Here's Amity Shlaes, at Forbes.com, on the Great Depression. A selection:
As for President Hoover, his tenure was marked not by laissez faire or
respect for private property–indeed, Hoover had labeled property a
"fetish" before he became president. The Great Engineer was in fact the
Great Intervener, meddling in multiple areas, raising taxes and backing
tariffs, to the economy's detriment. Mistrusting the stock market as
unreal, Hoover berated short-sellers and exhorted businesses to keep
wages high when they could ill afford it.
respect for private property–indeed, Hoover had labeled property a
"fetish" before he became president. The Great Engineer was in fact the
Great Intervener, meddling in multiple areas, raising taxes and backing
tariffs, to the economy's detriment. Mistrusting the stock market as
unreal, Hoover berated short-sellers and exhorted businesses to keep
wages high when they could ill afford it.
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{ 48 comments }
Well that sounds familiar…a lot like today's news.
I'm learning the re-writing of Hoover history to be one of the biggest farces in the ongoing defense of deregulatory policy.
Anyone know what year taxes where raised by Hoover?
I would like someone to explain why if Hoovers policies which are claimed to be so interventionist and thus made the Great Depression bad…. why did FDR's policies (much more interventionist) not make it even worse?
Most of Hoovers actions were responses to the desperation of the failing economy do to his lack of action in his first 3 years. Most of what he did was in 1932 well after the Coolidge caused crash had completed its implosion unrestrained by significant Hoover action of any sort.
Thanks Don for posting this; over at the Marginal Revolution there is a post of a Barro article that merely feeds the mythology of the "great man" FDR. Below is a re-hash of what I posted at MR on the Barro article:
From the Barro article comes this quote:
"And I think Roosevelt at the time recognized ex-post that some of the things he tried were failures and then his attitude was “OK, it’s a failure I’ll stop doing it.” Which is actually pretty positive."
My reaction to this: As the old saying goes: 'Better late than never, but better never late.' The point is that late is late; and by extension wealth destroying policy is wealth destroying policy. It serves no good purpose to say that folly followed by realization is on net 'pretty positive.' FDR's destruction of farm goods, for example, was assuredly asinine. If he stopped doing it at some point, well, I don't say: Magnifique!
Another Barro quote is : "It’s clear that a lot of the policies that were put into place were negative, but as to sorting out how important they were, that’s a much more challenging question."
My reaction to this Barro quote in conjunction with the first Barro quote:
Judgment is required of course in making empirical assessment, but an intelligent assessment is impossible if on net folly followed by realization much later is considered 'pretty positive.'
Shlaes is obviously not pandering to the crowd that wants to lionize FDR; she is obviously an objective economic historian who has done her homework. Bravo Shlaes!
Muirgeo,
I know this won't make any difference because of your reading comp issues, but here's a piece on what Harding did to right the economy after the greatest GDP drop of all time. Hint: the answer is "nothing."
Muirdiot, you should love and adore Hoover. He is everything you and John Maynard Keynes would want him to be. JMK loved Hoover. As for your demand for information, go have someone who still give two figs about you look it up since you clearly haven't the ability to do it yourself. People here aren't your servants.
A few thoughts -
I don't know what Keynes actually thought of Hoover, but he wasn't exactly Keynesian. Although he did run deficits, he raised taxes – and the deficits themselves weren't especially large. Not exactly Keyensian. I'm sure Keynes appreciated the Hoover Dam, though (called the "Boulder Dam" at the time). JMK berated FDR for not relying enough on public works projects earlier in the depression.
I appreciate Shlaes a lot for setting the record straight with Hoover – he was not a budget balancer or a non-interventionist. It's good that Shlaes has been telling that story. It's important not to go too far with it. Whatever Hoover did end up doing, he does come across as tight-fisted next to FDR, and I think that's the take-away point.
Calling Hoover a protectionist is a little unfair too, I think. He opposed Smoot-Hawley. It's true he didn't have the political will to veto it – and he deserves censure for that – but he knew it was a bad bill. We can at least recognize that, even if we don't like the fact that he put politics above his country.
