Thomas Sowell on the Great Depression

by Don Boudreaux on September 17, 2011

in Great Depression, History, Myths and Fallacies

Thomas Sowell argues that “there was no Great Depression until AFTER politicians started intervening in the economy.”

There was a stock market crash in October 1929 and unemployment shot up to 9 percent — for one month. Then unemployment started drifting back down until it was 6.3 percent in June 1930, when the first major federal intervention took place.

That was the Smoot-Hawley tariff bill, which more than a thousand economists across the country pleaded with Congress and President Hoover not to enact. But then, as now, politicians decided that they had to “do something.”

Within 6 months, unemployment hit double digits. Then, as now, when “doing something” made things worse, many felt that the answer was to do something more.

Both President Hoover and President Roosevelt did more — and more, and more. Unemployment remained in double digits for the entire remainder of the decade. Indeed, unemployment topped 20 percent and remained there for 35 months, stretching from the Hoover administration into the Roosevelt administration.

Sowell is correct generally – correct that government interventions and other failures put the “Great” in the “Great Depression” – but he is incorrect in his suggestion that Smoot-Hawley did much to spark such a major increase in unemployment.  Smoot-Hawley certainly didn’t help matters, and likely hurt just a bit.  But as Doug Irwin argues in his new book Peddling Protectionism, foreign trade was too small a part of America’s economy in 1930 to have enabled Smoot-Hawley – as ill-advised as it unquestionably was – to be a major factor in deepening and prolonging the Great Depression.

A far worse government failure than Smoot-Hawley was the “Great Contraction” – the Fed allowing the money supply to fall by one-third between 1930 and 1933.  And, following this calamity, an even more destructive curse descended on America: FDR’s New Dealing hyperactivity in which his Trusted Brains cartelized industries, destroyed agricultural products, attempted artificially to raise prices (in the wake of the Great Contraction, no less!), launched entirely new regulatory agencies headed either by Geniuses or by cronies, spent and ran up government debt orgiastically, pumped labor unions with more arbitrary power to behave monopolistically, and demonized entrepreneurs and industrialists.

The regime uncertainty unleashed by this earthquake of arrogance ought to be – but, sadly, isn’t – a sufficient warning to avoid such mistakes today.

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Invisible Backhand September 17, 2011 at 4:52 pm

In 1987, when the stock market declined more in one day than it had in any day in 1929, Ronald Reagan did nothing. There were outcries and outrage in the media. But Reagan still did nothing.

That downturn not only rebounded, it was followed by 20 years of economic growth, marked by low inflation and low unemployment.

I learn so much at Cafe Hayek. Thank you.

ArrowSmith September 18, 2011 at 1:43 pm

Fuck off troll. We don’t need your snark polluting this website.

Ken Royall September 19, 2011 at 2:02 am

You are setting a fine example yourself.

Steve Horwitz September 17, 2011 at 4:54 pm

And even the Great Contraction wouldn’t have been as bad were it not in combination with the equally wrong-headed attempt by the Hoover Administration to convince employers to not lower nominal wages because Hoover and others believed that maintaining workers’ “purchasing power” was the key to avoiding a deepening slump. High wages are not the cause of prosperity, prosperity is the cause of high wages.

The Fed was guilty of not doing its job. Hoover et. al. were guilty of economic astrology.

Hoover’s high wage policy or the Great Contraction alone would have been pretty bad, but combine a falling price level with fixed nominal wages and the resulting 25% unemployment is no surprise.

Don Boudreaux September 17, 2011 at 5:02 pm

Superb point, amigo. Thanks!

Justin P September 17, 2011 at 5:04 pm

It’s never just one bad policy. Even today it would be hard to identify just one policy of the Obama administration that is prolonging the recession. The stimulus did some bad things, Obamacare didn’t help either, but all the other new laws all play a part in causing regime uncertainty. The problem is that most people don’t have the analytical capacity to handle it and want just one cause.

Daniel Kuehn September 17, 2011 at 5:05 pm

There’s some empirical work in the December 2010 JEH suggesting this didn’t have as much of an impact as it is alleged to have had. I have a submission languishing at the QJAE on this policy as well (they’re not nearly as efficient as you guys at RAE).

Methinks1776 September 17, 2011 at 5:05 pm

High wages are not the cause of prosperity, prosperity is the cause of high wages.

School children should be given this quote to memorize as a homework assignment. Unfortunately, their teachers won’t because they don’t understand it.

Don Boudreaux September 17, 2011 at 5:18 pm

Yep.

SweetLiberty September 17, 2011 at 5:20 pm

Nice.

sethstorm September 17, 2011 at 5:45 pm


School children should be given this quote to memorize as a homework assignment. Unfortunately, their teachers won’t because they don’t understand it.

I’d have a word with the teacher regarding indoctrination as soon as I discovered that happening.

Methinks1776 September 17, 2011 at 6:05 pm

Yeah, you’re right. Better have them continue to learn “facts” according to Sethstorm like “from each according to his ability to each according to his need” and “If business isn’t creating jobs for me, it’s holding me hostage”.

LifeLetters September 17, 2011 at 6:06 pm

Sethstorm, you’re 48 years too late. Madalyn Murray O’Hair got God banned from public schools back in ’63, and the indoctrinators have had their way ever since. You should have “had a word” with the teacher back then.

Gil September 18, 2011 at 12:39 am

And the omnipotent being walked away and sulked ever since instead of smiting the evildoers.

SheetWise September 18, 2011 at 7:39 am

“I’d have a word with the teacher regarding indoctrination as soon as I discovered that happening.”

I agree. School choice is the answer.

sethstorm September 17, 2011 at 5:03 pm


Unemployment remained in double digits for the entire remainder of the decade. Indeed, unemployment topped 20 percent and remained there for 35 months, stretching from the Hoover administration into the Roosevelt administration.

Economic royalism. It is a shame that, for all the benefits of the New Deal, there are people with an old grudge against FDR’s legacy. What they couldn’t do to FDR when he was alive – defeat him by vote or bankers’ coup – his opponents have attempted to do with historical revisionism.

The only things that banking/business interests have learned are to provide favors to political candidates and/or destroy those who are likely to be FDR II – as pre-emptive moves.

Ken September 17, 2011 at 5:25 pm

Seth,

“for all the benefits of the New Deal”

Ha!! That made me laugh. It’s been a sunless cloudy day here in MD. Thanks for the laugh.

Regards,
Ken

sethstorm September 17, 2011 at 6:10 pm

Have whatever opinion you want, it’s still a very free country.

FDR’s policies had changed this nation for the better. They provided a way for the nation to transition away from allowing pure despotism on the part of businesses to a more responsive and balanced relationship. Despite the partial repudiation of the New Deal, it has largely survived the many attempts to finish the job.

I am not wishing for profit to be denied to business. The only thing that should be denied them is the ability to deny others freedom, for a sufficiently powerful business interest is indistinguishable from a government bureacracy.

Pete September 17, 2011 at 6:30 pm

So instead of business giving us a raw deal, they’ve teamed up with government to give us a worse one! Teamwork ftw!

As long as the word “we” emotes more nobility than “I,” there will be less and less value put on the individual, and more and more put on small groups who claim to speak for larger groups.

Ken September 17, 2011 at 6:31 pm

Seth,

“They provided a way for the nation to transition away from allowing pure despotism”

False. The New Deal along with many other FDR policies explicitly gather more power to the federal government, particularly the executive branch, bringing the country ever closer to despotism.

“The only thing that should be denied them is the ability to deny others freedom”

How can a business deny people freedom without the help of government?

Regards,
Ken

sethstorm September 17, 2011 at 7:00 pm


How can a business deny people freedom without the help of government?

Surprisingly that is one point I can agree with. I don’t want the government to be simply a security apparatus for those interests – such as the governmental setup of BRIC countries – and outside the reach of the governed – such as ourselves.

How about you scale that upwards – to where a business gets the help of many governments of a certain level? Or that they play one government against another? At that scale, protecting a national interest of some kind is unavoidable – if only as a function to preserve individual freedom.

Ken September 17, 2011 at 7:10 pm

Seth,

“Or that they play one government against another?”

Businesses absolutely should do this. Do you really think that all the businesses leaving California for Texas should be forced to stay in California? If not, why would you be in favor of this at any level of governance? Is there something wrong with Boeing trying to open another production plant in South Carolina, rather than opening it in around the Puget Sound?

Competition in government is as important as it is in business.

“At that scale, protecting a national interest of some kind is unavoidable – if only as a function to preserve individual freedom.”

I’m not really sure what you are trying to say here.

Regards,
Ken

sethstorm September 17, 2011 at 11:22 pm

(re: your later reply)


Businesses absolutely should do this. Do you really think that all the businesses leaving California for Texas should be forced to stay in California? If not, why would you be in favor of this at any level of governance?

I was referring to the international level – where borders are enforced more strictly and are generally unreachable for workers, versus the open borders of states.


Is there something wrong with Boeing trying to open another production plant in South Carolina, rather than opening it in around the Puget Sound?

If they are doing so in full spirit and letter of the law, no problem exists. The problem exists when they decide to cross onto the wrong side of the law.

Ken September 17, 2011 at 11:43 pm

Seth,

“I was referring to the international level – where borders are enforced more strictly and are generally unreachable for workers, versus the open borders of states.”

