Slumps that go on and on

Amity Shlaes, 50, is a senior fellow of the Council on Foreign Relations and a Bloomberg News columnist. She has written several terrific books on economics, including The Forgotten Man: A New History of the Great Depression.

I interviewed her soon after that book came out ("The hallowed New Deal," WORLD, March 8, 2008) at a time when her story of how Washington prolonged the Depression seemed an interesting historical tidbit. Since then we've had a recession and a jobless recovery, which makes Shlaes' focus on the jobless recovery of the 1930s utterly relevant. Here's an edited and tightened version of her comments.

Stock market crashes are not unusual in American history. Short-lived depressions are not unusual. What made the 1930s different was that the Depression went on and on . . . That's right. Do you know that in 1921 and 1922, two in 10 men were unemployed for a whole year? We do not even remember that: It's the forgotten depression because it all snapped back: Suddenly unemployment was below 5 percent. That change in the employment rate, up and down, was characteristic of the pre-Roosevelt United States. That was on balance a good thing: People were not afraid to rehire because when they rehired, there were not a lot of policies constraining them.

Is our situation now more like 1922 or more like 1937? A front-page New York Times story says people over 50 can forget about getting a job again. The reason is not because they are old and stupid or can't use an iTouch. It is because the obstacles to hiring are so great that employers don't think it worth the bother. They might hire someone and the government says you have to keep him on. Maybe the government will say you have to pay him more than you are able to pay-­therefore, you don't hire at all. That is very much like 1937.

Now we're told the recession is over, but unemployment is still high . . . Historically, the definition of recession is two consecutive quarters of negative growth, or, the economy shrinking. But there are limits to what GDP can convey. And one of those issues is employment. In my view, if you have one in 10 unemployed-something is wrong with the economy whether you call it recession or not. If the administration accepts that, that's a failure on the part of our government.

What types of policies now would lead to the creation of more jobs? A move toward a balanced budget. A serious commitment, such as a constitutional amendment, to making the government smaller. A commitment to permanently lower tax rates.

We don't hear much about the price of labor . . . What does it cost to hire someone? The worst thing about these downturns is the unemployment. Something is wrong with what we are doing if people are unemployed for a long time. A while ago I did a story comparing the change in employment rates in recessions in the U.S. and in Europe and what I found was that America fired a lot of people and rehired a lot of people faster than Europe. That difference is disappearing and that is a problem.

"Nice work if you can get it" was an expression that became popular during the Depression . . . It's a song from a Gershwin musical. It resonated because that was precisely the experience in the late 1930s. The Wagner Act, the Magna Carta for our modern labor law, scared employers. They didn't hire. Or they paid a higher wage, but hired fewer people. And that's the divide-nice work if you can get it.

Another famous quotation from Franklin Roosevelt, almost as famous as "We have nothing to fear but fear itself," is his statement about the need for "bold persistent experimentation." But Roosevelt's commitment to experimentation itself created fear . . . The Monopoly board game was popularized in the 1930s. You know the role of the banker. There is not much discretion: He hands out the money. The rules for how he does that are written down. Yet we've all had an experience where a sibling or a friend took license in that role and started cheating or changing the rules.

You also had a brother? Uh-huh. Changing the rules, mid-game. What happens when someone does that too much? You walk away from the board. That's what happens when the government has license to experiment and change things.

A CEO who is making plans for expansion needs to know what is coming up in legislation and regulation that will affect his business. If he doesn't have continuity from one year to the next, will he tend not to make a hazardous investment? A figure called net domestic private investment measures whether you buy more machines to replace the machines you already have. In the 1930s you can see points where that figure is negative. That is very rare for the United States, but business executives do what anyone with common sense would do-wait for the elephant in the room to leave the room, or sit down, or something.

Declaring business the enemy did not work very well in the 1930s. Why do we see this going on again? When you see government leaders really bullying business, you know that government's economic policy is failing. They get angry and they get desperate.

So to reduce unemployment, government should . . . Mostly get out of the way. Employers are very concerned about healthcare legislation because they know that it will be a mandate upon them to pay more for healthcare, but they do not know the particular rules yet. They are concerned about unemployment insurance premiums: When unemployment insurance goes for 99 weeks, what the company must pay to support them will be higher.

How did New Deal government expansion affect charities? There was plenty of charity in the United States before the New Deal, and there were plenty of public works, mostly at the state level. This was essentially squeezed out by the New Dealers stepping in and hogging that space.

In a recent column you advocated a humble economic policy. What is that? The reality is there's a lot we do not know about economics. All of us don't know. To assume that a stimulus will always work is a big assumption. Given that we are not sure we know, maybe we should do less. There is a particular arrogance currently in Keynesian economics, which you see when economists say consumer spending drives the economy. Economists do not know that. Maybe the majority of people who got a doctorate in economics between 1968 and 1990 think that, but centuries before them, people who studied economics did not think that-maybe for a longer period. This assumption that Keynesianism is the only way is absurd.

You like lower taxes . . . I'm always for lower taxes because lower taxes make people want to do things. Less burden, more fun, and economics is about people wanting to have fun. Growth is fun for people in the marketplace.

If the jobless recovery continues, what will be the structural consequences? Maybe the economy changes and it is easier for everyone to be a freelancer. Being a freelancer can be worse than being an employee, or it can be more lucrative, more entrepreneurial. All things being equal, this country wants to grow. It is not a loser country. It is a winner country. In terms of the mentality of the country, it is still an immigrant country. People are here because they tried hard, or their parents tried hard, or their grandparents tried hard. To hear Marvin Olasky's complete interview with Amity Shlaes, click here.