Hoover the Interventionist

by Don Boudreaux on August 31, 2009

in Frenetic Fiddling, Great Depression, History, Man of System, Myths and Fallacies

President Herbert Hoover was no champion of laissez faire, neither in word nor (as this research shows) in deed.

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DJB August 31, 2009 at 5:24 pm

Which begs the Question, why does Stanford’s Hoover institute which generally champions private enterprise, continue to use his name? Its seems to propagate his legacy as being a proponent of laissez faire economics.

Anonymous August 31, 2009 at 5:29 pm

You are aware that in the 1929-33 period when Hoover was supposedly keeping wages high that average hourly earnings in manufacturing fell 21.4%.

By comparison, in the 1922 recession when government nonintervention allowed wages to fall so that markets could clear that average hourly earnings in manufacturing only fell 12.7.

Could you explain how a wage cut of almost double that in the 1922 recession reflected the great success of Hoover in fixing wages.

But maybe I am making a bad assumption to think that “so called” facts ever influences your fantasies.

Anonymous August 31, 2009 at 5:45 pm

Uhh….. why don’t you read the paper, which is based upon facts?

Anonymous August 31, 2009 at 6:03 pm

But note that when Ohanian parameterizes his model he takes deflation, the wage, and work hours as exogenous. That makes it very hard to compare his argument to people like Friedman or Bernanke, who might also say that deflation is exogenous and due to Fed policy, or to someone like Fisher who might say that deflation and output are simultaneously determined, or to someone like Keynes who also has a more simultaneous understanding of these variables.Ohanian is essentially saying “I’m going to treat these as exogenous and declare that the source of variation in these variables is entirely Hoover’s wage policy, and when I do that, the change in deflation, earnings, and employment adequately explains changes in output, consumption, investment, etc.”. It’s not an uninformative analysis, and it sounds like an extremely reasonable story to me – but it seems like a suspicious way to make the case. Particularly when the basis of many alternative explanations are that precisely those three variables that Ohanian treats exogenously are not exogenous at all – they’re endogenous. Now I just skipped ahead to the section where he parameterizes his model and I may be missing something. And like I said, this certainly sounds plausible. But the way he approaches the question seems to prevent him from arbitrating between other competing theories.

Justin P September 1, 2009 at 1:45 am

Why don’t you go a read the whole paper?


Anonymous September 1, 2009 at 10:16 am

Why don’t you read it? I may eventually, but it’s quite long and I have other things to read.

Are you suggesting I misunderstood the way he models it? The section I did read was fairly unambiguous. If you understand it differently let me know.

Anonymous August 31, 2009 at 5:52 pm

Deflation is higher than the fall in earnings, sfe, which means real wages rose.

I can’t speak for real wages in 1921 – I’m not sure what happened there.

Eric Hanneken August 31, 2009 at 6:16 pm

sfe, Lee Ohanian isn’t claiming that Hover kept wages high through FDR’s inauguration. From the link:

Overall, the economy suffered, with the GDP falling by 27 percent. In a situation in which wages would have been expected to fall, they remained at about 92 percent of what they had been two years earlier [1929, from the context]. When adjusted for deflation, they had actually climbed by 10 percent, Ohanian found. Interestingly, during the dreaded period of deflation a decade earlier, some manufacturing wages fell 30 percent. GDP, meanwhile, only dropped by 4 percent. . . .
“In late 1931, industry finally did cut wages, but it was too late,” Ohanian said.

Justin P September 1, 2009 at 1:47 am

Once FDR came in, he just played Russian roulette with the Economy.

Those pesky little letters, NRA and AAA exacerbated the problems caused by Hoover.

Mr. Econotarian September 1, 2009 at 12:24 am

Which goes back to the point that Hoover should have banned gold clauses in contracts, and went off the gold standard. He couldn’t conceive of banning gold clauses (a tremendous increase in Federal power), so he never went off the gold standard.

By the time FDR did it, we had four killer years of deflation and high unemployment (perhaps exacerbated by Hoover’s interventions).

Justin P September 1, 2009 at 1:21 am

Thanks for the link to the paper, Don.
There are a few Dem blogs I regular and I have this on going debate about Hoover and FDR. This paper will help, if I can only get them to read it.

Anonymous September 1, 2009 at 10:19 am

As a wise man once counseled me, make sure you read it first. It would be quite embarassing for someone on one of these “Dem blogs” to raise a methodological quibble which you attempt to implicitly criticize without explaining what their misunderstanding is, since you haven’t read it yourself.