This is a fantastic argument in favor of an open borders policy.

“If they are doing so in full spirit and letter of the law, no problem exists. The problem exists when they decide to cross onto the wrong side of the law.”

But why would there be a law restricting the opening of a new Boeing plant in South Carolina?

And what does the “full spirit” mean? This seems like the idea of a “living” constitution, that a document can mean whatever you want it to mean despite what the words actually say.

Regards,
Ken

sethstorm September 18, 2011 at 11:04 pm


This is a fantastic argument in favor of an open borders policy.

Except that I am not in favor of such policy. I am in favor of people not being limited to forming a business if they want the maximum amount of freedom. I am in favor of the US making deals that put our citizens first.

The despotic practices of China are things that I do not support coming to the US. I mean exactly that and nothing else in that statement.

To make a statement of that is outside the bounds of economics, but somehow relevant:

I love my country, the United States of America, too much to want to see it be subservient to foreign influence. This foreign influence is from countries that do not trust their own individuals as much as the US trusts its own individuals.

Ken September 19, 2011 at 12:05 am

seth,

“Except that I am not in favor of such policy.”

I never claimed that you were in favor of that policy. I was simply pointing out that the free movement of workers is extremely important for economic success and progress. The fact that you don’t support this free movement isn’t a surprise to me.

“I am in favor of the US making deals that put our citizens first.”

I figured as much. Standard racism and xenophobia. A human life is a human life. A Chinese death is as tragic a loss for the human race as an American life. The purpose of the US government wasn’t, and still isn’t, to hold American lives in higher regards than non-Americans, but rather to insure the rights and liberties of ALL who live within its borders and press this value as much as possible outside its borders.

“The despotic practices of China are things that I do not support coming to the US.”

I don’t support them either, but I do support the movement of Chinese from China to the US, and if Americans so choose the movement of Americans to China. People should be free to move wherever they want. Trade with the Chinese, particularly labor, is the surest way possible to reduce, and possibly eliminate, the oppressive policies of the Chinese government.

“I love my country, the United States of America, too much to want to see it be subservient to foreign influence.”

Right. Racism and xenophobia. Of course someone like you would think that no other culture had anything to offer Americans.

I love my country too, but recognize very clearly many other cultures have things to offer American culture. The power of American culture is the embrace and internalization of foreign influence, keeping what works and what’s good, while discarding what’s bad. This process isn’t perfect, but is one of the primary sources of American power.

“To make a statement of that is outside the bounds of economics”

False.

As for the rest of your comment, there is nothing wrong with foreign influence. I suspect, though, that mostly you mean you don’t want foreign control over the US government. If only there was some way to mitigate this, if it should happen. Oh yeah, LIMITED GOVERNMENT!

The point of the structure of the US government isn’t to ensure that the right men are elected to office. Over the last two hundred years, many despicable men have held high office in the US. No, the purpose is to incentivize, i.e., make in their self interest, even those despicable people to do the right thing, and when that’s not possible, limit the power they wield.

There is no doubt that there have been people elected in office willing to do to the US what Mao did to China or Stalin did to the Soviet Union; however, they couldn’t due to the limited power to which they had access.

Regards,
Ken

rightsaidfred September 19, 2011 at 7:26 am

…I do support the movement of Chinese from China to the US, and if Americans so choose the movement of Americans to China. People should be free to move wherever they want. Trade with the Chinese, particularly labor, is the surest way possible to reduce, and possibly eliminate, the oppressive policies of the Chinese government.

This is a naive view.

Ken September 19, 2011 at 10:33 am

“This is a naive view.”

No it isn’t. It’s the only grown up view to have.

Regards,
Ken

rightsaidfred September 19, 2011 at 12:55 pm

“People should be free to move wherever they want.”

That statement alone is problematic. Nothing is free, and indulging people’s wants is a big, higher order, non-linear differential equation. To imagine you or someone has a generalized solution to such an equation is hubris.

Ken September 19, 2011 at 1:05 pm

“That statement alone is problematic.”

All right. Let me clarify: people should be free to wherever they want, so long as they abide by property rights, i.e., cooperate with property owners to rent/lease/buy/trade for the services necessary to move.

Regards,
Ken

rightsaidfred September 19, 2011 at 3:40 pm

Open immigration is a bonus for some groups, usually the higher socio-economic strata. The marginal wage earner is pressured. From what I’ve seen of US and European immigration, inflow beyond what can be acculturated to a certain extent causes a loss of community amongst the native born. This plus downward wage pressure makes it in toto a negative. Any GDP per capita increase doesn’t account for all the costs.

Ken September 19, 2011 at 4:23 pm

righsaidfred,

“Open immigration is a bonus for some groups, usually the higher socio-economic strata.”

False. One of the primary reasons for restricting immigration is to selectively import low wage workers. Do you honestly believe that with open immigration, software developers and engineers would earn so much? There are many highly skilled foreign workers who are kept out of the American work force to keep those in the “higher socio-economic strata” in that “higher socio-economic strata”.

“The marginal wage earner is pressured.”

This is tautologically true for the technical meaning of “marginal” in economics. Wages, as are ALL prices, are determined on the margin.

“From what I’ve seen of US and European immigration, inflow beyond what can be acculturated to a certain extent causes a loss of community amongst the native born.”

So? Are “native born” humans somehow more important than immigrant humans? Sentiments like your are nothing but naked racism and/or xenophobia.

“This plus downward wage pressure makes it in toto a negative.”

False. If this were true, then mechanization would “in toto” make wages go negative.

“Any GDP per capita increase doesn’t account for all the costs.”

Averages are misleading if you don’t understand them. For example, are you aware that in whatever country you compute GDP EVERYONE’s wages can increase, yet GDP per capita can decrease? Per capita GDP represents an enormous collapsing of information into a single number that if not properly understood can create deep misunderstandings about an economy and the effects economic actions are actually occurring.

Regards,
Ken

rightsaidfred September 19, 2011 at 8:28 pm

GDP per capita can be misleading in both directions.

Mechanization, like immigration, drives down wages. If we can expand into other areas to create more jobs, fine, but sometimes we don’t get that expansion. Instead of us having to expand against our limited resources, let the would be immigrant expand at home.

I want to limit immigration from all races, and all countries. I don’t wish others ill. I wish them all the success they can muster in their own country.

Do you honestly believe that with open immigration, software developers and engineers would earn so much?

I didn’t know they earned so much, but importing big numbers of people to impoverish our engineering class is not a good long term strategy.

Libertarians are generally against imposed wealth transfer between individuals. Why are they so anxious to impose wealth transfer between countries via immigration?

Ken September 19, 2011 at 8:56 pm

rightsaidfred,

“Mechanization, like immigration, drives down wages.”

So the massive increases in wealth and wages over the last few centuries due explicitly to mechanization is some sort of optical illusion? Are you serious with this statement?

Additionally, if trading with others drives down wages, I’m assuming you are completely self sufficient and because of this refusal to let immigrants (others not you), you have incredibly high wages (through the massive wealth you create for yourself by restricting your own access to other’s products and services and restricting others from your products and services). Is that correct? Or are you again just whistling Dixie?

“I want to limit immigration from all races, and all countries. I don’t wish others ill. I wish them all the success they can muster in their own country.”

It’s apparent that you mostly don’t care about Americans. Forcing Americans to make products that should be made elsewhere or by someone else, due to comparative advantage, impoverishes Americans. This is a fundamental FACT about trade. If the US government restricts the liberty of Americans by preventing them trading with the Chinese, not only are Chinese impoverished, but Americans are impoverished as well.

“I didn’t know they earned so much”

Really? You didn’t know that software developers and engineers consistently earn more than most? No wonder you don’t understand economics. You don’t even know the basic facts about the worldwide economy.

“Why are they so anxious to impose wealth transfer between countries via immigration?”

This is what’s wrong with your train of thinking. This is definitely NOT a wealth transfer. If I earn more than you, wealth is NOT being transferred from you to me; it means I produce more value than you. The same is true for immigrants.

Your foolish, wrong headed, zero sum thinking about economics that has been thoroughly discredited. Limiting immigration limits wealth creation, which limits wages. Limiting immigration limits specialization, which limits wages. In other words, few things limit the amount of wealth that can be created like limiting immigration.

Take a while to learn about trade and the fact that trade, including trading labor, locally, nationally, and internationally, is good for EVERYONE. The longer time that passes, the greater the gains made from immigration and trade.

Regards,
Ken

rightsaidfred September 20, 2011 at 1:40 am

Thanks for your efforts to enlighten me.

You said,” then mechanization would “in toto” make wages go negative.” I said “mechanization drives down wages”. I meant to say, “mechanization does indeed drive down the labor component of each product.” Yes, I understand that the productivity increase from machinery ultimately raises wages for the now more productive worker, and as you so forcefully point out, a more productive immigrant raises the wealth of a nation. But a nation can have too much mechanization relative to the work force, just as a nation can have too much immigration relative to the labor resources.

All your economics is correct, assuming an economic rational firm/nation. But immigration is largely a social phenomenon, and many immigrants are not economically contributory. So when you say, “Limiting immigration limits wealth creation, which limits wages” this assumes an economically productive immigrant. Many are not.

In addition, firms often make economically irrational decisions. I have several acquaintances who are engineers, and they’ve seen colleagues laid off so three foreigners can be hired for the same spot. But the three foreigners end up doing less than the previous hire.

