Posted on 04/21/2009 5:27:29 PM PDT by Conservative Coulter Fan
Since late 2007, more and more commentators have drawn parallels between our current financial crisis and the Great Depression. Nobel laureates and presidential advisors
confidently proclaim that it was Herbert Hoover's laissez-faire penny pinching that exacerbated the Depression, and that the American economy was saved only when FDR boldly ran up enormous deficits to fight the Nazis. But as I document in my new book, The Politically Incorrect Guide to the Great Depression and the New Deal, this official history is utterly false.
Let's first set the record straight on Herbert Hoover's fiscal policies. Contrary to what you have heard and read over the last year, Hoover behaved as a textbook Keynesian after the stock-market crash. He immediately cut income tax rates by one percentage point (applicable to the 1929 tax year) and began ratcheting up federal spending, increasing it 42 percent from fiscal year (FY) 1930 to FY 1932.
But to truly appreciate Hoover's Keynesian bona fides, we must realize that this enormous jump in spending occurred amidst a collapse in tax receipts, due both to the decline in economic activity as well as the price deflation of the early 1930s. This combination led to unprecedented peacetime deficits under the Hoover administration — something FDR railed against during the 1932 campaign!
How big were Hoover's deficits? Well, his predecessor Calvin Coolidge had run a budget surplus every single year of his own presidency, and he held the federal budget roughly constant despite the roaring prosperity (and surging tax receipts) of the 1920s. In contrast to Coolidge — who was a true small-government president — Herbert Hoover managed to turn his initial $700 million surplus into a $2.6 billion deficit by 1932.
It's true, that doesn't sound like a big number today; Henry Paulson handed out more to bankers by breakfast. But keep in mind that Hoover's $2.6 billion deficit occurred because he spent $4.6 billion while only taking in $2 billion in tax receipts. Thus, as a percentage of the overall budget, the 1932 deficit was astounding — it would translate into a $3.3 trillion deficit in 2007 (instead of the actual deficit of $162 billion that year). For another angle, I note that Hoover's 1932 deficit was 4 percent of GDP, hardly the record of a Neanderthal budget cutter.
The real reason unemployment soared throughout Hoover's term was not his aversion to deficits, or his infatuation with the gold standard. No, the one thing that set Hoover apart from all previous US presidents was his insistence to big business that they not cut wage rates in response to the economic collapse. Hoover held a faulty notion that workers' purchasing power was the source of an economy's strength, and so it seemed to him that it would set in motion a vicious cycle if businesses began laying off workers and slashing paychecks because of slackening demand.
The results speak for themselves. During the heartless "liquidationist" era before Hoover, depressions (or "panics") were typically over within two years. Yes, it was surely no fun for workers to see their paychecks shrink quite rapidly, but it ensured a quick recovery, and, in any event, the blow was cushioned because prices in general would fall too.
So what was the fate of the worker during the allegedly compassionate Hoover era, when "enlightened" business leaders maintained wage rates amidst falling prices and profits? Well, Econ 101 tells us that higher prices lead to a smaller amount purchased. Because workers' "real wages" (i.e., nominal pay adjusted for price deflation) rose more quickly in the early 1930s than they had even during the Roaring Twenties, businesses couldn't afford to hire as many workers. That's why unemployment rates shot up to an inconceivable 28 percent by March 1933.
"This is all very interesting," the skeptical reader might say, "but it's undeniable that the huge spending of World War II pulled America out of the Depression. So it's clear Herbert Hoover didn't spend enough money."
Ah, here we come to one of the greatest myths in economic history, the alleged "fact" that US military spending fixed the economy. In my book I relied very heavily on the pioneering revisionist work of Bob Higgs, who has shown in several articles and books that the US economy was mired in depression until 1946, when the federal government finally relaxed its grip on the country's resources and workers.
For a fuller exposition, you'll (naturally) have to buy my book. But here's the quick summary: Sure, unemployment rates dropped sharply after the United States began drafting men into the armed forces. Is that so surprising? By the same token, if Obama wanted to reduce unemployment today, he could take two million laid-off workers, equip them with arm floaties, and send them to fight pirates. Voilà! The unemployment rate would fall.
The official government measures of rising GDP during the war years is also misleading. GDP figures include government spending, and so the massive military outlays were lumped into the numbers, even though $1 million spent on tanks is hardly the same indication of true economic output as $1 million spent by households on cars.
On top of that distortion, Higgs reminds us that the government instituted price controls during the war. Normally, if the Fed prints up a bunch of money to allow the government to buy massive quantities of goods (such as munitions and bombers, in this case), the CPI would go through the roof. Then when the economic statisticians tabulated the nominal GDP figures, they would adjust them downward because of the hike in the cost of living, so that "inflation adjusted" (real) GDP would not look as impressive. But this adjustment couldn't occur, because the government made it illegal for the CPI to go through the roof. So those official measures showing "real GDP" rising during World War II are as phony as the Soviet Union's announcements of industrial achievements.
I have only scratched the surface in this article of all the myths surrounding the Great Depression and the New Deal era. For example, we are also constantly told — this time by Chicago economists, not Keynesians — that "we learned in the Depression" that the Fed needs to rapidly expand the monetary base to avert disaster. Oops, turns out that's bogus too. But you'll have to buy my book to learn why.