Justin P September 3, 2009 at 1:50 am

I have read it, that is why I posted the link to the whole paper. Did you read it?
Ok then what’s your methodological quibble? And don’t worry, the people on the Dem blogs I visit don’t really read anything that might challenge their position anyway. They say they will read it, then say they did, but then can’t seem to remember anything about it later.Actually they say stuff like, “He/She is wrong”"How so?”"Their funded by ‘Big Oil.’”"So how is their paper wrong?”silence….

Anonymous September 3, 2009 at 9:46 am

You actually want me to repeat my methodological quibble again?

OK, here it goes – when Ohanian parameterizes the model he takes real wages (ie, deflation and nominal wages) between 1929 and 1931 to be exogenous and attributable to Hoover’s wage policy. I think this is very suspicious for two primary reasons:

1. Nominal wages fell – the only leg that Ohanian has to stand on is that real wages rose because the price level fell faster than nominal wages. It’s possible that Hoover had some concept of the real wage in mind when he met with these firms, but since he wouldn’t have had quickly updated information on the price level, I find that highly doubtful. It seems to me that Hoover would probably have insisted on the maintenance of nominal wages. By that measure, he clearly failed and it’s therefore misleading to exogenize real wages and attribute them to Hoover.

2. Even more importantly, by exogenizing nominal wages and deflation, Ohanian makes it IMPOSSIBLE to evaluate his theory against all other theories of the origin of the depression, which rely on the endogenous determination of deflation and nominal wages. Ohanian’s parameterization essentially says “just assume that all those dynamics that Fisher and Friedman and Keynes talked about are actually all due to Hoover’s meetings with a couple firms – and then look, a rising real wage increases unemployment”. That should not be a very convincing approach for anyone.

I find the story marginally plausible, but I don’t find his way of going about proving it plausible at all. Did you really find it convincing when you got to the parameterization section of the paper?

You sound like you’re reading some very crappy Dem blogs. Read Krugman or DeLong, or The Edge of the American West (I believe that one covered Ohanian’s paper too). They’re as liberal as you could ever want to go on and argue with, and they actually have in depth discussions about this stuff. What’s the point of even going to the blogs you go on if they just attribute everything to “Big Oil”?

SaulOhio September 1, 2009 at 10:17 am

One question: What means did Hoover use to keep wages from falling? Sounds to me like he just had meetings at which he asked them to refrain from lowering wages. I am guessing that he used the threat of imposing some other regulation, but from what I have read, it sounds much more civilized.

Anonymous September 1, 2009 at 10:47 am

As sfe points out (notwithstanding Don’s reply), nominal wages did fall during this period, prices just fell faster. So I think it’s very dicey to attribute any of the fall in real wages to Hoover’s meeting with a couple large manufacturers.

Sure, Hoover could have had some concept of the real wage in mind when he was talking with them – but since economic data was slow to be released, I doubt it. The fact that nominal wages fell precipitously suggests to me that his entreaties weren’t especially successful. Ohanian has a leg to stand on because of the behavior of real wages, but the even faster pace of deflation doesn’t exactly entice me to take this as gospel truth… in fact it again leads me back to the more traditional explanations of Fisher, Friedman, and Keynes, where you don’t have the restrictive assumption that deflation and nominal wages are exogenous to the development of the depression and attributable to Hoover’s wage policy.

SaulOhio September 1, 2009 at 11:26 am

He’s not saying that deflation was attributable to Hoover’s policies. That is not one of his assumption. I don’t know what Ohanian thinks caused deflation, but his study seems consistent at least with the idea that deflation was caused by the Fed’s policies, first of inflation, then trying to reign in inflation when it got out of hand.

BTW, I just read the abstract. Seems Hoover persuaded businessmen to keep wages up by promising protection against labor unions, which is consistent with the idea that his actions were interventionist. I’m planning on shelling out the $5 to get the entire paper.

Anonymous September 1, 2009 at 11:32 am

No you’re right – he didn’t say that Hoover caused deflation. What he did say was that he was considering the real wage exogenous, and therefore holding nominal wages and deflation exogenous, and attributing the real wage to Hoover’s policies.

What I’m saying is that in light of a falling nominal wage, I have a hard time buying that a nevertheless rising real wage was a sign of Hoover’s success. As I said above, I don’t find Ohanian’s story fundamentally implausible – he just seems to bend over backwards to make the case, which makes me suspicious.

Other theories explain the interaction of the nominal wage and deflation better, and provide other explanations for deflation and why it might fall faster than nominal wages. Simply exogenizing nominal wages and deflation by virtue of the decision to exogenizing real wages seems more restrictive to me.

Hold off on the five dollars – I have institutional access to NBER at work. I might be able to post a pdf… not sure how easy that is.

