A New Light on Some Economic Myths


BY CLIFF SLATER – We are only a month away from the opening of the Hawaii Legislature and so it is a good time to visit some of the myths that misinform our voters and legislators’ thinking on economic matters.

The first myth is that only anti-trust regulation kept Rockefeller, and the other ‘Robber Barons’ of the late 1800s, from perpetuating monopolies and extorting money from consumers. While the so-called “Robber Barons” fought their competitors like junkyard dogs — some survived and some did not — their welfare should not be our concern. Our concern should only be how the general public gains or loses from the process.

General wage levels, allowing for inflation, began increasing markedly from 1880 on,[1] which was the time of the rise of the corporations and the activities of the ‘Barons.’ That was a public gain. Rockefeller, who controlled 90 percent of the oil industry in 1880, lowered the price of kerosene, then the principal petroleum product and used by consumers to light their homes, from 58 cents to 8 cents per gallon over a 20 year period by ruthlessly cutting costs.[2] Another gain for the public.

As for anti-trust regulation protecting the public, the fact is that Rockefeller’s Standard Oil was set upon by competitors and by 1911 its market share was down to 64 percent[3] before being broken up by the courts into smaller units. When competition was already breaking the back of this quasi-monopoly, what was the point?[4]

The general public also benefited from the activities of the other “Robber Barons.” As examples, during this period, steel, transportation and fuel prices declined markedly all the while that wages were increasing. It was a significant rate of improvement from earlier times for the general public.

The second myth[5] is that President Roosevelt rescued the country from the business-caused Great Depression of the 1930s by using government spending and “priming the pump.” This myth has caused many to view such actions as a panacea to cure all economic ills.

However, economists have come to recognize that far from being the fault of business, what could have been a normal recession turned into the Great Depression because of government incompetence. The Federal Reserve was unwilling to sufficiently boost the money supply.[6] Congress passed depression-prolonging measures such as the National Industrial Recovery Act, with its many business-stifling requirements, and the Miller-Tydings Act outlawed discounting. As a result of these and a host of others, the economy stumbled along, with unemployment in 1938 still at 19 percent, until the build up to World War II led the country into recovery.

In short, because the Roosevelt administration believed in cooperative national planning rather than competitive free markets, its attempts to change our economic system prolonged the Depression.[7]

The third myth is that Reagan’s tax rate cuts in the 1980s caused budget deficits unlike the Clinton administration, which did not cut tax rates and experienced surpluses.[8]

However, under Reagan, tax collections during his eight years were 20 percent greater, even allowing for inflation, than under the eight years of the immediately previous administrations of Nixon/Ford and Carter. What caused the deficits was Congressional spending; Reagan had to work with a Democrat controlled Congress whose spending rose 50 percent faster than tax collections. That is what caused the large deficits. [9]

While the economy grew under Clinton at the same rate as under Reagan (strange as that may seem given recent rhetoric),[10] Clinton had to deal with a Republican controlled Congress,[11] and spending increased at only one third the rate of tax collections. Thus, the crimp on spending is what caused Clinton’s surpluses.

These three myths are the prevailing reasons that voters continue to approve of elected officials increasing business regulation, increasing government spending to “prime the pump” and keeping taxes high.

Cliff Slater is a regular columnist whose footnoted columns are at: www.lava.net/cslater


[1] Historical Statistics of the United States. U.S. Dept. of Commerce, Bureau of the Census. p. 165, Series 736. & p. 164, Series 726.

[2] Folsom, Bruce W. Jr. The Myth of the Robber Barons: A new look at the rise of big business in America. Young America’s Foundation. 1991. p. 83.

[3] Details of the Standard Oil Case (1911).

[4] This is not to say that there were no negative impacts but rather that regulatory impositions should be weighed against the benefits.

[5] See, for example, MSN’s Encyclopaedia & Microsoft’s Encarta.

[6] Friedman, Milton & Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960. Princeton University Press. 1971. p. 299.

Smiley, Gene. Rethinking the Great Depression. American Way Series. 2002. Has an extensive bibliography of recent economic studies of the Depression.

[7] Roosevelt’s attempt to control pricing, labor costs, mandatory union representation, production quotas, entry controls, and other anti-competitive measures demonstrated his total disdain for the free market. Roosevelt’s acceptance speech at the 1936 Democrat convention has been described as a declaration of war against business. Tax increases, union stimulating legislation such as the Wagner Act, the Fair Labor Standards Act, and the Walsh-Healey Act all played their part in delaying economic recovery. The 1933 and 1935 Securities Acts hindered business in raising funds in the capital markets, which also helped delay recovery.

[8] Cutting tax rates has so far resulted in gains in tax collections for good reason. When marginal tax rates are very high (during the 1950s the top bracket was over 90 percent) taxpayers take extraordinary actions to avoid them including moving out of the country. When JFK cut top tax rates in 1963 to 70 percent it resulted in a highly significant increase in collections. Reagan cut the top rate from 70 to 50 percent in 1982. The question remains as to what taxation rates result in the greatest yield. (Data from Table A.–U.S. Individual Income Tax:  Personal Exemptions and Lowest and Highest Bracket Tax Rates, and Tax Base for Regular Tax, Tax Years 1913-2003.

[9] Table showing Data sources and calculations made.

[10] Average real GDP during the Clinton years was 27.9 percent greater than the average of the preceding eight years. On the same basis, the GDP improvement during Reagan’s years was 26.7 percent. See Data sources.

[11] Rep. Newt Gingrich led the Republicans to victory in 1994 with his “Contract with America” program. When