The Great Recession (or the Great Hangover) that began in 2008 did not have to happen. Its causes and consequences are not mysterious. Indeed, this particular and very painful episode affirms what the best nonpartisan economists have tried to tell our politicians and policy-makers for decades, namely, that the more they try to inflate and direct the economy, the more damage the rest of us will suffer sooner or later. Hindsight is always 20-20, but in this instance, good old-fashioned common sense would have provided all the foresight needed to avoid the mess we’re in.

In this essay, we trace the path of the recession from its origins in the housing market bubble to the policies offered to cure the aftermath.

For all the tough talk about responsibility, the Barack Obama administration should not go into the automobile business (or the banking business, or the insurance business, or the mortgage business). We can be assured that the automobile industry in this country will be thoroughly politicized, the last thing the American economy needs now.

Beyond the consternation about the “loss of jobs,” we need to understand why GM and Chrysler are in their present fixes and why permitting them to experience bankruptcy – real bankruptcy – actually will save jobs. Second, we have to point out why saving these companies through government directives actually will damage the U.S. economy and make things worse, and potentially much worse.

While GM and Chrysler are at death’s door, we cannot say that for every automaker. Honda, Nissan, Toyota, and other companies with operations in the USA are doing fine, and while times are hard everywhere, they are not candidates for the undertaker.

Government critics of GM and Chrysler claim that they did not build the right kinds of cars: the small, fuel-efficient vehicles that people on the left want to force us to buy (when they are not trying to force us to take public transportation). The reason GM did not build those cars was that they could not make them profitably thanks to their labor contracts, which guarantee the highest industrial wages paid anywhere. (And that includes pay given to people who don’t work at all, per the United Autoworkers contracts.)

Unfortunately, GM and Chrysler (and Ford to a lesser extent) could not compete with other auto manufacturers when gasoline prices skyrocketed, which were brought about in large part because of concern about the strength of the rapidly inflating U.S. dollar. Furthermore, because of their bloated labor contracts, the Little Three (formerly the Big Three) had fewer profits squeezed out of automobile sales, which is a nice way of saying they were paying more for production than their foreign competitors. Start multiplying this times the numbers of cars sold and a definite pattern arises: Domestic companies were uncompetitive because they and their unions chose a higher cost structure.

One of the enduring myths in economics is that the higher the cost, the greater the wealth created. People still insist that Henry Ford “created the American middle class” when he doubled the pay of his autoworkers from $2.50 to $5 a day. That is nonsense. Higher costs do not create more wealth. Increased productivity does. On the other hand, higher costs imposed through government or coercive union contracts destroy wealth. The infamous UAW contracts required that the Little Three use more resources than were necessary to build cars and trucks, which meant those resources couldn’t be employed at their highest-valued uses, making everyone else poorer.

Even though the government is talking responsibility and even bankruptcy, nonetheless the market already has spoken on GM and Chrysler. At present the sum of the parts is greater than the value of the whole, which means these companies would be worth more by having their physical assets sold in a bankruptcy proceeding than kept together by government fiat.

By artificially keeping GM and Chrysler alive, the government not only is wasting scarce resources and forcing lower-income Americans to create “make-work” for higher-income people, it is also placing a hardship on those U.S. subsidiaries of foreign auto companies. Given the realities of American politics, I can imagine that sooner or later the government will take aim at those subsidiaries in hopes it can damage them in order to protect its “investment” in GM and Chrysler. Stay tuned.

Commentators on the present financial crisis have noted some interesting parallels to the Great Depression of the 1930s. Even if we survive Washington’s spending spree, Congress and the Obama administration could still tip us into catastrophe if they sharply raise taxes or tariffs as Congress did in 1930 and ’32. But more ominous parallels to an earlier age should not escape our notice.

Monumental sums for bailouts. Staggering increases in public debt. Concentration of power in the central government. A mad scramble by interest groups with endless claims on the treasury. Demagogic class warfare appeals. These things ring familiar in the ninth year of 21st century America just as surely as they dominated the ill-fated Roman welfare state of two millennia ago.

In the waning years of the Roman republic, a rogue named Clodius ran for the office of tribune. He bribed the electorate with promises of free grain at taxpayer expense and won. Thereafter, Romans in growing numbers embraced the notion that voting for a living could be more lucrative than working for one. This set into motion Kershner’s First Law, named for the late economist Howard E. Kershner: “When a self-governing people confer upon their government the power to take from some and give to others, the process will not stop until the last bone of the last taxpayer is picked bare.”

Candidates for Roman office spent huge sums to win public favor, then plundered the population afterwards to make good on their promises to the rent-seekers that elected them. As the republic gave way to dictatorship, a succession of emperors built their power on the huge handouts they controlled. Nearly a third of the city of Rome itself received public relief payments by the time of the birth of Christ.

In response to a severe money and credit crisis in 33 A.D., the central government extended credit at zero interest on a massive scale. Government spending in the wake of the crisis soared. 

In 91 A.D., the government became deeply involved in agriculture. Emperor Domitian, to reduce the production and raise the price of wine, ordered the destruction of half the provincial vineyards.

Following the lead of Rome, many cities within the empire spent themselves deeply into debt. Beginning with Emperor Hadrian early in the Second Century, municipalities in financial difficulty received aid from Rome and lost a substantial measure of their political independence in the bargain.

The central government also assumed the responsibility of providing the people with entertainment. Elaborate circuses and gladiator duels were staged to keep the people happy. The equivalent of a hundred million dollars per year in the city of Rome alone is one modern historian’s estimate of what was poured out on the games.

Under Emperor Antoninus Pius, who ruled from 138 to 161 A.D., the Roman bureaucracy reached mammoth proportions. Eventually, according to the historian Albert Trever, “the relentless system of taxation, requisition, and compulsory labor was administered by an army of military bureaucrats. . . .Everywhere were the ubiquitous personal agents of the emperors” employed to crush tax evaders.

There were plenty of taxes to evade. Emperor Nero is said by Roman historian Gaius Suetonius in De Vitae Caesarum to have once rubbed his hands together and declared, “Let us tax and tax again! Let us see to it that no one owns anything!” Taxation ultimately destroyed the wealthy first, followed by the middle and lower classes. “What the soldiers or the barbarians spared, the emperors took in taxes,” according to historian W. G. Hardy. 

Late in the Third Century, Emperor Aurelian declared government relief payments to be a hereditary right. He provided recipients government-baked bread (instead of the old practice of giving them wheat and letting them bake their own bread) and added free salt, pork, and olive oil. 

Rome suffered from the bane of all welfare states, inflation. The massive demands on the government to spend and subsidize created pressures for the multiplication of money. Roman coinage was debased by one emperor after another to pay for expensive programs. Once almost pure silver, the denarius by the year 300 was little more than a piece of junk containing less than five percent silver. 

Prices skyrocketed and savings vanished. Businessmen were vilified even as government continued its spendthrift ways. Price controls further ravaged a battered and shrinking private economy. By 476 A.D. when barbarians wiped the empire from the map, Rome had committed moral and economic suicide.

Another Great Depression should indeed concern us. The one that followed the Roman welfare state is known as the Dark Ages and it lasted for several hundred years.