How to wreck the economy

Amity Shales:

Perverse monetary policy was the greatest cause of the Great Depression. But five non-monetary missteps were important in making the Depression great, and the same missteps damaged the global economy as well. While many are thinking about the Depression, few seem concerned about replicating these Foolish Five today:

• Giving in to protectionism. In Herbert Hoover's time, Sen. Reed Smoot and Rep. W.C. Hawley proposed a tariff that was to raise effective duties by as much as half. More than a thousand economists signed an open letter warning that the duties would "raise the cost of living and injure the great majority of our citizens."

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Today, international trade claims a sizable share of our economy. Bilateral free-trade agreements with Colombia or Panama are good insurance — cheap steps that might prevent an expensive loss, that of the Western Hemisphere to Venezuela's Hugo Chavez.

Yet again, one party — the Democrats, this time — is cavalier. House Speaker Nancy Pelosi is blocking passage of these bilateral agreements. And another ambivalent politician — Sen. Barack Obama — has sent mixed messages to Canada about just how much he wants to roll back the North American Free Trade Agreement.

• Blaming the messenger. Punishing the stock market for the 1929 crash was popular in Washington in the early 1930s. Lawmakers attacked the practice of short selling; Senate Banking Committee counsel Ferdinand Pecora hauled J.P. Morgan and other Wall Streeters in for hearings. By 1934, Congress was creating the Securities and Exchange Commission. The Roosevelt administration also prosecuted business leaders, including former Treasury Secretary Andrew Mellon and utilities magnate Samuel Insull. The new regulatory culture cut crime and protected investors. But the arbitrary nature of the assault petrified Wall Streeters.

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• Increasing taxes in a downturn. Hoover more than doubled income tax rates, taking the top marginal rate to 63 percent from 25 percent. FDR hiked the top rate to 90 percent. Perhaps worse, Roosevelt's Treasury crafted taxes to punish business, including an undistributed profits tax and an excess profits tax, that ultimately sucked cash from a capital-starved economy.

Today, Democrats are planning tax increases that make Bill Clinton's hike look mild....

• Assuming bigger government will bring back growth....

• Ignoring the cost of inconsistency. FDR spoke of "bold persistent experimentation." Obama speaks of "change." Both can do damage. What's more, the list of experiments is always finite. Our bailouts look reassuring, but even Washington cannot rescue the entire economy....

Shlaes wrote the author of The Forgotten Man: A New History of the Great Depression. History says the Democrats are wrong on their economic policies being pushed right now in the name of change. I hope the voters notice before it is too late. It should also be noted that the Democrats want to punish the energy sector rather than free it to produce.