Anonymous September 1, 2009 at 12:43 pm

Try the link provided on this website: http://tinyurl.com/mwf3ul

It doesn’t seem to be the NBER version – it looks like the preprint for the Journal of Economic Theory, which means it’s probably more recent than the NBER version anyway. Also, Ohanian is at the Minneapolis Fed, so it may very well be a public access working paper there too.

Brad Delong has thoughts on this paper too:
I haven’t read what he has to say yet.

Justin P September 3, 2009 at 1:52 am

So you post a link from Delong, to support you case? Yet you acknowledge that you didn’t even read Delong’s post. Hmm
Did you even read Ohanian’s paper? How many pages is it?

SaulOhio September 1, 2009 at 10:18 am

I mean he had meetings at which he asked employers not to lower wages.

Anonymous September 1, 2009 at 1:46 pm

You just do not get it.

Cutting wages in a recession does not lead to greater employment.

If you got beyond introductory economic you would learn that a firm expands employment until the employees marginal product is equal to their marginal revenues.

But in a recession with falling demand the marginal employees marginal revenues falls to zero. With a marginal revene of zero you can not cut wages enough so that they equal marginal revenues.

To put it in other terms. If demand for widgets falls from 500 to 400 the marginal revenue for the person producing widgets number 401, 40w, etc., etc, is zero.

Cutting wages will not induce the firm to hire more employees to produce more widgets that they can not sell.

The problem in a recession, or in a depression for that matter is not expensive labor, it is inadequate demand.

The theory that cutting wages will lead to more employment is bad economics in both theory and practice.

That is why when demand rebounded in 1933 wages started rising, because the marginal revenues and product of the marginal employee rose.

I keep asking those advocating this theory to show me a single example of wage cutting leading to greater employment. They are never able to do it.

SaulOhio September 1, 2009 at 5:41 pm

I remember an example of a sweater factory during the Great Depression which made an agreement between management and employees to cut wages rather than lay off workers. Roosevelt strongly disapproved, but they did it anyway, and they found they were able to reduce the price of their sweaters enough that they could sell all they produced at a good profit. I can’t find the reference right now, sorry.

Why wouldn’t the quantity demanded increase if wage cuts allowed manufacturers to reduce prices? This is the solution to the misallignment of supply and demand caused by deflation.

SaulOhio September 1, 2009 at 7:08 pm

Also, the whole paper is based on empirical examples that should satisfy you. His argument is that emplyment dropped in those sectors of the economy where Hoover managed to prevent wages from falling. The Great Depression hit these businesses first.

“Moreover, unemployment did not plague the part of the labor force that was exempt from Hoover’s 1929 wage policy. While farm employment would be reduced by Dust Bowl climatic conditions in 1935, at the outset of the Depression it remained surprisingly strong, Ohanian found. In fact, hours clocked in the agricultural sector, which comprised about 30 percent of the workforce at the time, were roughly unchanged through 1931. And unlike in the manufacturing sector, agricultural wages fell dramatically, by 30 percent.

‘Wages fell substantially, but farm employment rates held steady until the Dust Bowl,’ Ohanian said. “

Anonymous September 2, 2009 at 11:38 am

Farm employment held up because so many people did like my grandfather went back to live on the farm after he lost his job on the railroad.

The rural county in Kentucky that my family is from is fairly typical. Its population peaked in the 1890s census and has fallen every decade since than except in the 1930s when their was substantial back migration from Chicago and Detroit back to the farms in Kentucky.

At least on the farm you could raise your own food and survive.

Anonymous September 2, 2009 at 12:14 am

“Hoover met with major leaders of industry and cut a deal with them”

If only Jefferson had been prescient enough to call for a separation of economics and state.

Anonymous September 5, 2009 at 3:07 am

Just a few teasers. The full evisceration of Ohanian’s key argument is here:

and here:

“First, let’s cut to the chase. Ohanian summarizes his operative theory on pages 48 and 49. I will quote the section in full at the bottom of this post. For now, the two key sentences are “Any monetary explanation of the Depression requires a theory of a very large and very protracted monetary non-neutrality…. The non-neutrality is quantitatively large in the Hoover economy because Hoover’s wage maintenance and work-sharing program reduces steady state hours and capital stocks [emphasis added].”

“So what is the mechanism by which Hoover’s program reduced capital stocks?… http://econospeak.blogspot.com/2009/08/and-it-aint-shinola.html

2. The Sandwichman assesses the validity of the claim by Lanoie, Raymond and Shearer that:

“…little empirical work has been done to measure the consequences of work sharing. …data that would permit the direct measurement of the productivity effects of work sharing has generally not been available….”


