(See my initial post here.)
The Great Depression should teach us a few things about the economic consequences of well-intended policies.
As unemployment rose in 1929, Herbert Hoover worked to convince industries to increase wages-- the idea being that an increase in household income leads to an increase in expenditure. FDR later mandated the wage increases under the National Recovery Administration (NRA). The fallacy is that businesses just have extra money sitting around to give employees. If I make a product for $1.00 and sell it for $1.50, and then the government says I have to spend $2 to make that product, I either have to raise my price, cut my production costs (like laborers), or go out of business. Unemployment climbed to over 25% and no one wanted to be without a job, so workers were willing to work for less than the federal mandate in order to keep their jobs. The result was that the Roosevelt administration prosecuted those companies, shutting the businesses down (putting everyone out of work) and further exacerbating unemployment. To whom does that make sense? The Fed kept the money supply too tight and prices were falling. Frustrated business owners had to argue in court that the market determined the price they could sell their products at while prosecutors painted them as immoral people preying on workers and customers. Don't believe me? Look at the court transcripts from the Schechter Case.
FDR, frustrated by the Supreme Court declaring the NRA unconstitutional, pushed the undistributed profits tax into law in 1936. This forced businesses to pay shareholders dividends, rather than saving or reinvesting that money into the company. The rationale being that an increase in shareholders' household income will lead to increase in expenditure/aggregate demand. But most companies like to save for downturns, so that they don't have to lay off workers. They also like to invest in research and development, new plant and equipment, and other expansions that, in turn, employ more workers.
When another downturn hit in 1938, companies didn't have the reserves they would have had in the absence of this tax. It was eliminated in 1939. Did we learn from this?
Maybe not entirely. You can see an echo of this in this misleading article by Jordan Weissmann today, advocating an increase in the minimum wage and lower profits for McDonalds. Sounds like 1929, to me. Raising wages will be great for those workers who don't see their job or hours cut. But given that the typical minimum wage worker is <=25 years old an in a household earning $50,000 or more, does this make sense? Given that unemployment is elevated and the Fed is keeping money too tight ...sounds a lot like 1929.
The Affordable Care Act's employer mandate is the same as a mandated wage increase-- employers who have more than 49 employees have to provide health insurance or pay a fine. So, some employers aren't expanding beyond 49 employees, and some workers are going to see their jobs and hours cut so the company can stay in business. It's not that the company is "immoral" or "cruel" (like FDR said), it's just that the owner wants to maintain his livelihood, and his workers do too. That's a structural problem that is exacerbated by the Fed's passive tightening. There were debates then about the unemployment, how much was structural instead of demand-driven. There are similar debates now about whether businesses aren't hiring because demand or whether it's structural hurdles like the ACA. We obviously didn't know what the impact of the 1930s policies would be, but we can look back and see the consequences. Shame on us if we repeat it with similar mistakes.
When money is tight, fiscal expansion and federal stimulus don't have the permanent effects you would like them to-- it's hard to prime the pump. Tariffs like Smoot-Hawley and mandated nominal wage hikes have greater negative impact than they would normally have (they would have negative impact anyway, and that's important to remember). The Fed is always the second-mover, able to offset through monetary policy any fiscal policy it chooses. But as Scott Sumner and the market monetarists are fond of pointing out-- we don't seem to have learned anything from the Great Depression about having better monetary policy.