In the course of a New Republic article analogizing George W. Bush to Herbert Hoover, historian Alan Brinkley perpetuates the long-discredited myth that Hoover failed to stop the Great Depression because he pursued laissez-faire policies:
Herbert Hoover . . . exemplifies the dangers of sticking to one's principles. One of the ablest and most widely admired men in America when he was elected president in 1928, Hoover left office four years later discredited and reviled--a victim of a Depression that he had not created, to be sure, but also a victim of his choice of conviction over pragmatism. Unwilling to challenge the pillars of free-market capitalism, strongly committed to balanced budgets and fiscal prudence, convinced that the natural laws of economics would bring the Depression to a close, he responded to the Depression with such restraint and timidity that had his administration not ended when it did, the entire financial system of the United States might have collapsed.
Far from being "unwilling to challenge the pillars of free-market capitalism," Hoover reacted to the Depression by promoting extensive government intervention. For example, he established the Reconstruction Finance Corporation, a new federal agency that gave massive loans and grants to banks, failing businesses and state and local governments - a policy similar to today's bailouts. He also supported (albeit reluctantly) the enactment of the Smoot-Hawley tariff, a protectionist measure intended to strengthen American businesses by shielding them from foreign competition. Furthermore, he sponsored a massive increase in federal spending on a variety of relief programs. Similar to today's Democratic Congress, Hoover sought to stimulate the economy by increasing federal funding for public works through the Emergency Relief and Construction Act.
Speaking before the 1932 Republican Convention, Hoover boasted that he had rejected the "disastrous" option of doing "nothing" and instead had "met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic." In that same 1932 campaign, FDR even denounced Hoover for overspending and promised to enact a balanced budget.
Nor were Hoover's interventionist policies a sudden change of heart caused by the Great Depression. He had advocated extensive increases in government spending and regulation for years, especially during his time as Secretary of Commerce in the 1920s. Even before the Depression began, the Hoover Administration promoted federal intervention in labor relations and massive farm subsidies.
None of this is news to economic historians. By the 1960s and 70s, research by a variety of scholars had shown that Hoover was anything but a laissez faire advocate. Liberal historian Joan Hoff Wilson's 1975 book Herbert Hoover: Forgotten Progressive is a good summary of the evidence. It is surprising that an outstanding historian like Brinkley would ignore this body of research.
Brinkley is right, however, to suggest that Hoover's policies were similar to Bush's. Like Hoover, the Bush administration responded to an economic crisis with a policy of bailouts. Also like Hoover, Bush sought to push the GOP towards big government policies long before any economic crisis had occurred. Under Bush, the GOP massively increased domestic spending and federal regulation. Bush also, in his own words,"use[d] the mighty muscle of the federal government" to incentivize financial institutions to issue mortgages to borrowers with dubious credit qualifications - an interventionist policy that helped cause the current crisis.
After Hoover left office, New Dealers used the myth of his supposed adherence to laissez-faire as a justification for discrediting free market policies. Today, we are seeing the creation of a similar myth about Bush. The truth, however, is almost the exact opposite of the myth.
The fact that Hoover and Bush pursued interventionist policies doesn't in and of itself prove that free markets are the way to go. Perhaps Hoover and Bush simply chose the wrong kinds of interventions. Nonetheless, the myth of Hoover as laissez-faire advocate was an important rhetorical prop for supporters of big government policies in the 1930s. Hopefully, it is not too late to forestall the creation of a similar convenient myth about Bush today.
UPDATE: It's worth noting that FDR strongly denounced Hoover for being overly interventionist during the 1932 campaign. He attacked what he called the GOP's "reckless and extravagant spending" and warned against Hoover's tendency to conclude that "we ought to center control of everything in Washington as rapidly as possible." The later liberal Democratic view of Hoover as a laissez-faire advocate is a post-New Deal invention. When Hoover was actually in office, most Democrats realized that he was an interventionist, and many criticized him for it.
Related Posts (on one page):
- How the New Deal Prolonged and Deepened the Great Depression:
- More on Hoover as Proto-New Dealer:
- Bush is Indeed Like Herbert Hoover - But Not in the Way You Think:
- Does the Financial Crisis Discredit Libertarianism? Round II:
- Anna Schwartz on the Economic Crisis:
- Does the Financial Crisis Discredit Libertarianism?