Where Shlaes loses me is in her critique of FDR's New Deal. She grasps at everything to explain the "depression within a depression" except the most obvious candidate – the temporary budget tightening by Roosevelt. My understandign is she also uses an employment data series that excludes New Deal work program employment, which is nothing less than bizarre. By using that data, her point is essentially reduced to "I don't think FDR was successful, and even if he was successful I'm deliberately excluding the jobs that the New Deal created because I say they don't count".
This is just what I've gathered from her articles – I haven't gotten a chance to read The Forgotten Man yet, so I don't want to say too much about her argument. She comes across as very helpful in explaining Hoover and the early crisis, but a lot more convoluted when she tries to debunk the New Deal.
It's also worth pointing out… and I know I'll probably sound like a jackass for saying this… but she's not a trained economist. She's a good economic historian, and she's a good journalist – I'm sure she does her research well. But I usually read her more for the history she provides than for a formal debunking of Keynes.
I suppose we're now emerging from the "depression" wrought by the "crisis". The current "contraction" won't last a decade, because it can't. A protracted recession at this time threatens too many established entitlements, so we mustn't have one.
By this time next year, official statistics will again show "growth", the Federal deficit will again be on a "downward trajectory", and statists will again claim credit for rescuing us from misguided market worshipers.
What will be "growing"? The superficial answer is "GDP". We'll produce "more" of something domestically. We'll produce less of other things, and we may consume less of things that we currently consume, but we'll "produce" and "consume" more of some things, enough that our net "production" will rise.
Maybe we'll produce and consume more empty holes in the ground, but the men ordering the digging will assign a price to the holes, and we'll pay the price, so that'll take care of the "recession". Men ordered (and happily willing) to dig will accumulate "profits", and if we're lucky, they'll reinvest these profits in some enterprise more useful than further hole digging.
Yes, that's a Keynesian analysis. It's also how the world has worked for my entire life.
JMK approved of Hoover, Daniel. It is not bizarre to use a data series that excludes the WPA jobs. The fluctuations in employment still exist in the data set using WPA jobs – only the absolute numbers are different (lower with WPA jobs, obviously).
There's an argument to be made against using make-work projects in jobs data. It's too tempting for politicians to bastardize employment data by creating make-work projects. Also, if we want to compare how many jobs the economy created (which is what's important) rather than government fantasies, then it's correct to exclude WPA jobs.
Keep in mind that the Soviet Union had full (100%) employment. What did that tell us about the Soviet economy?
Methinks -
The lesson of the Soviet full employment is that you don't use employment as your only indicator. Whether that employment eventually results in long term GDP growth is an empirical question – and I think we've gotten the empirical answer in the Soviet case.
But you're not providing an honest test of Keynesian or New Deal policies by excluding that employment – you're assuming a priori that those changes are valueless or meaningless. A lot of people feel that Shlaes essentially forfeited the argument by assuming her own conclusions like that.
Gadzooks, the 1921 crash didn't lead to a Great Depression? Egads, the 1987 crash didn't lead to a Great Depression either.
Then again, how many people actually lived in the 'Roaring '20s'? I thought most nations were doing fairly mediocre in the 1920's and 'didn't have as far to fall' as the U.S. did. However, wasn't the 'Roaring '20s' confined to a fairly small section of the U.S. economy? Weren't other sectors, such as agriculture, rather 'ho-hum' during the 1920s? How much of the stock market crash of 1929 have to with a stock market bubble than any actual productive growth? All I heard with the wonderful share prices were the standard Ponzi-bubble type – they were only high because others were willing to pay more. Isn't then farly easy to say that "yes the 1930s shouldn't be able to recapture the 'dizzying heights of the late 1920s' because it was simply a bubble"?
By the same token – how is full employment a private world a magical thing to aspire either? Children worked in coal mines in the 'good old days' and were 'gainfully employed'.