Our Nation makes economically irrational decisions. Do you need examples?

Ken September 20, 2011 at 10:10 am

rightsaidfred,

“a more productive immigrant raises the wealth of a nation.”

It’s not just MORE productive immigrants, but ANY productive immigrant that raises the wealth of a nation. You seem to think that for an immigrant to get a job an American MUST lose his job, which is clearly untrue. If I produce $150K of value in a year and some immigrant comes to the US and produced $15K of value in a year, the US is richer by $15K than it otherwise would have been without that immigrant.

“But a nation can have too much mechanization relative to the work force, just as a nation can have too much immigration relative to the labor resources.”

While I think this both statements are false, let’s assume it’s true. Are you really so arrogant as to claim to have ALL the relevant knowledge of ALL industries operating in the US to make such a claim, then have ALL the knowledge necessary to enact a policy to do what you think is the right thing? Don’t forget that there isn’t one person who knows how to make a pencil. And don’t forget that what you think is the right thing isn’t necessarily true for all or even most people.

“All your economics is correct, assuming an economic rational firm/nation.”

Irrationality by definition is unpredictable, hence unmeasurable and not subject to prediction. Meaning that anything you have to say on the subject is suspect. If you expect firms to act irrationally, then say that you need legislation Y to correct for that irrationality you are contradicting yourself.

But at heart you are incorrect. While it is true companies make mistakes, they do act rationally, making the best choices they can with the information they have, as do governments. The problem you seem to be having is assuming these two things have the same incentives. They do not.

“Many [immigrants] are not [economically productive].”

And yet, I constantly hear the refrain the foreigners are taking jobs. Also, there are far more non-immigrants who are economically unproductive. What do you propose to do about that?

“I have several acquaintances who are engineers, and they’ve seen colleagues laid off so three foreigners can be hired for the same spot. But the three foreigners end up doing less than the previous hire.”

Really? Of course, your friends are not biased or prejudiced in any way are they? Additionally, these three immigrants don’t need to be more productive that the ones laid off. That the cost of employment is less than the return the company gets is all that matters. In other words, it’s perfectly rational to lay off an employee and hire another who will work for 75% of the laid off worker, but it 80% as productive. In this example, the company actually has a higher profit margin.

“Our Nation makes economically irrational decisions. Do you need examples?”

When you say “nations”, do you actually mean “governments” or “politicians”? Because these are two different things. And my answer if you said politicians or governments act irrationally, I’d tell you, “No they don’t”. Study a little public choice and you’ll see that politicians are acting rationally in their own self interest. The fact that this may not be in the best interest of the average citizen is irrelevant.

Regards,
Ken

rightsaidfred September 20, 2011 at 12:31 pm

Really?

Really.

Again, you win within the parameters you set, but that’s not always what we get.

Economically irrational behavior is predictable. One of RJ Herrnstein’s contributions was the Matching Law, demonstrating that organisms don’t always behave in maximizing fashion. Dan Ariely comes from this genre with his Predictably Irrational work. Check it out.

People and groups are always going against their economic interest for political and social reasons. You assume economics will trump all. Not so.

“But a nation can have too much mechanization relative to the work force, just as a nation can have too much immigration relative to the labor resources.”

To take an extreme example, Bangladesh can buy 1000 CNC milling machines, but they will probably languish and rust. Bangladesh can import 100 million Chinese laborers, but they will languish and be a burden. You tell me Bangladesh will not make those decisions because they are economically irrational. But I’ve seen our country let in immigrants who have no intention of working, or destroy wealth. You cast this as a rational decision by politicians whose interest is to import votes. But it is not a long run economically rational decision, and yet it is made.

And yet, I constantly hear the refrain the foreigners are taking jobs.

If they take jobs beyond the economy’s ability to expand beyond the cost of a laid off worker, then we are less well off.

Also, there are far more non-immigrants who are economically unproductive. What do you propose to do about that?

I’m working on it. One thing at a time. In the meantime, let’s not import more of these problems we need to solve.

hire another who will work for 75% of the laid off worker, but it 80% as productive.

In your example, things work. In my example, the new worker is sub 70%, and the thing doesn’t work.

Ken September 20, 2011 at 1:49 pm

rightsaidfred,

“Bangladesh can buy 1000 CNC milling machines, but they will probably languish”

Why would Bangladeshis buy 1000 CNC’s only to leave them unused?

“Bangladesh can import 100 million Chinese laborers, but they will languish and be a burden.”

How can anyone be a burden unless you have a foolish “social” programs. This isn’t an argument against immigrants. This is an argument against “social” programs. People don’t just automatically sit idle. They sit idle for a reason. Always this idle labor is due to government stupidity.

“You tell me Bangladesh will not make those decisions because they are economically irrational.”

So let me get this straight: you imagine stupid scenarios, then claim these imaginary examples amount to proof that people act irrationally. Really?

“But I’ve seen our country let in immigrants who have no intention of working, or destroy wealth.”

I’ve seen far more Americans with no intention of working than immigrants. If you want to incentivize work, stop paying people to sit on their ass.

“You cast this as a rational decision by politicians whose interest is to import votes. But it is not a long run economically rational decision, and yet it is made.”

Because politicians act in their OWN economic rational self interest. Buying votes is a real vote getter. Since economics depends on profits AND losses and politicians write rules, so that others pay for their mistakes, the system breaks down.

“If they take jobs beyond the economy’s ability to expand beyond the cost of a laid off worker, then we are less well off.”

Wrong. If a worker is getting paid $10/hour to do X, but gets laid off because another worker is willing to get paid $9/hour to do X, we are $1/hour RICHER. You blithely ignore the consumer side of the transaction.

“I’m working on it. One thing at a time. In the meantime, let’s not import more of these problems we need to solve.”

Fair enough. But an easy place to start is the elimination of welfare and government run unemployment insurance.

“In my example, the new worker is sub 70%, and the thing doesn’t work.”

This type of thing does happen, but the funny thing about the bottom line: it doesn’t lie. Once the problem has been found, it will be corrected. Or the company folds. Systematically hiring substandard workers, when superior workers are available doesn’t happen. If you’re telling me that the company you’re referencing hired foreign workers and purposely paid them proportionally more than their American counterparts, I can confidently say that at the least you don’t know what you are talking about and at the worst you are lying.

Regards,
Ken

rightsaidfred September 20, 2011 at 6:02 pm

How can anyone be a burden unless you have a foolish “social” programs.

That’s largely the point here. We have foolish social programs, partly exploited by immigrants. Why should we countenance massive immigration under this scenario? You tell me how great immigration will be under the assumption that we are importing people who do productive work, but we often don’t import people who do productive work, so tell me again why I should support massive immigration into this country? If you know we have dysfunctional social programs, why do you advocate massive immigration?

So let me get this straight: you imagine stupid scenarios, then claim these imaginary examples amount to proof that people act irrationally.

Cut me some slack. I was using an extreme example to point out that willy nilly adding machinery or people to an enterprise/nation doesn’t always add value. Firms often over-buy or over-hire. I’m suggesting that maybe our country is over-accepting immigrants.

I’ve seen far more Americans with no intention of working than immigrants.

I see the opposite in my area. For you to say that suggests some animosity on your part. Later generations of immigrants tend to become those same dis-incentivized Americans, so eventually we need to solve that problem.

If a worker is getting paid $10/hour to do X, but gets laid off because another worker is willing to get paid $9/hour to do X, we are $1/hour RICHER.

I’m assuming that each worker costs a community $5 an hour whether he works or not. If he is displaced for $1 an hour and does not find other employment, we are $4 an hour poorer.

If you’re telling me that the company you’re referencing hired foreign workers and purposely paid them proportionally more than their American counterparts

Keeping up with the competition had them open an office in India and outsource a bunch of work, but they went cheap and got the dregs . Companies have politics and follow fads to the detriment of the bottom line. I suspect you haven’t worked in corporate America very much.

Ken September 20, 2011 at 6:38 pm

rightsaidfred,

“You tell me how great immigration will be under the assumption that we are importing people who do productive work, but we often don’t import people who do productive work, so tell me again why I should support massive immigration into this country?”

Because the vast majority of immigrants are not just productive, but very productive. The immigration is not the problem. If what you say is true, then Mexicans would be flooding across the border for the past few years. What we see instead is a slowing of, and actual reduction in many places, illegal immigration into this country. If the social programs are kept up, which they are, why would a declining economy affect immigration so much if immigrants weren’t coming here to work.

“Cut me some slack. I was using an extreme example”

The fact that you used an extreme example is why I won’t cut you some slack. Acting as if your extreme example were the norm is even more of a reason I won’t cut you some slack.

“For you to say that suggests some animosity on your part.”

Towards Americans? I don’t generally like laziness, but I resent those who are lazy, yet have a deep sense of entitlement.

I live in Baltimore/DC area. Drive around both those cities and you will see primarily immigrant Mexicans who want to work. If you need low cost labor in Baltimore, drive over to 7/11 near where Boston St forks off Fleet St. The native Baltimore and DC population, primarily black, have an extreme sense of entitlement, even those who work full time. The attitude in the inner city of both of these places is incredibly corrosive and it shows up in all sorts of statistics.