Please.
This is indeed a useful analogy, but it serves the argument's rebuttal even better. It presumes that the government can consciously and willfully alter the number of jobs saved or created through government spending, presumably by varying the amount spent. Why, we are asked, do we turn to Tylenol when morphine is available? Now, bring this argument to its logical conclusions. If this were true, then not only would the government spend "stimulus" money in times good and bad, but it could also prevent any job loss at any time by simply spending more money. If 800 billion creates 3 million jobs, why not a trillion or even two? It's morphine with no side effects! Clearly, this is not the case. Like strong medicine, large economic bailouts, stimulus packages, and large government programs are hardly the panacea that the previous commentator makes them out to be.
I understand that intuitively this may might make sense to some people. At the very least, the argument very clearly outlines cause and effect. Government money = jobs. This simplistic logic is persuasive to those who are, by their nature, predisposed to simplicity. But as previously mentioned, those who might be inclined to extend the reasoning beyond its basic conclusions would likely be alerted to its fallacy.
The private sector, albeit cyclical, will always and forever be the more efficient source of jobs. Adding another million to government payrolls only serves to remove their skills and productivity from the job-creating economy. Even if you don't buy this argument, the fact that the Obama stimulus plan spends hundreds of billions on welfare programs and the states (which goes directly into the hands of non-productive state workers and their unions) instead of direct investment in infrastructure that might pay off down the road should give you pause.
A healthy private sector is what this country needs. Yes, that does require efficient regulation and oversight, especially over banks and other institutions that are critical to macroeconomic stability. At the same time, job creation is not likely to come from politicians who've probably never had a real one. Real economic investment means putting money back into the pockets of the people who know how to spend it, pollyannaish faith in government and our new president not withstanding.
You should have asked yourself, "percent of what" while reading this chart. The chart shows federal spending as a percent of total GDP. During the period in question GDP contracted by over 30%, so absolute federal spending was relatively constant over the same period. The chart you cite appears to support the assertion that New Deal policies did not increase federal spending significantly over the levels initiated during the Hoover administration.
Part of the problem is indeed that the government is inefficient in creating jobs, in comparison with the private sector. Not only does much of what is created not advance the economy (except for the wages paid), but whatever is created, is created inefficiently. So, during the Depression, you have people creating stuff that we really didn't need, such as huge public works projects, instead of creating actual products that people wanted to buy. Much of our National Park infrastructure was built then, at the expense of building consumer goods. Things are worse now, due to Davis-Bacon, among other things. We may see two or three fast food jobs sacrificed for each union wage public works job created.
Maybe the better way to look at this is to compare one person earning union wages building something that is of marginal use to the public and has a half century payback plus paying several people unemployment, or paying them all for their contribution to the economy.
One gets the sense that Brinkley has never heard it at all.
1. We had a great deal of idle manufacturing capacity.
2. We had least 25% of the population on farms compared to 2% today.
3. People were more self sufficient.
4. Crime was much lower.
5. We were an export economy as opposed to an import economy.
6. We were willing to send immigrants back home to free up jobs for Americans. In fact after 1925 immigration was highly redistricted. Today legal immigration is approximately 1 million per year, and no politician is willing to send them home.
7. Today's total debt to GDP ratio is nearly 4 as opposed to 1929 when it was 2.
8. We did not have a huge debt to foreign nations. The national debt was held by Americans in the main.
It made sense for the government to try to pump up aggregate demand by running deficits because we had idle capacity. Today the so-called stimulus packages act to create employment in China more than the US because that's who makes the stuff Americans buy as consumers.
In short, today's situation is so different that it's not useful to try to compare Bush to Hoover.
BTW Intrade Prediction Markets now put the US into a Depression in 2009 with probability of 55%, or 6 to 5 odds in favor of Depression.
Why Ilya, who tells us so much about rational igorance, thinks it might be different, is unclear.
You should have asked yourself, "percent of what" while reading this chart. The chart shows federal spending as a percent of total GDP. During the period in question GDP contracted by over 30%, so absolute federal spending was relatively constant over the same period. The chart you cite appears to support the assertion that New Deal policies did not increase federal spending significantly over the levels initiated during the Hoover administration.