Daniel,
The lesson from the Soviet economy is that employment isn't a meaningful indicator at all if you strip it of meaning.
Keynes was in favour of hiring people to dig and refill ditches. Please find meaning and value in that. By including the WPA employment data, you assume that the work they did was value added (the whole is worth more than the sum of the parts). What evidence do you have for that since none of these projects were undertaken by private industry before or during the depression?
You folks will love this one…
When looking at economic stability, there is a very interesting correlation that is not often talked about, and I don't know why. It's counter-intuitive at first glance, but I think it can be explained in the framework of rational choice and expectations.
Here is the table of the top marginal tax rates since 1913.
Notice the tax rate in 1929.
Notice the tax rate in 1982.
Notice the tax rate in 1987.
Notice the tax rate in 1993.
Notice the tax rate from 1945 to 1969.
The tax rate in 1929 was lowest before the crash and the depression. There was a good deal of market exuberance.
1982 saw the tax rate sharply decrease, but there were many other things going on, including a sharp reduction in the money supply.
In 1987, there was a sharp reduction in taxes. There was no recession, but there was frenzied market activity.
1993 saw us climbing out of a recession only after taxes were raised. There may be no relation between the two events.
1945 to 1969 was a period of remarkable economic stability. It had healthy business cycles, and they always include periods of mild recessions. This period also saw consistently high taxes.
A couple of thoughts:
When taxes are lowered, companies and individual see this as a windfall and shift their appetite for risk. Individuals may be more inclined to spend the money rather than save it. Corporations may grow to meet the increased demand, but they may be more inclined to take profits during periods of low taxes rather than reinvest earnings.
When taxes are raised, companies might be inclined to reinvest rather than take profits. This might be noticed as periods of strong innovation and efficiency gains.
How about the top marginal tax rate between 1776 and 1913?
Also, why did the U.S economy grow btween 1801 and 1900 by 5400% as measured by the real GDP, at the same time inflation was -34%?
Why did the economy grow only 2300% between 1901 and 2000 at the same time inflation was over 2000%?
I haven't seen the data. What's your theory?
My theory is quite simple: while the 19th century economy was not as free as could have been, it was a lot freer than it was in the 20th century. Government was a lot smaller, resources were not wasted on empire, parasitic government agencies were a lot fewer, redistribution schemes were yet to take shape
Data can be found on measuringworth.org
S Andrews, I think the natural rate of inflation was magnified quite a bit by the industrial revolution due to capital expenses.
Companies will pass on the expense to meet increased demand while demand is high. That is inflationary. As long as demand requiring growth is present, inflation will be present, so I'm not sure how such large growth with negative inflation happened in the 19th century.
What was the reason?
Federal budget was $6.6 billion in 1920 during the Wilson depression and Harding cut it all the way to 4.026 billion in 1922, and the 1921 depression, one of the sharpest ever turned out to be a really short one. Almost a 40% cut in budget.
1920s experienced surplus budgets for almost every year. Total federal budget outlays trended down through out the decade, setting off the roaring 20s. Yes, as Murray Rothbard pointed out in his 1960s book ( way before Amity Shlaes ), there was malinvestments from easy monetary policy of the Fed, there was a bubble in the stock market.
1930 budget, still a surplus budget was 5% bigger than the 1929 budget. 1931, Hoover ran a deficit of almost 15% of the outlays. In 1932 budget deficits were more than 60% of the outlays ( worse than even 2009 )
Total Federal budget in 1937 was double of what it was in 1929. Budget deficits were still running anywhere between 30-60% until that year, including 1937. If anything, a substantial reducion in deficit spending didn't happen until 1938, well into the depression within the depression. But 1938 was an exception, soon to be followed by more deficit spending in 1939, 1940 and then of course the war years.
Federal budget in 1947 was only 1/3rd of the 1945 budget, setting off a boom ending the depression.
As long as demand requiring growth is present, inflation will be present, so I'm not sure how such large growth with negative inflation happened in the 19th century.