Immigration didn’t cause these problems, the social programs did. My biggest complaint with you is that you even admit that the social programs are the primary problems, but your cure is to limit immigration? That just doesn’t make any sense.

“I’m assuming that each worker costs a community $5″

Why would you assume this? It seems like you are assuming your conclusion. Also, note that my assumptions is $1/hour. The $5 without any time frame is meaningless and incomparable to the $1/hour. Unless your claim is that each worker (do you really mean person?) costs a community (whatever that means; do you really mean the amount spent by a city per day divided by the number of people in the city. If you’re claim is that that is $5/hour per person in a city, I’m gonna have to call shennanigans.

But most importantly, even if this were true, the community would be $1/hour richer because producing the same amount of value at a lower cost ALWAYS increases wealth, no matter who does it. That $5/hour spending you’re assuming the community spends is still there no matter what.

“Keeping up with the competition had them open an office in India and outsource a bunch of work”

You are aware that outsourcing is NOT immigration, so this entire line or reasoning is irrelevant to our discussion, aren’t you?

“I suspect you haven’t worked in corporate America very much.”

Right. I guess the 8 to 9 years of corporate experience I have in the high tech corporate America sector wouldn’t be considered “very much” would it?

Regards,
Ken

rightsaidfred September 22, 2011 at 2:55 am

The immigrants in my area are well versed in what gov’t programs they can access. They are coached. I’m not saying they come here solely for the social programs, but the attractive effect is not zero.

I am not saying that limiting immigration cures the problem of our social programs. I’m saying that we should keep out those that are likely to use the programs or in general be criminals/non producers, but we don’t do that.

The problems of inner city Blacks are well known. I don’t see how importing more people helps this blight.

Yes, outsourcing and immigration are different, but not completely so. I’ve heard less directly about corporations going for wholesale replacement of current workers with H1B1 visas. The point was that these decisions, like many in corporate America, are often for non-economic reasons: following fads, short term bookkeeping gains, listening to a consultant, office politics, bosses throwing their weight, etc. You paint companies as stepping from one earnestly considered economic decision to another. Hardly the case.

Because the vast majority of immigrants are not just productive, but very productive.

Some are, some not so much. The illegal cohort is a net drain. The big recent immigration numbers into the US have not corresponded with particularly good economic growth, while China and Germany have done well utilizing mainly home grown help.

Daniel Kuehn September 17, 2011 at 5:03 pm

re: “A far worse government failure than Smoot-Hawley was the “Great Contraction” – the Fed allowing the money supply to fall by one-third between 1930 and 1933.”

Wow – I am impressed. Is Don Boudreaux saying that if he were around in 1933 and the Fed decided to increase the money supply by 50%, he would have said “yes, at least that much sounds good”.

vikingvista September 17, 2011 at 5:08 pm

It’s very Friedmanite.

Don Boudreaux September 17, 2011 at 5:14 pm

I don’t say that, Daniel. That X ought not have happened does not imply that reversing X some time in the future is necessarily desirable. Perhaps it would have been, but perhaps not.

For the record, though, I do not believe that the best money supply is one that never changes.

Daniel Kuehn September 17, 2011 at 5:22 pm

I’m asking because you didn’t say… and I’m still not sure. Do you think increasing the money supply during a downturn like the depression is the right thing to do or not? I know your statement doesn’t strictly imply it, but you appear to be much closer to it than I’ve ever heard from you. Do you have an opinion on it that you can share with us, and perhaps implications for today? Surely one can’t think that the fall in the money supply was bad and be completely ambivalent about a policy response.

SweetLiberty September 17, 2011 at 5:27 pm

I too would like Don’s position, but just for the record DK, what’s yours?

Daniel Kuehn September 17, 2011 at 5:38 pm

Oh, I am definitely pro. I would have noted that initially if I had thought it needed clarifying :)

Sam Grove September 17, 2011 at 8:34 pm

Did not the Fed pursue a policy of money supply contraction?

Pulling together the various points made here is that several policies pursued by government in managing the economy compounded the problem. Contracting the money supply while attempting to thwart market adaption to this contraction makes for a bigger problem; increasing unemployment.

I think Don’s point is that the monetary policy at the time should have been one of stability rather than contraction OR expansion.

SweetLiberty September 17, 2011 at 9:00 pm

It would be nice if Don could confirm this rather than sitting this one out.

Daniel Kuehn September 18, 2011 at 6:50 am

It would be nice, Sweet Liberty.

The question, Sam, is that given the contraction of the money supply would an expansion have been called for or not? Don is not clear whether stability itself is the goal (in which case maybe he wouldn’t want and expansion), or a given full employment money supply (in which case maybe he would). I don’t see how you’re able to figure out which is his “point” – I can’t tell which.

Now it’s an interesting question whether this was the “policy” of the Fed. People like Scott Sumner consider passive movements like this to be “policy”. That seems like a strange way of talking about it to me, but I suppose reasonable people can argue that point.

vikingvista September 18, 2011 at 6:11 pm

It depends what you mean by “stability”. DB said he opposes a rigidly fixed monetary supply. But if you read Selgin, you realize that a monetary supply left alone to the free market without coercive interference would likely involve competing branch banking that employs fractional reserve lending practices that respond appropriately to market signals.

The question is, how do you appropriately assign blame when you start your considerations right in the middle of a long term interventionalist program?

Greg Lucas September 17, 2011 at 5:08 pm

Dr. Sowell clearly said, as you have quoted, that Smoot-Hawley was “the FIRST major federal intervention.” And with his point being that government intervention is worse than government laissez-faire, he kept his argument short by pointing out the first intervention and then generically mentioning that Hoover and FDR continued to meddle. I do not think that he was making the case that Smoot-Hawley alone was the cause of the unemployment rise – merely that it was the first in a number of missteps.

vikingvista September 17, 2011 at 5:10 pm

I wonder if any of those missteps occurred before 1929.

Harold Cockerill September 18, 2011 at 7:32 am

Absolutely. We got involved in a European war over how the colonial empires would divide up the world. Then we inflated our money supply to help the British after Churchill’s idiotic decision to resume the gold standard at a pre war price level. The Roaring Twenties ensued so we were set up for a correction made much worse by Smoot-Hawley and the rest of the interventions.

This huge pile of crap piled on us by really smart people in governments all over the world set us up for World War II. This is what comes of massive intervention that distorts the market and leads to the spiral of falling production and more intervention. We’re watching it happen again in Europe. Human nature doesn’t change. What will keep those people from starting another war that murders millions? It’s incredibly stupid to think it can’t happen again.

Don Boudreaux September 17, 2011 at 5:13 pm

I never said that Sowell said that Smoot-Hawley was the sole cause of the Depression. I said merely that he is mistaken to suggest that Smoot-Hawley played a significant role in causing the U.S. unemployment rate to rise in 1930.

Ken Royall September 17, 2011 at 11:52 pm

I beg to differ with you on that too. You are ignoring the chilling effect of the government merely ENACTING Smoot-Hawley. Markets are forward looking. When they see that government is starting to take fairly drastic interventionist measures, they rightly get cautious.

We are witnessing this right now. Obama has made it clear that he is a top down central planner of the worst kind. He sees the private sector as a piggy bank to pay for his socialist agenda and reward his political allies.

The Boeing situation comes to mind. Whether they build planes in South Carolina or not may not have an enormous impact on our national economy. The DECISION the NLRB made speaks volumes about the future direction of labor and economic policy however. When companies are making decisions toward expanding in other states or perhaps going offshore these types of policies will weigh heavily in their decision.

We will never know what DIDN’T happen as a result of Smoot-Hawley but we must always remember the unseen. From what I have read there was quite a stir over it anyway with foreign governments responding in kind. That ain’t good for business.

SheetWise September 18, 2011 at 8:30 am

+1

People who don’t understand the burden of the anticipation of legislation and regulation do not understand business.

If you have friends on both sides of this issue, ask them what percentage their spending — on voluntary transactions — goes toward the profit of corporations, corporate executives, etc.

The answers will stun you. The truth is easy to see — but the perception is so distorted that you can — at the very least — understand why the left survives. Destroy these myths and you will win the left.

If you could compare these numbers to government efficiencies, you would will win the war — but, alas, our government investigates fraud in industries where the bottom line profit — as a percentage — would not even amount to a rounding error in their own calculations.

g-dub September 18, 2011 at 10:44 am

“People who don’t understand the burden of the anticipation of legislation and regulation do not understand business.”

Has the community organizer president ever made a business decision of importance?

g-dub September 18, 2011 at 10:47 am

“Destroy these myths and you will win the left.”

The arguments require depth of thinking. You’re talking about a fat and lazy electorate who wants ideas spoon-fed to them in bullet points of 10 words or less.

The schools must be recovered from the socialists. It’ll take 100 years, if it can be done at all.

Dan J September 18, 2011 at 1:16 am

Diminishing the role of Smoot-Hawley does no one any good. But, I would agree that it is equally unhelpful to directly link the tariffs as sole reason for massive increase in unemployment. But, as Sowell asserts, the negative effects led to belief in more govt interventionism. Each policy leading to further one’s, compounding the damage.

Ken Royall September 19, 2011 at 2:12 am

I have read Sowell quite extensively, he would never make the claim that Smoot Hawley was the sole reason for higher unemployment in that period, his writings say quite the opposite. I think Don is reading too much into his statement. Sowell mentions Smoot-Hawley but goes on to say politicians wanted to show they were “doing something”. This is an implicit acknowledgment of subsequent policies that had adverse effects on the economy.