Do you have the figures for absolute federal spending? Just going by your rough numbers, if federal spending was 100x in 1930 and 70x in 1934 due to a 30% GDP contraction, then 3.4% of 100x is 3.4x while 10.8% of 70x is 7.6x, still a significant increase. This page gives a few real figures, saying "New Deal emergency spending on public works, relief, and rural programs drove up federal outlays to $6.6 billion in fiscal year 1934 and $8.2 billion in fiscal year 1936, well above Hoover's largest budget of $4.7 billion in fiscal year 1932". It would also be interesting to know what fraction of the money was going to public works and other ways of employing people directly (as opposed to more 'trickle down' spending): this page says:
Upon taking office, the new president faced a Congress clamoring for a $5 billion public works program. Then as now, the money was to be channeled through states and local governments. Then as now, governors and mayors said they had projects ready to go.
But according to the historian David M. Kennedy (in his magisterial, Pulitzer Prize winning book Freedom From Fear: The American People in Depression and War, 1929–1945), Roosevelt had some of the same concerns about public works spending as his hapless predecessor, Herbert Hoover.
Roosevelt “endorsed Hoover’s conclusion that only about $900 million worth of acceptable projects were on the shelf,” Kennedy writes. When his Labor Secretary, Frances Perkins, pressed the $5 billion list on him, Roosevelt countered by “going through the New York projects item by item, pointing out in well-informed detail how unsound most of them were,” Kennedy says. “In the end, Roosevelt caved to political pressures and allowed an appropriation for $3.3 billion to be made for the new Public Works Administration.
Finally, if Brett A.'s comments at the beginning of the thread are correct that might also be another significant difference between Hoover's style of spending and Roosevelt's.
Hoover lamented after the fact that his Treasury Secretary was a "liquidationist" -- someone who thought that bank failures were healthy and "purged the system" of waste and excess. At the time, the Hoover Administration allowed the failure of the large (private) Bank of the United States in 1930, and stood by while a wave of bank failures took place throughout 1931. And the Fed raised interest rates in May 1931 to protect the U.S. from a run on the dollar, an action that accentuated the credit crunch in the U.S.
One difference is the fact that our economy is now a service economy. If we raise tariff barriers we will have no TV's, IPods, toasters, furniture, etc to buy. We don't make that stuff anymore.
Unfortunately, a healthy service economy needs a healthy global economy.
Bank of United States. According to Shlaes there was no "the" in its name.
All that's predicting is a 2.6% decrease in GDP at the end of the year. For some reason they're adding quarterly losses together, which effectively multiplies the decline by 4.
It was quite obvious that this "crash" was comming. All the economic signs were that interest rates were being held below market by Alan Greenspan. It's obvious that he lacked the understanding of economics that was needed for his job. Likewise Clinton, Obama, McCain, Bernarke, Barney Frank, and the rest of them.
When you set interest rates below market it will cause lowered savings, increased borrowing, an economic boom, inflated asset prices, a trade deficit, commodity price increases, over leverage, and finally bank failures, etc.
The events unfolded precisely in line with Austrian Business Cycle theory.
The Feds actions right now are highly irresponsible. Look at the monetary base. In two months it doubled. That is just crazy Zimbabwe style monetary policy.
Alan Greenspan set interest rates too low, and caused a financial bubble. His answer to the popping of the bubble was to reinflate, which only postponed and made the bubble worse. Bernarke is repeating the process. Eventually one of these bubbles will be impossible to reflate without substantial price inflation, and economic hardship.
The answer is not to give the patient more of the same drug that poisoned him.
It is absolutely sad that the politicians are listening to idiots like Krugman, Bernarke, Greenspan, and the like. Anyone who quotes any of these guys as authorities is ignorant of valid economic theory.
This whole mess was caused by having a fraction reserve monetary system backed by a central bank. The fiat aspects of the currency have not been a major factor as of yet, althought that 100% jump in the money suppy over two months is yet to play out.
The way to have a stable economy is to outlaw fractional reserve banking. It makes no sense for peoples short term savings to be lent out long term. It only leads to the business cycle, and bank runs, etc. If banks were not allowed to lend out short term savings then no one would be able to run to the bank to pull out the money that wasn't there.