Wrong! Here is what Henry Hazlitt said about inflation in 1964 ( way before Milton Friedman was credited with saying it ):
Undue expansion or increase of the currency of a country, especially by the issuing of paper money not redeemable in specie.
In recent years, however, the term has come to be used in a radically different sense. This is recognized in the second definition given by the American College Dictionary:
A substantial rise of prices caused by an undue expansion in paper money or bank credit.
Capital expenses cause prices to fall as companies find more efficient ways to make profits and competition prevents from raising prices, which is one reason why in industries where intervention from government is less, prices tend to fall year after year – for instance, electronics, computers and it's accessories. At worst, in these industries, you get a much improved product for similar prices year after year – if we really didn't have a monetary planning authorities, prices would fall in this case as well.
K Ackermann misunderstands inflation. Inflation is not caused by rising prices; it's caused by an increase in the supply of money relative to the demand for money.
As economies grow, with a stable supply of money, the price level will FALL, not increase. A good reference here is George A. Selgin, Less Than Zero (1997).
They are inter-related. The demand would not be manifest in the absense of money.
A tax cut places more money in an idividual's hands, who may in turn purchase products. If a manufacturer anticipates that inventory and resources will not satisfy demand, they are forced to spend money for more supplies, extra labor, more equipment, etc. These up front expendetures are often offset by raising prices on existing inventory or purchase agreements.
Don –
That is the Austrian definition of the term, but the rest of the world understands inflation to be "rising prices" – of which an increase in the supply of money relative to the demand of money is a huge contributor. I wouldn't be so harsh on K Ackermann just because he didn't conform to a very narrow segment of the population's use of that term.
I wouldn't be so harsh on K Ackermann just because he didn't conform to a very narrow segment of the population's use of that term.
Whether something is fact or fiction is not determined by it's popularity.
The demand would not be manifest in the absense of money.
Very true. However, any amount of money will do.
as after thought, demand can manifest even in the absense of what we today know as money. Demand comes from production. Market place is nothing but a place to exchange one's production for someone else's. Money is just a measuring scale for this. Demand can manifest even in a barter economy. However, money is very useful in making many multiples more types of exchanges possible.
Ackerman,
A higher tax rate doesn't encourage more investment. It decreases return, unless you can invest through a tax-deferred program or tax advantaged security.
The marginal tax rate is marginally interesting. Take a look not at the top marginal tax rate for the cherry-picked 1945 – 1969 period, but at the effective tax rate. The top marginal tax rate has been all over the map, the effective tax rate – the rate at which taxes are actually paid – has changed much less.
Tax rates may be more useful in consideration if government spending is not ignored.
We may be able even to ignore tax rates by using government spending as a measure of the cost of government. If they don't raise tax rates, then they will either borrow or inflate. IAC, what matters is the diversion of resources by political agency.
If all government spending were reflected in tax rates, then the people would take more interest in government spending and business would have an accurate account of the diversion of resources.
Accounting can be faked, and often is.
DK wrote: "I know I'll probably sound like a jackass for saying this… but she's not a trained economist. She's a good economic historian, and she's a good journalist – I'm sure she does her research well."
Oh ya, I agree with you bro. Adam Smith probably doesn't meet you expectation of a "trained economist" either.
:>)
DK-
You are mistaken. There is nothing uniquely Austrian about my description of the cause of inflation. Milton Friedman would agree.
I can only guess why you suppose that my standard quantity-theory-of-money explanation of the cause of inflation to be 'Austrian.'.
I'm sure Hoover would have devalued off the Gold Standard if he thought he could do the Gold Clause Ban, he as much as said so in speeches.
It took FDR's guts to do something that was at the extreme edge of what people thought was Federal Power: the re-writing of contracts (especially mortgages) from being payable in gold to be payable in fiat currency. Then devaluation would not put every debtor deeply underwater.
By the time the US devalued off the Gold Standard, the deflationary damage had been done for four years. That's a long time to be out of work.
Of course, we know FDR then did lots of other things at the extreme edge of Federal power (which provided less benefit and likely hurt the economy), and even got whacked by the Supreme Court for doing so.