SweetLiberty September 17, 2011 at 5:15 pm

Honest question here: If contracting the money supply prolongs a recession, and expanding the money supply (via Quantitative Easing 1, 2, etc.) also seems to prolong a recession, is the answer simply to not mess with the money supply at all?

g-dub September 17, 2011 at 7:12 pm

Maybe I shouldn’t be the one answering. :-)

I think that defaults and bank failures lower the quantity of money. That is not something the central bank is doing (not at the time, anyway). “Do nothing” then means “let the quantity contract.”

I suppose some bank, maybe central, would have to create money to maintain status quo regarding the total quantity. I suppose that has some sense of neutrality, wrt quantity only. But that neutrality is “messing.” Someone did something.

SweetLiberty September 17, 2011 at 9:14 pm

I appreciate your explanation g-dub. But if “defaults and bank failures” do indeed lower the quantity of money, does that not increase the purchasing power of the remaining monetary stock? Is there no free market offset to defaults and bank failures that works itself out without the artificial intervention of a Central Bank further promoting bad lending practices leading to a continued moral hazard?

It seems like Bernanke is getting a lot of tacit support for his Quantitative Easing policies. These policies seem desperate attempts to keep an artificial bubble afloat by creating inflation rather than letting the economy adjust to prior interferences which shouldn’t have happened in the first place. I know I’m going on my gut here, but something about pumping up the money supply during a recession just doesn’t pass my sniff test.
,

g-dub September 17, 2011 at 11:51 pm

“But if ‘defaults and bank failures’ do indeed lower the quantity of money, does that not increase the purchasing power of the remaining monetary stock?”

Given enough time, sure. With a massive cluster (meaning all at the same time) of failures/contraction, I suppose there could be a great deal of uncertainty in price restructuring, including necessary debt restructures.

I don’t just think it is merely about moral hazard and bad lending. The banking industry was highly regulated (still is). I don’t know that rapid “free market recovery” was possible, as it was not a free market.

It was a complex problem. The question might be if policy that would be bad in isolation would be as bad in all circumstances, or might even be compensating.

I tend to say “never,” and pay the piper (expose the folly). But I can see how reasonable people would disagree.

Dan J September 18, 2011 at 1:22 am

The QE policies may have had positive results if it were not for all of the other policies and legislations passed… Obamacare, Dodd-Frank, EPA threats, ‘necessary skyrocketing energy prices’, NLRB harassment of Boeing, Obama admin threats to Humana during Obamacare debate, Mr Salazzar harassment of petroleum industries, increase in taxes (Obamacare), threats of increased taxes, cronyism from White House, etc., etc.,. Etc.,…….
The QE policies MAY HAVE….. Not an endorsement…..

Harold Cockerill September 18, 2011 at 7:43 am

Just as banking laws restricting branch banking set us up for so many bank failures during the 30s. That’s what destroyed so much money and the price level should have dropped after that. Hoover was so smart he thought he could run something like an economy. He was so smart he knew what people should be getting paid. Isn’t this where Hayek is supposed to be quoted?

g-dub September 18, 2011 at 10:26 pm

I feel somewhat similarly. While I don’t endorse it either, there are a lot of worse things in the world than mild inflation. (Presuming that is how the recent QE’s actually work out.)

SaulOhio September 17, 2011 at 7:18 pm

Yes. Don’t inflate it in the first place so that it can’t contract.

Greg Webb September 18, 2011 at 1:16 am

Yes.

SheetWise September 18, 2011 at 9:33 am

It’s “MONEY” that is the abstraction. Everything else is real.

Expanding the money supply is counterfeiting — there’s no other responsible way to refer to it. The counterfeiter is the only one who gets full value for their dollar — and when the counterfeit is legal, the only one who writes the birth certificate.

Tyre September 17, 2011 at 5:16 pm

Let’s not forget that the Treasury Department’s great decision to sterilize gold inflows and thereby choke off monetary growth in ’38 caused the double-dip.

Lord Keynes September 17, 2011 at 5:18 pm

“an even more destructive curse descended on America: FDR’s New Dealing hyperactivity in which his Trusted Brains cartelized industries, destroyed agricultural products, attempted artificially to raise prices”

Even Keynes disagreed with the National Industrial Recovery Act:

http://socialdemocracy21stcentury.blogspot.com/2011/09/keynes-on-new-deal-in-1933.html

The error is to lump all New Deal measures into the same category. Fiscal stimulus was a positive measure. And when fiscal and monetary contraction was implemented in 1937 the economy slumped:

http://socialdemocracy21stcentury.blogspot.com/2011/08/debunking-catalan-on-recession-of-1937.html

That doesn’t fit your libertarian story.

Nor does the fact that countries where large-scale fiscal stimulus was carried out (as opposed to Roosevelt’s mild to moderate fiscal expansion) like Germany and Japan emerged from the depression
quickly:

http://socialdemocracy21stcentury.blogspot.com/2011/09/fiscal-stimulus-in-germany-19331936.html

http://socialdemocracy21stcentury.blogspot.com/2011/08/takahashi-korekiyo-and-fiscal-stimulus.html

Chuclehead September 17, 2011 at 5:41 pm

If the US was on the gold standard, why would the money supply shrink so much. What happened to the gold that backed it?

Harold Cockerill September 18, 2011 at 7:47 am

We weren’t on a real gold standard. It was the gold exchange standard the great powers set up to bullshit their citizens into thinking the governments were being responsible. Didn’t do the job. Even the phoney standard put a crimp in what they wanted to do which is why FDR pulled the plug on it.

SheetWise September 18, 2011 at 10:04 am

“… which is why FDR pulled the plug on it.”

Not because the store was going to be exposed as tungsten bars?

I’m at a loss for words here as I search for some meaningful insight from the knowledge that there either is or isn’t honor among thieves.

Pietro Poggi-Corradini September 17, 2011 at 5:42 pm
Ken Royall September 17, 2011 at 11:56 pm

Very good point. The cascading effect of one bad policy causing other dominoes to fall. Something we economic wonks discuss all the time which Don seems to have forgotten momentarily.

Will September 17, 2011 at 5:58 pm

Regime Uncertainty – I have been reading “Basic Economics” by Sowell and I had an aha moment when I read the section on present value. It has been several years since I thought about present value in a specific way and it made me remember what a contracts professor use to say, “I don’t care what the rules of a game are, just don’t change them in the middle of the season or worse in the middle of the game.” (well it was something similar to that). Uncertainty in the future created by this regime, especially since no one nows exactly what Obamacare truely is, has created unnecessary risks that have to be taken into accout today.

Amir Weitmann September 17, 2011 at 5:59 pm

I did read a very interesting paper a year or two ago (and I am sorry I don’t remember where but I am sure you can find it and know about it) suggesting that Smoot-Hawley actually did play a significant role in the great depression, although not as it thought conventionally, but rather because of its indirect effects. If I am not mistaken, the point was that because of the banking regulation existing at the time, banks could only have one branch on one State, or something like that. The result was that the client basis of most of those banks was not very diversified and that many banks were very much linked to one sector of activity in the economy, like agriculture.

So when the Smoot-Hawley tariffs became law, they caused retaliation from foreign countries, who closed their borders to US exporters, driving a lot them bankrupt. It just so happened that those exporters were quite concentrated and that their bankruptcy caused the collapse of the banks linked to their sectors of activity, which had then a ripple effect in the whole banking system, this being a major factor in the banking collapse, which the policies of the Fed obviously helped.

Don, I”d be happy to hear your take on that. Thanks

Justin P September 17, 2011 at 7:00 pm

That’s Rustici’s thesis. Check out the econtalk link above.

Railesjr September 18, 2011 at 12:40 am

I’m glad people are mentioning Rustici’s thesis presented on EconTalk. I just read the show notes and there is a powerful argument that Smoot-Hawley had significant impact on specific regional banks that were tied to exports, mainly agricultural and iron and steel. It’s an eye opener to see how government policy wreaks havoc on markets when you start looking at microenomic details. I wonder if the Keynes economists have a built in blind spot to this because their world view is so “macro”.

Justin P September 18, 2011 at 1:31 am

They do. It’s called aggregation.

Harold Cockerill September 18, 2011 at 7:51 am

The killer is Hoover promised to sign Smoot-Hawley in the interest of helping the agricultural sector. He said he knew it was a bad move but as he had made it a campaign promise to the farmers he had to follow through. They got what they wanted.

g-dub September 17, 2011 at 7:18 pm

Those were the unit banking laws. They definitely caused bank failures. Strong banks couldn’t buy weak banks, for example. Sure, there would have been discounts otherwise. Jim Powell wrote about this, and I once read a more academic paper that was pretty good. Can’t remember it though.

I had not heard it related to Smoot, tho.

Apparently, Canada, a similar nation in law, and right next door had very few if any bank failures as the US. One wonders, why? It seems to me that bank failures must lower the quantity of money.

Harold Cockerill September 18, 2011 at 7:54 am

They allowed branch banking and hadn’t created a fragile system unable to weather local downturns.