The fractional reserve system is insanely unstable. It's based on banks having loans backed by assets that are very things that are run up in price by the banks loaning out unbacked currency in the first place. When bank reserves drop from 100% down through 50%, to 25%, to 4%, the banknotes increase the money supply by first double, then quadruple, then by twenty five times. This money is used to buy the very assets, like houses, that supposedly back these loans.
The run up in prices, of course, cannot be sustained because it is merely a mirage caused by the increase in the money supply, which will collapse as the distortions caused by the lending eventually correct. We can run an economy on building houses, for instance.
This whole mess, btw, was caused by lawyers and judges ruling that fractional reserve banking was not fraudlent. Well, it is. It's a subtle kind of pyramid scheme, based on the obvious fact that you can pay short term savers back if you've lent out long term.
I will somewhat agree with you on the fractional reserve system. Keep in mind that the 4% = 25x, etc. assumes a constant 4%. The system works just fine as long as the reserves are constant. The problem right now may be that while legal reserves are constant, real reserves are dropping, due to the bad loans. However, this shouldn't be translating into more money to lend, but rather, less, since the banks are under pressure to meet their legal reserve requirements, thus necessitating reduced lending. So, let me suggest that maybe the better metric in monetary expansion through lending would be legal reserves, when they are below actual reserves.
"All that's predicting is a 2.6% decrease in GDP at the end of the year. For some reason they're adding quarterly losses together, which effectively multiplies the decline by 4."
Yes there does appear to be an error in the wording. If you define a Depression as a 10% yearly drop in GDP, that means a drop of 2.6% each quarter-- (1-.026)^4 = (1-0.1).
All of Our Economic Problems Find They Root in the Existence of Credit.
Out of the $5,000,000,000,000 bail out money for the banks, that is $1,000 for every inhabitant of this planet, what is it exactly that WE, The People, got?
If Your Bank Doesn't Pay Back Its Credits, Why Should You Pay Yours? Or Else ...
If the Banks Get 0% Loans, How Come You Don't?
At the Same Moment, Everyday Some of Us Are Losing Our Home or Even Our Jobs.
Credit is Mathematically Inept, Morally Unacceptable.
They Bail Out, We Opt Out
Opting Out Is Completely Anonymous.
The Credit Free, Free Market Economy
Is Both Dynamic on the Short Run &Stable on the Long Run, The Only Available Short Run Solution.
I Am, Hence, Leading an Exit Out of Credit:
Let me outline for you my proposed strategy:
✔ Preserve Your Belongings.
✔ The Property Title: Opt Out of Credit.
✔ The Credit Free Money: The Dinar-Shekel AKA The DaSh, Symbol: - .
✔ Asset Transfer: The Right Grant Operation.
✔ A Specific Application of Employment Interest and Money.
[A Tract Intended For my Fellows Economists].
If Risk Free Interest Rates Are at 0.00% Doesn't That Mean That Credit is Worthless?
Since credit based currencies are managed by setting interest rates, on which all control has been lost, are they managed anymore?
We Need, Hence, Cancel All Interest Bearing Debt and Abolish Interest Bearing Credit.
In This Age of Turbulence The People Wants an Exit Out of Credit: An Adventure in a New World Economic Order.
The other option would be to wait till most of the productive assets of the economy get physically destroyed either by war or by rust.
It will be either awfully deadly or dramatically long.
A price none of us can afford to pay.
“The current crisis can be overcome only by developing a sense of common purpose. The alternative to a new international order is chaos.”
- Henry A. Kissinger
They Bail Out, Let's Opt Out!
If You Don't Opt Out Now, Then When?
Let me provide you with a link to my press release for my open letter to Chairman Ben S. Bernanke:
Chairman Ben S. Bernanke, Quantitative [Ooops! I Meant Credit] Easing Can't Work!
Yours Sincerely,
Shalom P. Hamou AKA 'MC Shalom'
Chief Economist - Master Conductor
1 7 7 6 - Annuit Cœptis
Tel: +972 54 441-7640
http://edsk.org/
The Fed seems to be treating the problem as a bank liquidly crisis, not an insolvency crisis. If the Fed exchanges bad assets from the banks for their (created) base money, then they can't "run the printing press backwards" to control the monetary base when V returns to normal. That means rampart inflation. I suspect this is why the Fed refuses to disclose what's in its balance sheet. Bloomberg financial news has a FOIA suit going to force them to disclose what they have taken in.