But I'll give FDR props for the Gold Clause Ban.
Here is george selgin on the gold standard, in an interview given to the Federal reserve
Econotarian's view on gold standard is not Austrian at all. Even Milton Friedman didn't blame the gold standard for the crisis.
Of course, we know FDR then did lots of other things at the extreme edge of Federal power.
And the most heneous was something the average American does not fully understand in its implication.
When he interred 100,000 American citizens of Japanese heritage simply by association, he showed that the Constitution is a mutable document that the government will ignore anytime it wants, and without repercussion.
@Methinks – I shouldn't have stated it as though it was known. I should have said that maybe it might induce reinvestment.
I guess another way to ask it is, will a company be more inclined to make capital equipment purchases during periods of low or high taxes, or does it even play a roll?
The main point I was bringing up was the possibility that the different tax rates might induce different behavior.
I've seen a lot of information on monetary policies and behavior, but not so much on the most personal of fiscal policies, and that is taxes.
How was the 1921 incident a 'depression' at all? Something about a large fall and so forth? I can't reference to it except at Libertarian sites.
FDR confiscated people's gold at a price of $20 and immediately devalued the dollar that was given in exchange. It is called theft. It was not an act of guts – it was act of thievery and hence an act of cowardice.
S Andrews's post explains why FDR was a thief and a coward as a result of confiscating people's gold. Obama, who lionizes FDR, wants to confiscate people's wealth via increased progressivity in the income tax system, via increasing taxation upon corporations, via increasing the cost of energy (his draconian cap and trade), via nationalizing health care, and via corporate bailouts. Obama, like FDR, embrace the notion of the Federal government boldly experimenting, a move directly oposal to the founder vision of Federalism (that would subject state government experimentation to the contratint of competition). If FDR was a thief and a coward, as I agree he was, then by implication any president taking the same path will end up no differently labelled.
Don -
RE: "I can only guess why you suppose that my standard quantity-theory-of-money explanation of the cause of inflation to be 'Austrian.'."
The title of your blog might have lead me in that direction… but yes, "quantity theory of money" is more accurate. The point is you're pretending K Ackermann misunderstands the situation when there's really just a disagreement over the situation – two very different things… and since the most commonly used definition of inflation is "rising prices", you're doing Ackermann and others a disservice by insisting that your understanding of how inflation must trump Webster!
Gil -
Try NBER dating for the 1921 recession. I'm not sure the logic behind calling it a depression. It was a sharp downturn, but doesn't come close to the Great Depression. And maybe the reason why 1921 didn't turn into 1929 was that the Fed's policy was (as Friedman describes it) "active, vigorous, self-confident", compared to the reaction in the early thirties that was "passive, defensive, hesitant".
Ackerman,
Yes, the tax code absolutely can and does introduce distortions. But, it usually provides reason for not investing or not investing in anything productive. For example, when income taxes are increased, tax exempt municipal bonds become a more attractive investment relative to fully taxable and higher risk private business. Exactly the opposite of the effect you're hoping for.
Investing in equipment purely for tax reasons is a waste. A capital expenditure is only a net positive if the net present value of the cash flow it produces exceeds the cost of the factors to produce it. If the only reason to invest is to avoid punitive taxes, then you will end up with misallocated resources – wealth destruction.
FDR's constant and rash tinkering and scapegoating confused and terrified private industry to the point of inaction. Investment by private industry seized up. To punish companies which prudently didn't invest in wealth destroying projects, he introduced a retained earnings tax (sort of like what you're wondering about, I think). This became one of the reasons for the "depression within a depression" in 1938.
Increasing tax rates does not increase investment in productive activity because the tax increase is always on productive activity. The only activity increased tax rates increase is tax avoidance.
Daniel,
So if nominal prices aren't rising then there's no inflation?
Ackerman clearly misunderstands inflation because he clearly thinks that economic growth causes inflation. You think that's true?
I think you're just too attached to your habit of disagreeing with Don even when you agree. It's annoying.
