Easy money is the current Fed policy to avoid the mistakes of the 1930s that caused the Great Depression, says Arthur B. Laffer.
But tight money was not the cause of the Depression writes Laffer, chief economic adviser under President Reagan and chairman of Laffer Associates, in The Wall Street Journal.
It was high taxes and protectionism.
Although Fed monetary policy was an important factor, "The Smoot-Hawley tariff of June, 1930, was the catalyst that got the whole thing going," Laffer says.
Politicians raised taxes on imports in an effort to protect American manufacturing, touching off a trade war.
"It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products."
Two years later, says Laffer, "huge federal and state tax increases. . . followed the initial decline in the economy. . . There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy's relapse in 1937."
Laffer says the lessons are clear.
"My hope is that the people who are running our economy do look to the Great Depression as an object lesson. My fear is that they will misinterpret the evidence and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits."
Laffer is not alone in his concern about the economy taking a double dip.
Stephen Roach chairman of Morgan Stanley Asia told Bloomberg that odds of a U.S.- led relapse into global recession "may be as high as one-in-three."
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