Absolutely. And war is anti-capitalist/anti-market because it kills consumers and destroys capital. But that doesn't mean it's unecessary or even undesirable at times.
That is correct and we agree. I feel the same way towards killing, but wouldn’t hesitate to use lethal force to stop someone from hurting you, me or anyone else, on or off a battlefield.
The political reality of that time is war was inevitable and not fighting would have placed us in a foolish position. You must act in your national/personal interests. Just like arguing over the invasion of Iraq/Afghanistan devolves into “what if” scenarios.
Wouldn’t it be heaven if the world were peopled with angels.
The economic reality, though, is that war is a net negative on an economy. Just getting your students to understand that would go a long way towards correcting liberal myths about the GD. (interestingly, as you pointed out in another post - private uses of war materiel - guns, canon, tanks, APCs, etc. can be net positive to wealth)
BTW my son (we home school) is studying for the AP US History. It is taught wrongly on many historical “facts”. What do I do? Tell him to study for the test or teach him the truth and let him fail?
We’ve compromised - he answers the lies on the test, but knows the truth. Multiply him by thousands and thousands of our best and brightest over decades and you get an idea of what government education has done to our elites.
It is why the Left is so inane - they’ve been lied to for 16+ years. It must be true!
Good question on the AP. As I tell all conservative parents or students, you have to decide what your goals are: do you want a high score on the test? If so, “teach to the test” and study for what they will ask (some PC stuff, though not as much as you think). If you want to answer “correctly,” be prepared to pay a penalty. Same in classes with radical profs. If you want to stand up, good for you. It will come at a cost, usually. Ask Miss California.
Thanks ..... makes it simple for guys like me to understand.
Sooooooooooo how do we get out of this?
The premise of your question is incorrect. Unemployment never made it back down to 10% before the war... I didn’t think so.. as, I’ve read several times that 1938 was a VERY bad year, economically... the following are statistics from the US.Gov, Bureau of Labor Statistics:
Year Unemployment rate
1923-29 3.3
1930 8.9
1931 15.9
1932 23.6
1933 24.9
1934 21.7
1935 20.1
1936 17.0
1937 14.3
1938 19.0
1939 17.2
1940 14.6
1941 9.9
1942 4.7
Thanks for the specific unemployment data. According to your numbers, unemployment first got back to the single digits in 1941, not 1940 as I had thought.
BUT — even 1940 was still significantly better than 1932 or 1933. So it’s not correct to picture the country drifting along, caught up in an unchanging Depression, until World War II bailed us out. Things did improve under Roosevelt. The issue is whether the improvement came because of his policies or in spite of them.
Great insight, but this point really deserves more elaboration. FDR did not take the U.S. off the Gold Standard (that was actually Nixon in 1971). What FDR did was really much worse. FDR decided that Americans just weren't going to spend their money. There's that confounded debt deflation again. What to do? In comes an executive order forbidding the hoarding of bullion, coins, certificates. Let's say you have an ounce of gold you are forced to turn over to the FED for FRNs. They peg gold at $20/ounce. Shortly after the "hoarding" is eliminated the Treasury decides that an ounce of gold is really worth $35 (well, now that the govt holds all the gold, why not?).
Can you say ka-ching (FDR sure could)?
Except for that whole 69% devaluation thingy. That's the kind of "beggar thy neighbor" thinking that is cropping up again. Very naive and very dangerous, but I'm sure Robert Gibbs could do a bang-up job explaining it to the press.
If I listen very closely, I can still hear my Grandfather rail about the "gold confiscation".
2 books that everyone needs to read to “understand” FDR
1. Liberal Facists(tells you about the Woodrow Wilson/FDR/LBJ unbroken thread of Liberalism).
2. FDR’s Folly(tells how FDR’s policies prolong the Great Depression).
I don't know... As I said, from everything I've read, things were heading in the wrong direction again by 1938.... that's 6 years into FDR's Admin... I mean, >14% unemployment in 1940 is still pretty darn bad... especially, when you consider, that by 1939, the US was already ramping up production of weaponry to "Lend" to our European allies. I suspect, this program helped to put a lot of people back to work.
In the midwest, new jobs appeared in the form of day labor, farm hands, small jobs in terms of tasks performed and wages paid. For example, the engineers at Fisher Controls in Iowa were kept on as janitors, sweeping floors. A manager at FC told me that they did not lay off any engineers, for which they were proud, but the engineers were “sweeping the floors”. I spoke with one farmer who worked for the WPA making park benches, park facilities, and other miscellaneous public works projects. He and others also worked for the railroad on maintenance gangs when the railroad was hiring for short term work. These were not steady jobs but they kept people working part time here and there. So, employment came from a combination of gov’t program work, short term labor jobs, and lowered responsibility jobs. Some folks had regular jobs that continued from before the Depression and some of those people worked in public and private jobs as police, postal workers, milkmen, etc. If you worked in an agricultural industry job or in a bank (driven by mortgages, especially farm related loans) then the Depression may have seen you out of a job completely as farm income dropped and farms went under.
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