Mickey T. Hobart September 17, 2011 at 6:12 pm

How much of a role do you think the Revenue Act of 1932 played?

rbd September 17, 2011 at 7:58 pm

How did the Fed allow the money supply to decrease by 1/3? Can someone point me to some reading on this? I just want to know the mechanics behind it. Thx.

Daniel Kuehn September 18, 2011 at 6:55 am

Friedman and Schwartz, p. 332-350

Craig September 17, 2011 at 7:59 pm

“foreign trade was too small a part of America’s economy in 1930 to have enabled Smoot-Hawley – as ill-advised as it unquestionably was – to be a major factor in deepening and prolonging the Great Depression.”

Jude Wanniski is rolling over in his grave. You’ve just told us how the world doesn’t work.

EG September 17, 2011 at 8:48 pm

“But as Doug Irwin argues in his new book Peddling Protectionism, foreign trade was too small a part of America’s economy in 1930 to have enabled Smoot-Hawley – as ill-advised as it unquestionably was – to be a major factor in deepening and prolonging the Great Depression.”

Wait a minute! I said this very thing, here at Cafe Hayek, several months ago (or was it a year ago? something like that).

Invisible Backhand September 17, 2011 at 9:23 pm

An economic downturn in 1920-21 sent unemployment up to 12 percent. President Warren Harding did nothing, except for cutting government spending. The economy quickly rebounded on its own.

A series of recent reviews of the depression of 1920–1921 by Austrian School and libertarian economists have argued that the downturn demonstrates the poverty of Keynesian policy recommendations. However, these writers misrepresent important characteristics of the 1920–1921 downturn, understating the actions of the Federal Reserve and overestimating the relevance of the Harding administration’s fiscal policy. They also engage a caricatured version of Keynesian theory and policy, which ignores Keynes’s views on the efficacy of nominal wage reductions and the preconditions for monetary and fiscal intervention.

http://www.springerlink.com/content/5683j4v650187261/

kyle8 September 17, 2011 at 10:06 pm

Milton Friedman proved very positively that it was Fed monetary policy that was the original primary culprit in turning the recession into the great depression.

But it was FDR and his meddling fiscal policy that caused the second downturn in the 1930′s.

blsdaniel September 17, 2011 at 11:14 pm

SOWELL: “…almost nobody seems at all interested in looking at the hard facts about what happens when the government leaves the economy alone, compared to what happens when politicians intervene….What about the track record of doing nothing? For more than the first century and a half of this nation, that was essentially what the federal government did — nothing. None of the downturns in all that time ever lasted as long as the Great Depression.”

ME: I read this several days ago on National Review, and debating it got me thinking about what the REAL track record of intervention vs. non-intervention was. Sowell seemed to believe that that the contractions prior to 1929 had little intervention (at least compared to what came later) while those that came after 1929 had a great deal. In general, I’ll accept this (though I reject his comparing the Great Depression, which was two recessions and the intervening recovery thrown into one, to previous stand-along contractions) and ask how the low-intervention era compares to the high-intervention era.

Look at the NBER business cycle data (http://nber.org/cycles/cyclesmain.html),
and you will see that the average length of the 19 business cycles that they record leading up to (but not including) the 1929 contraction average 20.5 months in length, while the 14 contractions that include and come after 1929 average 13.3 months in length. Furthermore, expansions before 1929 average 25.3 months in length, while those afterwards average an incredible 59.4 months in length.

In response to my comments on NRO, a person by the name of Sthrn Engr guided me to a website that showed estimates for GDP going all the way back to 1792. I know that the National Income Product Accounts used to calculate GDP only got started in the 1930s, but there are pepole who try, using various means, to push the numbers back further. Still, while I don’t know what method was used here to estimate real GDP back that far, I’d no other data to try.

I wound up only using the data back to 1854, as from 1792 to 1866 there is not a single contraction, and I find that unbelievable. Furthermore, 1854 is where the NBER business cycle data began, so similar periods would be being compared. However, as many of the drops in real GDP and NBER contractions couldn’t be matched up, I used just the former, and counted any year with a drop in GDP as a contraction (with back to back contractions being counted as two).

Under this methodology, the earlier data (1854 – 1929) had 12 “recessions”. They are below, with the percentage of the contraction:
1866 (4.6%)
1875 (.1%)
1884 (1.6%)
1893 (5.8%)
1894 (4.7%)
1896 (1.7%)
1904 (3.5%)
1908 (10.8%)
1914 (7.7%)
1917 (2.5%)
1920 (.9%)
1921 (2.3%)

For the later years we get:
1930 8.6%
1931 6.5%
1932 13.1%
1933 1.3%
1938 3.4%
1945 1.1%
1946 10.9%
1947 .9%
1949 .5%
1954 .6%
1958 .9%
1974 .6%
1975 .2%
1980 .3%
1982 1.9%
1991 .2%
2009 3.2%

If you take the two (geometric) means you get:

Average downturn 1854 – 1929: -2.55%
Average downturn 1930 – 2010: -1.44%

Thus, in addition to be correlated with shorter contractions and (much) longer expansions, the era of interventions seems to also be correlated with less deep recessions than did the more laissez faire ones.

Finally, there is the issue of long-term growth. I find that from 1854 to 1929, GDP grew at an average rate of 3.6% per year, while from 1930 to present, it only grew at 3.25% per year. Over 75 years, the former growth rate would turn $1 into $14.58, while under the latter growth rate, the single dollar would, in 75 years, grow to only $11.01.

Thus, the TRUE track record, using this method, would appear to be that interventions are correlated with shorter, shallower recessions and longer expansions. However, it was also correlated with slower growth. This would seem to imply that the boom-bust cycle was actually greater during the period of low intervention than it was during laissez faire.

Ken Royall September 18, 2011 at 12:04 am

Are you saying there were no interventions prior to 1930? I haven’t seen any empirical evidence to support that. In addition, the economy took off pretty significantly after the war. We were the kings of the industrial world for quite a while afterword as our domestic infrastructure was still intact and there was enormous pent-up consumer demand from the rationing during the conflict. That would also account for the smaller, shorter contractions in those years.

It also depends on what kind of “interventions” were done. Reagan some things in his first few years that could be seen as interventions but were actually in support of a allowing the private sector to flourish. Those measures were not similar to what Roosevelt did.

blsdaniel September 18, 2011 at 10:16 am

I was pretty much just accepting Sowell’s claim that, for the first 150 of our nation’s history, our response to contractions was to do nothing. Like you, I have doubts that pre-1929 contractions were treated with “nothing”. I just took Sowell as his word and did the comparison.

Also, just to be clear, I don’t think that this comparison, which only controls for government activism during contractions (if it even does that) if particularly telling. That was kind of half of my point: Sowell’s methodology, beside telling the exactly opposite story he is trying to get it to tell, was specious.

Frankly, Sowell has pretty much fallen from his (previously well-earned) status of intellectual heavy-weight. This isn’t the first time I’ve tried to look at the data he seems to be talking about (though he rarely gives an actual source) and found the data to not be saying what he claims it is.

Dan J September 18, 2011 at 1:11 pm

Haven’t seen anything, recently written or stated, that could possibly marginalize Sowell to a ‘fallen’ status on intellectual heavy-weight.
At 80+ yrs old, the esteemed gentleman would run circles around you, intellectually.

blsdaniel September 18, 2011 at 3:34 pm

YOU: Haven’t seen anything, recently written or stated, that could possibly marginalize Sowell to a ‘fallen’ status on intellectual heavy-weight.

ME: Even though you haven’t seen it, I think the evidence is there. This (i.e., the issue over average length of contraction before and after 1929) was one such example. The one furtherest back (the first I saw that really forced me to begin the process of rethinking the quality of his short writings) was in 1997 or 1998. The Nobel Prizes for the year had been announced, and he did an article talking about what the fact that no one born in America got one said about the decline of the US education system since the 1940s and 1950s.

I found a website giving brief biographies of those who had won the prizes going back decades and did a count. Turns out (at least up to that point) the 1990s was the best decade ever for native born Americans. The real disaster decade (were one to call it that) for native born Americans was the 1950s, when so many of the prizes the US got went to Jews who had fled Europe years earlier.

Now I am not saying that this means that the US had a bad education in the 1950s. Indeed, given how long it takes to go from high school to being in a position to win a Nobel, doing that would be utterly ridiculous. But that also applies to using the (alleged) lack of native born Nobels in the 1990s to critique the education system of those days.

And that has become a familiar pattern when I read much of what he writes today. First, the logic of his premise starts to look faulty. Second, upon further checking, even the premise isn’t true. Instead of looking like a real look at the underlying data, his articles just sound like recycled empty talking points.

Dan J September 18, 2011 at 4:01 pm

I give absolutely no regards to the Nobel prize. It is a political prize. it is an ideological prize. Absolute proof: Barak Obama.
Nobel prize I discount, entirely.
I would never accept anybody’s writings as being absolute. His books have the references. Indeed, his writings would seem to harken back to familiar territories. But, they are solid and rein true, now, as they did when he first reported on them. Use of politically motivated, or do-gooder legislations like affirmative actions have not suddenly become a tool that has helped the demographic it was intended for move beyond the poor advancements of that group.
He has become like so many Libertarians, not saying he is libertarian, frustrated (I assert from writings) to really expound on issues further.
It’s tiring to repeat oneself. I am not even close to having as much experiences or knowledge that so many possess, here.
You, bd, likely possess more knowledge than I. But, I have learned that repetition of qualifiers before discussing issues is tiring as the assumptions are drawn on statements made. Such as criticizing Obama usually comes with ‘ but Bush….’, and then getting sidetracked on comparisons as I try to state over and over that I am no fan of Bush presidency…..
You have still not laid out a solid foundation to assert your position that would seem to contradict Sowell’s. I will hold my breath on your

blsdaniel September 18, 2011 at 6:54 pm

Your final reply to me seems to have been chopped off.