Methinks wrote: "To punish companies which prudently didn't invest in wealth destroying projects, he introduced a retained earnings tax (sort of like what you're wondering about, I think). This became one of the reasons for the "depression within a depression" in 1938."
FDR's retained earnings tax sound similar to Obama's plan to end the deferral of corporate taxes on profits earned by American companies overseas. According to the WSJ editorial I read this a.m., US companies abroad don't pay the difference between US tax rate and foreign tax rate until profits are repatriated. That is, is the profits are retained earnings abroad, they are not taxed. As the WSJ article explained the efficient solution to this is to simply lower US corporate tax rates. Instead of this, Obama wants to punish the retention of earnings abroad.
It seems that FDR's pension for, as you say, "constant and rash tinkering and scapegoating" is descriptive of Obama's general approach as well.
Its "deja vu, all over again".
Maybe he will try to "pack the Court" too?
Federal reserve didn't do any open market operations during the depression of 1921.
In 1921, Wholesale prices was allowed to adjust quickly by falling 56%. Money supply was allowed to contract sharply.
I used to occasionally look up "inflation" in dictionaries to check on the state of the definition.
For many years, inflation was defined as an increase in the money supply the resulted in rising prices. Now I see that the popular misconception has displaced that definition and thus entrenched the popular misconception.
There are any number of reasons for general price increases, such as increased transportation costs when petroleum prices rise or when taxes are increased, but my understanding is rooted in the inflation related to expansion of the money supply causing devaluation of the currency.
These distinctions are important if citizens are to learn how to manage their government. People need to understand the difference between monetary inflation and cost increases, both of which can result in price increases.
Maybe he will try to "pack the Court" too?
As opposed to every other president?
These distinctions are important if citizens are to learn how to manage their government. People need to understand the difference between monetary inflation and cost increases, both of which can result in price increases.
It's not as straightforeward as it once was. The US benefits from a distortion in the model due to the status of our currency as being the reserve currency.
I'm not saying the chickens won't come home to roost, but when you consider the size of the swap lines to meet reserve demands, they should have resulted in dollar inflation larger than what has happened.
Although it's certainly true, as Mr. Andrews indicates, that prices will tend to fall in a growing economy with a "stable" (i.e. constant) money stock, I should make clear that my pamphlet "Less Than Zero," to which he refers, doesn't argue for a constant money stock, or for a such a rate of deflation as would be required to preserve monetary equilibrium with a constant money stock. It defends deflation only at a rate consistent with the rate of growth of factor productivity, which is generally less than an economy's overall rate of economic growth. In other words, it argues for monetary expansion to offset extensive (as opposed to intensive) expansion of real output.
Ackermann,
Are you a person who doesn't know enough US history to know that FDR's proposal called "packing the court" is something wildly more radical than simply making appointments that suit a president's politics? If you Google before you leap you will post less fatuously in the future.
Oh dear oh dear—Hoover raised taxes, and tariffs. Below are the taxes—note the Wikipedia site says 1935 but it includes all the revenue acts before and after it, so that ye may be able to pull up everything before and after it.
http://en.wikipedia.org/wiki/Revenue_Act_of_1935
For those of you who are into post hoc thinking, then I shall include the U.S. tariff policy in the 30s:
http://en.wikipedia.org/wiki/Hawley-Smoot_tariff
And unemployment:
http://en.wikipedia.org/wiki/File:US_Unemployment_1890-2008.gif
Wow! Look at the spike in unemployment after the Smoot-Hawley Tariff of 1930! Ok, I know things are more complicated than this, but I never knew that Archbishop Desmon Tutu was so in favour of supporting Apartheid South Africa when he advocated trade Sanctions against them in the 80s.
I love free trade—I buy things from poor people every day! Dude, I never knew I was such a good person. Those of you who oppose it are either cowards, greedy, or corporate stooges—sorry, off to Wall-mart to buy from poor people and shun those who are to pathetic to provide me with what I want at an agreeable price.