Anonymous September 3, 2009 at 9:35 am

Not to support my case. How could I know if DeLong would support my case or not if I hadn’t read it yet? That makes no sense Justin. I posted it because I thought it would be of interest to people interested in the Ohanian paper.

I did eventually read DeLong’s post. He does criticize the paper, but not along the lines that I was criticizing it. DeLong followed the Irving Fisher approach – the debt-deflation approach. He was suggesting that in a depression dominated by nominally fixed debts, cutting everyone’s income isn’t going to help – it’s going to make the real debt burden higher.

I read portions of Ohanian’s paper – it’s about 50 pages or so I believe. Did you read it?

Justin P September 3, 2009 at 1:44 pm

Yes, I did read it. I don’t agree with his rational expectations approach but Delong makes the absurd claim that:
“If Hoover’s inviting businessmen to the White House could push the unemployment rate up from 4% to 23%, simple extrapolation would then suggest that Roosevelt’s labor-market policies ought to have pushed unemployment up to 118%–and unemployment in post-WWII Europe ought to have averaged 384%.”

I know Delong is smart enough to remember Smoot-Hawley as well and how that effected the unemployment rate going into FDR’s first term. So why doesn’t he mention that in his post criticizing Ohanian? Oh yes, because that would have to acknowledge another piece of Hoover’s interventionism. Which of course is verboten if we are going to deify FDR as the ONE who saved us meme.
Oh and don’t forget Hoover signing on to raise top tax rates from 25% to 63% in 1932, how non internationalist.

Ohanian’s point though is correct.: “I conclude that the Depression is the consequence of government programs and policies, including those of Hoover, that increased labor’s ability to raise wages above their competitive levels. The Depression would have been much less severe in the absence of Hoover’s program.”

Yes I did have to ask you if you even read it. From my experience most of the people I’ve argued with do so instinctively and without actually reading anything they are arguing about.

I don’t post on Krugman’s blog because he likes to censor anything opposing opinions, very liberal of him.
I don’t post on Delong’s blog for the same reason I don’t post on Rush’s, their both political shills. Delong goes out of his way to attack anyone that opposes his Keynesian views, take a look at his post about Allan Meltzer for one example.

Anonymous September 3, 2009 at 2:01 pm

“So why doesn’t he mention that in his post criticizing Ohanian? Oh yes, because that would have to acknowledge another piece of Hoover’s interventionism.”

Wait a minute… I hope you’re not under the impression that DeLong is somehow a fan of Smoot-Hawley because he didn’t mention it in this particular post. I agree, though, that that would have been a good addition. Smoot Hawley explains the beginning of the Depression considerably better than Hoover calling a few business leaders in for a meeting. The problem is Ohanian wants to pin a large portion of it on those informal meetings, and more than that, he wants to simply assume that the rise in real wages is all attributable to those meetings. I’m honestly surprised he’s even getting that published – that assumption alone seems to make the whole paper practically worthless to me. This criticism isn’t based in Keynesianism or anything like that at all – it’s just a basic “on what basis could you possibly justify that assumption” critique.

And if those meetings with Hoover were so damaging, why did things start improving steadily under Roosevelt, who had even more heavy handed labor policies (this is DeLong’s point – Smoot-Hawley is really besides the point)? It just doesn’t make sense. In fact, if he were to have brought in Smoot Hawley as an alternative explanation, that would just drive his point further that Hoover’s meetings probably had little to nothing to do with it.

RE: “Which of course is verboten if we are going to deify FDR as the ONE who saved us meme.”

I’m not sure why you think it’s deification or a meme or that people are forbidden from thinking otherwise. He’s just saying Ohanian’s point doesn’t make sense. Is all scholarly criticism going to be branded as deification by you if it doesn’t trash FDR?

RE: “Delong goes out of his way to attack anyone that opposes his Keynesian views, take a look at his post about Allan Meltzer for one example.”

OK, this is rich. There are posts on this blog ALL THE TIME about how Krugman “isn’t even a real economist anymore”, which is exactly what DeLong said about Meltzer. Here’s the difference – DeLong spent about 23 lines of text describing what he had to criticize in Meltzer. Is DeLong a drama queen about it? Sure he is. But he put a substantive case out there. I don’t understand how you can pout about that and not even bat an eye at the nearly identical one-liners that get tossed at Krugman.

Anonymous September 3, 2009 at 2:03 pm

To paraphrase something Murray Rothbard once said – “I don’t believe in the ad hominem fallacy because attacking someone without attacking their ideas doesn’t refute their ideas. I prefer to attack their ideas first, and THEN attack the person.”

That’s all DeLong is doing :)

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