Vis a vis your feelings for the Nobel Prizes, I share them, especially after the award went to both Al Gore and Obama. The latter was especially criminal. But how is that germane here? The point wasn’t as to their value, but rather to the fact that his characterization of whether or not native born Americans were still winning them was completely wrong, as a small amount of effort would easily have shown him. I don’t know if he didn’t look or if he looked but didn’t care, but it was one of those two. That’s not mere lack of a qualifier. It’s just shoddy work.

Ditto with the length of the pre-1929 and post-1929 contractions. Either he’s comparing the pre-1929 contractions with just the Great Depression, in which case he’s cherry picking, or he’s comparing the pre-1929 contraction with the post-1929 contractions in general, in which case he’s wrong: there’s no evidence that the pre-1929 contractions were shorter or shallower than the post-1929 ones. Again, that isn’t the result of leaving off some qualifier.

Invisible Backhand September 18, 2011 at 10:52 am

Great job, blsdan. It would seem the slower growth meant the amplitude of the business cycle was lower, which is good.

blsdaniel September 18, 2011 at 3:38 pm

Well, the lower boom-bust cycle IS good, but even though I can’t remember who said it, I still remember reading some economist write “once you start thinking about growth, it’s hard to think about anything else”.

Growth is huge, and providing less of it ain’t a good thing.

Still, this data, though hardly the product of deep research, is a significant challenge to anyone who agrees with Sowell’s view that pre-1929 contractions had little government intervention and the Austrian view that government intervention is largely what drives the business cycle.

Invisible Backhand September 18, 2011 at 4:18 pm

Nah, he says patently false stuff like this, from the same article:

In 1987, when the stock market declined more in one day than it had in any day in 1929, Ronald Reagan did nothing. There were outcries and outrage in the media. But Reagan still did nothing.

That downturn not only rebounded, it was followed by 20 years of economic growth, marked by low inflation and low unemployment.

Which is just re-writing history. But he’s from the Hoover Institution, which produced Condi Rice, George Schultz and Donald Rumsfeld. I don’t know if he has his ‘Reagan Legacy Project’ hat on for this article or his ‘Neocon Rehab Project’ on, but its all rather transparent propaganda.

blsdaniel September 18, 2011 at 6:41 pm

I was more commenting on the mixed blessing of the trade-off between boom-bust and long-term growth.

Still, I won’t deny (and, in fact, in the comments for this very article on National Reiew Online I as much said) that when he wants to show that nothing was done in 1987, he conveniently forgets the actions by the Federal Reserve.

Like I said, his short articles are becoming empty talking points, instead of the insightful material the his older works (especially Preferential Policies) were.

I know that to voice such opinions on a conservative or libertarian webpage sounds like spoling for a fight, but facts are facts.

g-dub September 18, 2011 at 11:03 am

GDP has some imputation of value in it. I don’t really know, but I would say state and local governments grew to larger sizes in the 20th century. Since the price system (from which value is imputed) is necessarily distorted for government expenditures, it would be nice to factor out government when doing such evaluations. (I am not saying “all government expenditure is total waste”).

carlsoane September 18, 2011 at 12:19 pm

I believe the pre WWI information for your chart was drawn mainly from one source, Willard Thorp’s “Business Annals” written in 1926, which relied primarily on data from the business press and some reports on wholesale prices.

In this report –”An Improved Annual Chronology of U.S. Business Cycles Since the 1790′s” by Joseph Davis (http://www.nber.org/papers/w11157.pdf)– the author relies instead on a measure of annual industrial production, and comes to the conclusion that “an important implication of the new chronology is the lack of discernible differences in the frequency and duration of industrial cycles among the pre-Civil War, Civil War to WWI, and post-WWII periods.”

blsdaniel September 18, 2011 at 3:45 pm

Nice link!

I’ll look it over.

However, even this result still raises red flags for the Austria school assuming, once again, that one accepts Sowell’s statement that the pre-1929 business cycles were free of interference (and that the post-1929 cycles weren’t).

SaulOhio September 19, 2011 at 5:33 am

Recessions before 1930 include the Long Depression, which Austrian economists say wasn’t a depression at all, but good times when the money supply remained fairly stable and productivity increased, resulting in falling prices and an increase in the standard of living.

blsdaniel September 19, 2011 at 11:12 am

Even taking the Long Depression out altogether doesn’t undermine the main result: pre-1921 recessions still lasted longer.

Packman September 19, 2011 at 1:25 pm

blsdaniel – is that data inflation-adjusted?

Daniel September 19, 2011 at 10:46 pm

The website I got it from claimed it was in 2005 dollars.

Again, this was just data someone suggested that I look at to compare DEPTH of recessions. Obviously, inflation doesn’t affect the NBER data on LENGTH of recessions.

Packman September 22, 2011 at 10:14 am

Actually I very much beg to differ. In an environment of general inflation (such as what we’ve had for a few decades now), recessions end much quicker than they otherwise would. Generally the most-used gauge is expansion or contraction of GDP – in nominal terms, not real terms. Often the end of a recession is declared when GDP starts expanding in nominal terms, however real GDP may still be contracting.

Packman September 22, 2011 at 10:21 am

E.g. this past recession was declared over in June 2009, though in real terms GDP didn’t stop contracting until 3 months later.

(Though of course the “expansion” that we did have of course was QE-induced anyhow; so while technically we were done with recessing then – in reality the fundamentals were still worsening, and still are now.)

Packman September 22, 2011 at 10:24 am

More the to point actually – the 1800′s were generally a price-deflationary century. Prices in the U.S. dropped roughly 50% across the century. By normal recessionary measures we had a lot more recessions, deeper ones, and longer ones, than we had in the 1900′s e.g. see the various FRED charts) – but this was generally due to the price deflation, not due to the 1800′s economy being worse than the 1900′s economy.

Railesjr September 18, 2011 at 1:08 am

Perhaps Sowell was referring to the Great Depression length where unemployment was at 23.6% in 1932 and still at 14.6 % in 1940. A stretch of 8 years where you might have had expansions but they provided cold comfort to the millions of people out of work in the US.

blsdaniel September 18, 2011 at 3:49 pm

Possibly, though one wonders where he got his data on unemployment rates for the first 150 years of US history.

Not that estimates don’t likely exist (as they do for GDP), but saying whose series he was using, or even saying that unemployment was his metric, would have been nice.

This is another of my complaints vis a vis his articles. One is often left wondering exactly what he meant and, thereby, what it would take to prove him right or wrong.

Dan J September 18, 2011 at 4:02 pm

Read his books.

blsdaniel September 18, 2011 at 9:12 pm

I read a couple. The one I really remember was remember was Preferential Policies. It was awesome.

I realize that articles can’t match books. If they did, writing books would be pointless.

But that doesn’t mean that the articles have any reasons to display the issues I’ve laid out, above.

Greg Webb September 18, 2011 at 1:31 am

Thanks for the insightful analysis by Professor Sowell. It seems that similar astrologers are handing economic policy for the Obama Administration. Their policies put the Great in Depression and Recession.

Stone Glasgow September 18, 2011 at 7:56 am

It’s fascinating that no one is supporting a free market in currency production, even when arguing that the Fed created too little money in 1930 and is now creating too much.

This is like arguing that department stores are, or are not, supplying the right amount of goods to match public demand. For God’s sake, it’s a moot point; the real problem is the monopoly, not its actions.

SweetLiberty September 18, 2011 at 10:29 am

I tend to agree.

vikingvista September 18, 2011 at 11:34 pm

Triple amen, brother. Triple amen.

JoshINHB September 18, 2011 at 10:25 am

Test

ArrowSmith September 18, 2011 at 1:43 pm

Guess what? In schools today they teach the Great Depression happened because Herbert Hoover was not punishing the capitalists enough.

SaulOhio September 19, 2011 at 5:35 am

Still?

Patrick Barron September 18, 2011 at 2:07 pm

“A far worse government failure than Smoot-Hawley was the “Great Contraction” – the Fed allowing the money supply to fall by one-third between 1930 and 1933.”

Murray N. Rothbard has shown that the Fed did everything in its power to inflate the money supply, but uncontrolled factors overwhelmed the Fed. The “Great Contraction” was the inevitable consequence of fractional reserve banking, in which money is created out of thin air. When the malinvestment is revealed, there are not sufficient real assets to meet all of the new, false money claims of the banks’ depositors.

vikingvista September 18, 2011 at 6:21 pm

Rothbard was good at describing how free markets absent any state action could reasonably deal with common offenses like fraud, theft, property offenses, etc. Too bad he didn’t give more thought to how a free market would naturally and effectively regulate the only kind of banking the world has ever known–fractional reserve banking.

