…But maybe President Obama is instead the next Herbert Hoover? Studying the policies pursued by the Hoover Administration in the wake of the 1929 crash, UCLA economist Lee Ohanian found that a strong recession became the Great Depression because of Hoover’s pro-labor, statist interventions:
Pro-labor policies pushed by President Herbert Hoover after the stock market crash of 1929 accounted for close to two-thirds of the drop in the nation’s gross domestic product over the two years that followed, causing what might otherwise have been a bad recession to slip into the Great Depression, a UCLA economist concludes in a new study.
“These findings suggest that the recession was three times worse — at a minimum — than it would otherwise have been, because of Hoover,” said Lee E. Ohanian, a UCLA professor of economics.
The policies, which included both propping up wages and encouraging job-sharing, also accounted for more than two-thirds of the precipitous decline in hours worked in the manufacturing sector, which was much harder hit initially than the agricultural sector, according to Ohanian.
“By keeping industrial wages too high, Hoover sharply depressed employment beyond where it otherwise would have been, and that act drove down the overall gross national product,” Ohanian said. “His policy was the single most important event in precipitating the Great Depression.”
The findings are slated to appear in the December issue of the peer-reviewed Journal of Economic Theory and were posted today on the website of the National Bureau of Economic Research (www.nber.org) as a working paper.
The article goes on to point out that Hoover’s exact solutions are not likely to be followed by President Obama. However, Ohanian argues, the disastrous results of Hoover’s interventions illustrate what can happen when government pursues hasty, ill-advised policies. Everything Hoover tried only made things worse.
And while Obama may not follow Hoover’s exact policies, we are seeing the same hasty, ill-considered rush to “do something:” the trillion-dollar pork fiesta stimulus bill; the Waxman-Markey cap-and-trade “greenhouse gas” bill; and now the health-care bill aimed at nationalizing 1/6th of the US economy. Anyone of these is bad enough; in combination, the effects on the US economy would almost certainly be horrific.
I’d go a little farther than Ohanian in his article and argue that these kind of large-scale statist interventions, whether in terms of wage control and job-sharing like Hoover or massive Keynesian deficit spending like Obama, are doomed to fail because a free market economy is too complex and has too many factors to successfully control, manage, or direct. In fact, if one looks at Hoover’s predecessors, Presidents Harding and Coolidge, one sees the right way to handle a sharp recession. Treasury Secretary Mellon advised cutting government spending and lowering taxes to free up capital in order to stimulate business, and then let the natural forces of the market economy heal itself. Which it did, bringing the US out of the sharp recession of 1919-1920 and laying the groundwork for a decade of prosperity. (And which was repeated with greater success by Ronald Reagan in the early 80s.)
Articles like this one and Ohanian’s earlier research showing that FDR’s corporatism lengthened the Depression by seven years
, as well as longer works of history such as Amity Shlaes’ The Forgotten Man
, are important revisionist works for two reasons. First, they dispel forever the notion implanted in popular consciousness by liberal historians and economists, that Hoover was a laissez-faire president with a do-nothing attitude toward the economy, a view used to justify the interventionist approach. Far from it, in fact: Hoover was very much an interventionist, and FDR continued and expanded several of his policies.
The second reason is that these researches present convincing evidence that the received wisdom about the Great Depression, that FDR’s policies pulled us out of it and that government intervention can fix an economy in crisis, is just plain wrong. Indeed, by 1939 the New Deal was clearly a failure and Treasury Secertary Morgenthau said (quoted in an article by Mark Levey
By 1939 Roosevelt’s own Treasury secretary, Henry Morgenthau, had realized that the New Deal economic policies had failed. “We have tried spending money,” Morgenthau wrote in his diary. “We are spending more than we have ever spent before and it does not work. . . . After eight years of this Administration we have just as much unemployment as when we started. . . . And an enormous debt to boot!”
In fact, only the military draft in the face of World War II broke the back of unemployment in the US, by pulling five million men off the streets.
Obama’s an educated man: maybe he should look more closely at his predecessors’ experiences before following further in their footsteps.
PS. Sorry for the bad formatting, but something in this post is killing the spaces between paragraphs.