." The Democratic presidential candidate wants public affirmation of his argument that the whole free-market philosophy of economics has been wrong.

Some of this talk carries an implicit suggestion: Do what I say or we will have another Great Depression. And no wonder: This September feels a lot like autumn 1929.

But there's an important fallacy here. The stock market crash of October 1929 and the Great Depression were not the same thing. What made the depression great was not magnitude but duration -- the fact that unemployment was still 20% 10 years later. In the 1930s, policies like the ones described above did not speed recovery; they impeded it.