But I think if he had had a chance to consider Selgin’s work, he would have been eager to embrace yet another “offense” that could be comfortably left entirely to free market management.

g-dub September 22, 2011 at 9:50 am

“Too bad he didn’t give more thought to how a free market would naturally and effectively regulate the only kind of banking the world has ever known–fractional reserve banking.”

I’ve never been able to figure out why FRB could not exist in a free market. As long as the terms are known and voluntary, I don’t see why not.

When I used to visit mises.org some time ago, I would see some posters rail that “FRB could not exist in a free market!” I wasn’t persuaded. That didn’t stop the shout downs.

Octavio Saenz MD Sr September 20, 2011 at 6:53 pm

“OUR” SATANIC “CORPORATIVISM”!
Most Respectful, submit This Most Patriotic and Most Faithful Message also personally and specially to a Nationally Significant Patriotic Friend. Thank you
OUR “MOST BELOVED” AMERICA’S MOST CROOKEDLY EVIL ANTI-AMERICAN “CORPORATIVISM”!
Most Respectfully, This Most Earnest Patriotic Appeal was also submitted to almost all of The Heads of Our Churches and to almost all of The Presidents and Provosts of Our Universities – “Personally”!
UNIVERSAL PSEUDO-CORPORATISM!!!
This Most-Loving Prayer was also addressed and mailed personally to all Top Politicking and Religious Leaders of The World!
THE WORST CRIME, EVER, AGAINST ALMIGHTY GOD’S HUMANITY – FOREVER?
(Also Truly Honoring Dr. Martin Luther King’s Most Patriotic Legacy!)
The Nucleus of Our Whole World’s Ever-Growing Suicidal Nuclear Crisis is created by No Other than The Most Defrauding and Most Greedy Ultra-Conservative and Ultra-Libertine Politico-Religionism Everywhere – Universally! Our Whole World has No True Religion Anywhere!
The Nucleus of The Most-Dominant Over-Ambition of Our Universal True Atheism is none other than The Most Voracious Globally Inhuman “Corporatist” Economic Exploitation: all by The Most Extreme Global Disregard for THE MOST FUNDAMENTAL BASIC UNIVERSAL HUMAN LITERACY and also for THE MOST FUNDAMENTAL UNIVERSAL GOOD-SAMARITAN BASIC HEALTH INSURANCE. THESE TWO TOGETHER INDEED CONSTITUTE ALMIGHTY GOD’S TRUE UNIVERSAL MOST ELEMENTAL DEMOCRACY’S MOST VITAL AS MOST ESSENTIAL MEANS FOR ALMIGHTY GOD’S TRUE INDIVIDUAL EQUAL OPPORTUNITY – TO REACH THOSE TWO MOST INDISPENSABLE ALMIGHTY GOD’S INDIVIDUAL ELEMENTAL HUMAN GIFTS (RIGHTS), NO MORE, NO LESS!!!
All of Our Vast World-Wide HUMANITY Perpetually Shackled – AS ILLITERATE AND INFIRM “HUMANITY” – of course including Our Western World, is ever more and more so “CRUCIFIED” as threatened with impunity by instilling in them “OUR” Religionist-Inculcated Utmost Fear of “GOING TO HELL” if they have “NO FAITH” – that is, if disobedient to “Our” Politico-Religionist False “Leadership – as just like telling them “THEIR ‘HEAVEN’ IS ‘LIVING’ IN OUR SATANIC EXPLOITATION”!
Our Totally Politico-Religionist Western World has always even tried to expand Our Most Voracious Greedy “Corporatism” to Our Islamic Eastern World’s “Friendly” Governments, but I most strongly suspect that Islamic Religionism has an opposite but Equally Religionist Inhuman Self-Defense: when Our Western “Corporatist” Inhuman Intervention reach Their Eastern Critical Religionist Level – as in Our Unending Warring Perplexity with “Their Islamic” World – Their Islamic Religionist Counteracting General “’Inspiration’-To-Go-To-Heaven” is no other than Their Ultra-Terrorist “Salvific” Individual Self-Immolation!
ALL OF THESE, FOR SURE SO FAR, ARE THE MOST IRREFUTABLE PORTENDING SYMBOLISM OF A MOST-CERTAIN-GLOBAL-NUCLEAR-ARMAGEDDON: THERE IS NOT THE SLIGHTEST DOUBT ABOUT THE CERTAINTY OF THE WHOLE WORLD’S TOTAL HOLOCAUST!!! MAY WE REALLY AND TRULY PRAY, SO THAT WE ALL – TRULY AND SOLIDLY HONEST AMERICANS – REALLY ENABLE GOD THE ALMIGHTY TO BLESS (SAVE) OUR MOST BELOVED TRUE AMERICA!!! OTHERWISE, ANY OTHER “CRIME” OR”ABORTION” IS AN INNOCENT BY-PRODUCT!!!

Octavio Saenz MD Sr September 20, 2011 at 6:55 pm

“OUR” SATANIC RELIGIONISM!
Most Reverent, please submit This Most Patriotic and Most Faithful Message, also personally and specially, to a Nationally Significant and Patriotic Friend. Thank you!
“OUR MOST BELOVED AMERICA’S” MOST CROOKEDLY SATANIC ANTI-AMERICAN POLITICKING AND RELIGIONISM!
Most Reverent, This Most Earnest Patriotic Appeal was also submitted to All The Presidents of Our American Universities, and to Their Provosts – submitted to both personally!
UNIVERSAL RELIGIONISM AND POLITICKING!
This Most Loving Prayer is also addressed to All Top Religious and Politicking World Leaders – Most Faithfully!
This is all and only about The Most Criminal World-Wide RELIGIONISM AND POLITICKING EVER!
All that Our Whole Wide World has ever needed, and still presently needs foremost and more than ever, is A TRULY AMERICAN NATIONAL INCORRUPT REEVALUATION!
“MERRY CHRISTMASTIMES !!!” “HAPPY NEW YEARS!!!” “HAPPY HOLIDAYS!!!” “HAPPY NEW CENTURIES!
ALMIGHTY GOD’S TRUE NUCLEAR DEMOCRACY SHALL NEVER EXIST IN OUR AMERICA UNTIL BOTH TRUE DEMOCRACY’S UNIVERSAL MOST BASIC FUNCTIONAL LITERACY, AND UNIVERSAL MOST BASIC TRUE“GOOD SAMARITAN” HEALTH INSURANCE ARE CONSTITUTIONALLY COMPELLED AS MOST CRIMINALLY PUNISHABLE! THAT IS, UNTIL OUR INSATIABLE ULTRA-WEALTHY CORRUPT “CORPORATISM” GIVE A TRUE EXAMPLE FOR SUCH A SACRED UNIVERSAL HUMAN EQUAL OPPORTUNITY – FOR THE SAKE OF OUR MOST EXPLOITED AS MOST SUFFERING ILLITERATE AND POOREST HEALTH-UNINSURED AMERICAN BROTHERS!
Almighty God did not write His Bible just to “Inspire” The Implacable Religionist “Sacrosanct” Church-Like Corporations of This World to use IT as toilet paper; that is, to use IT as Such a Globalized, Religionist, Materialist, PIOUSLY MUM, AND SO ULTIMATELY EQUALLY SUICIDAL-TERRORIST,SUBLIMINAL INHUMAN EXPLOITATION!
Why ”THE TRULY UNIVERSAL CHURCH” – AS “FREE AND SEPARATE FROM THE STATE” – NEVER TAKE ALL OF THESE AS ITS TRUE DAILY PREACHING INITIATIVE – AS ITS TRUE RELIGIOUS LEADERS DID BEFORE???!!! BECAUSE THEY ARE NOT ANYMORE “THE TRUE SERVANTS OF ALMIGHTY GOD” (AS THEY SO FERVENTLY CLAIM) BUT OF THE GOVERNMENTAL “MOST COMFORTABLE” RAPACIOUS CORPORATIST MOST INHUMAN WORLD POLITICS OF EXPLOITAION!!!
WHY ABSOLUTELY NOBODY SPEAKS ANYTHING – SPECIALLY AT THE MOST IMPORTANT ELECTION TIME – ABOUT DENOUNCING AND UPROOTING ONCE AND FOR ALL THE HIGHEST LEVEL OF OUR “AMERICAN” ILLITERACY AND LACK OF TRULY DEMOCRATIC UNIVERSAL “GOOD SAMARITAN” ALSO INDISPENSABLE MOST BASIC HEALTH INSURANCE!
THE TRUTHFULLNESS EVER MISSING IN ALL OF OUR SUPER-POLITICAL SPEECHES, ALWAYS PRETENDING TO “HONOR” OUR MOST BELOVED AMERICA – AND MOST SORELY MISSING FOR OUR AMERICA’S SALVATION – IS THE TRULY POLITICAL, TRULY RELIGIOUS, AND TRULY PATRIOTIC DEMOCRATIC INSPIRATION!
WHY ARE WE SO SILANTLY MOST OBSTINATE AND MOST ANTIPATRIOTIC!!!???
MAY WE ALL TRUE AMERICANS ALWAYS TRULY PRAY SO THAT WE ALL TRUE SOLID AMERICANS REALLY ENABLE ALMIGHY GOD TO EVER BLESS (SAVE) OUR MOST BELOVED TRUE AMERICA!!!
OTHERWISE, ANY OTHER “CRIME” OR “ABORTION” IS AN INNOCENT BY-PRODUCT!!!

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