It seems to me that the US government has decided to rescue the banking system and other failing businesses by taxation via inflation. In other words, the bad bank assets are passed on to the citizens in the form of depreciated currency instead of explicit taxes. This way taxpayers get mad at merchants instead of the government. This is why the government will first try wage and price controls (as Nixon did) even though they know it won't work. The controls send a signal that greedy business is responsible for the increasing prices and not the Fed. In other words, the inflation is made to appear as some kind of exogenous event.
Does "the rest of them" include G.W. Bush? If not, why not? If so, interesting that you would mention Clinton by name and not the President on whose watch the economy melted down.
If, on the other hand, you were just nitpicking a hastily written blog comment, may I direct your attention to the incorrect spelling of Chairman Bernanke's last name? I would be interested in your Rorshaching of that error, which I expect to be just as fruitful as your last effort.
To the econ pundits, we seem to be experiencing deflation, not inflation. How to explain this, given the apparent increase of the money supply?
And if some unimaginable amount of money is owed through CDSs and similar obscure financial arrangements, perhaps a better solution than the Feds buying everything up would be to abrogate those contracts. Who holds these trillions of $ of derivative instruments? The Obama administration should consider breaking these contracts, maybe it might help. (Nothing seems likely to help the US economy.) Clear the deck and start over. No need to repeat Hoover and FDR. Try something different.
JoeSixPack:
The economic meltdown of 2008 happened eight years after Clinton left office. And Clinton left office with economic numbers Bush would have killed for in most of Bush's eight years. But if your theory is that there were economic problems late in Clinton's second term, shouldn't those have been the fault of Bush, Sr.? After all, he was president eight years before the end of Clinton's second term.
To both:
Look, I don't the economic crisis that happened on Bush's watch is All Bush's Fault Entirely. But not naming him (in the first place) and getting so defensive by refusing to admit that he was a signifcant part of the problem in future comments is more than a little odd/unbalanced.
"To the econ pundits, we seem to be experiencing deflation, not inflation. How to explain this, given the apparent increase of the money supply?"
The increase in the money supply has not caused inflation yet because the money isn't circulating. Banks don't want to lend because they fear the borrower might default. Consumers aren't buying because they are paying of debt and saving from fear of unemployment. Fewer transactions, less circulation. Moreover many investors have to sell their liquid assets to meet margin call etc. Suppose someone's money is tied up in a hedge fund which has stopped honoring redemptions. That someone might have to go out and sell other assets like cars or houses to raise cash to meet expenses. All this tends to depress prices. When we go from deflation to inflation is hard to tell.
That is not the worst of it. The worst of it is that the jobs that the govt. creates are created at the expense of jobs that the private sector could create.
Money, work, and ownership are all transferred from the privately-controlled sector to the governmentally-controlled sector.
Starve the beast before it turns on us.
Lack of trust in system. I think the behavior of all authorities have been dismal but the main problem is that no ones know the depth of this.
I think there are very big mistakes being made. One thing that most economists and polititians apparently don't grasp is that many of the things that improve the lives of millions and as such give profit to economy are already made. There is no need more essential routes and public works. Most of them are already there.
I suggested that the poster may have been referring to the THREE big Presidential candidates: Barack Obama, John McCain, and HILLARY Clinton, by last name only. If so, you have jumped to a conclusion in assuming he referred to BILL Clinton and defensively left out George W. Bush. You have responded by repeating your question as if you had not read my post, or I had written too opaquely.
As to why you might care about the other poster's misspelling, don't you realize that I am mocking your armchair psychoanalysis based on your uncharitable interpretation of what he wrote? Right now I am doing the same regarding your last comment
Ah, I see what you mean. If the original poster meant Hillary Clinton that does undercut my point a bit -- although still naming Mr. B - whose-name-can't-be-spelled-correctly and not naming G.W. was still odd. But fair enough.
If you have a comment about spelling, typos, or format errors, please e-mail the poster directly rather than posting a comment.
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