Sunday, May 24, 2009

Two Great Depressions

Current economic problems have brought back beliefs and arguments concerning the Great Depression. One account I have encountered goes roughly as follows: "After the stock market crash, Hoover cut taxes and government expenditure in order to revive the economy. Instead of reviving, things got worse and worse until Roosevelt came in, introduced the New Deal, and so eventually ended the Depression." The obvious conclusion is that we should deal with present problems, as the administration is dealing with them, by vastly expanding government expenditure.

The first half of this is a simple factual claim, easily checked. The current Statistical Abstract of the United States is conveniently webbed, but does not go back far enough to provide figures for expenditure under Hoover; Historical Statistics of the United States, so far as I can tell, is webbed only in a for-pay version. But earlier volumes of the Statistical Abstract are also webbed. The 1935 volume contains figures both for federal expenditure and for prices in the relevant years. Federal expenditure was:

1929 3,298,859
1930 3,440,269
1931 3,779,868
1932 4,861,696

Far from being cut, it increased every year.

These figures greatly understate the increase, because during this period prices and national income were falling. Measured in purchasing power rather than in dollars, federal expenditure roughly doubled over the final three years of Hoover's administration. Relative to GDP, it nearly tripled.

The second half of the story is trickier, because it depends on assumptions about what would have happened without the New Deal—that the Depression would have continued forever, or at least for much longer. That seems implausible, judging by other depressions and recessions; the Great Depression was unusually long, not unusually short. Arguing that since the economy eventually recovered the New Deal was a success is like arguing that if the doctor bleeds the patient and the patient survives and eventually recovers, the treatment was a success.

We can learn a little more by looking at a different Great Depression—the one that didn't happen. From 1920 to 1921, the consumer price index fell by 10.8%, more than in any year of the Great Depression; it fell another 2.3% in the next year. Unemployment rose to about its 1931 level. Looking just at that data, it's obviously the start of a depression.

Harding did what Hoover is supposed to have done, reducing taxes and government expenditure. By 1923 the recession was over. It was the Great Depression that didn't happen.

21 Comments:

At 12:20 PM, May 24, 2009, Blogger VangelV said...

Sadly, most Americans and clearly most professional historians put FDR near the top of the list of great presidents and Harding near the bottom. Even more sadly, that tells us that the public is getting its education from people who favour an interventionist approach for government. In the world of politics the writings of a muddled thinker who is pushing pushing failed ideas (Keynes) are preferred to clear ideas that explain economic reality (Hayek, Mises, Rothbard).

 
At 3:27 PM, May 24, 2009, Anonymous Maxim Lott said...

Agreed. Along with dramatically increasing spending, by the way, Hoover raised the top marginal tax rate on personal incomes from 25 percent to 63 percent. The estate tax was doubled and corporate taxes were raised by almost 15 percent.
[Source: Revenue Act of 1932 - http://www.hiddenmysteries.org/law/research/Revenue%20Act%20of%201932.pdf ]

 
At 12:02 PM, May 25, 2009, Anonymous Andy said...

The real issue is that people do not recognize public education as a crime against humanity.

Once the government turns education communist, providing it through free public schools, the incentive to distort knowledge so as to lead all graduates to support further growth of government is irresistible.

You're only talking about one particular bit of the problem. I do remember being taught in school that Hoover caused the great depression and FDR rescued us from it with the New Deal.

 
At 1:58 PM, May 25, 2009, Blogger Vijay said...

Tom Woods makes exactly the same thesis - although in much greater detail - in his fantastic book Meltdown.

 
At 2:03 PM, May 25, 2009, Anonymous Anonymous said...

In the world of politics the writings of a muddled thinker who is pushing pushing failed ideas (Keynes) are preferred to clear ideas that explain economic reality (Hayek, Mises, Rothbard).Are you meaning to say that the guy whom suggested the government does good by spending money, without having to worry as to how it get spent, was not the messiah?

Blasphemy! Whats there not to love?

 
At 3:51 PM, May 25, 2009, Anonymous Anonymous said...

What is the defining edge of a depression?

If it is the spending index, but the population has no more spending capacity, somebody has to do that. The government, because is the manager of the tax money.

The economiy reality should be based in real facts, and if population growth offsets even the tax money collected from income not even that option is reliable long term.

What do the experts have to say?

Mt

 
At 7:37 AM, May 26, 2009, Blogger Gary McGath said...

It doesn't matter how much damage Roosevelt did. He "led us out of the Depression," whatever that means, so he's deemed a hero. If Obama presides over two terms of economic misery, he'll probably get the same accolades.

 
At 10:28 AM, May 26, 2009, Anonymous Granite said...

Obama's a good point... Do you think in 2079, school kids will be learning about Bush the fiscal conservative causing the second depression?

 
At 10:51 AM, May 26, 2009, Anonymous Hammerhead said...

Andy may be right about public education. There is, e.g., widespread indoctrination about the dangers of global warming being conducted in public schools. A sort of state-sponsored Gaia-faith.

That kids can learn on their own via the Internet and other forms of digital media, is one hopeful trend against the monopoly of public school indoctrination.

My hope for civilization, for future economies, is we'll finally get beyond the belief that we need centralized political powers to ensure human peace and prosperity - there's a lot of evidence they do the opposite. It's a bit ironic that a president who is always talking about bringing things into the 21st century, seems to embrace old socialist ideology from the 19th century.

 
At 12:39 PM, May 26, 2009, Blogger TX CHL Instructor said...

"That kids can learn on their own via the Internet and other forms of digital media, is one hopeful trend against the monopoly of public school indoctrination."

Uh, no. Unfortunately, once the seed of indoctrination is planted, confirmation bias takes over. It's a very difficult cycle to break, and very few people can do so.

 
At 2:01 PM, May 26, 2009, Blogger Pedro P Romero said...

So because historians and economists have put much attention to the great depression that did happen, ie 1930s. It is that a better policy to deal with the current financial mess is absent.

 
At 2:46 PM, May 26, 2009, Blogger VangelV said...

Obama's a good point... Do you think in 2079, school kids will be learning about Bush the fiscal conservative causing the second depression?What will matter is how Obama handles this crisis. Sadly, the way he is handling it, he is making Bush look very good.

What the US needs is to have the government get out of the way and let the markets punish the foolhardy and reckless as it rewards those who did the right things.

Instead of catering to political and economic elites, Congress and Obama should let things play out and allow for wealth to flow to those that deserve it. If that were the case the crisis would be over in three or four years and the country would be on a solid foundation.

Sadly, Congress and Obama have put their political well being above all else and have chosen to pursue a path to bigger government and meddling than even Bush favoured. That means that we would be wise to sell the USD and buy gold.

 
At 9:23 AM, May 27, 2009, Anonymous Granite said...

Right, right, right, but I don't believe even our current lot of //ticks// politicians could crash the whole shebang. It's going to get better, and probably while Obama is still president.

Whether things are fixed with or despite him won't matter, just that it happened on his watch.

 
At 7:06 AM, May 28, 2009, Blogger VangelV said...

Right, right, right, but I don't believe even our current lot of //ticks// politicians could crash the whole shebang. It's going to get better, and probably while Obama is still president.Of course they could crash the system. This problem has been growing for a very long time and after Nixon closed the gold window it became easy to predict what would happen in the end. To think that Obama is different or better than his predecessors is pure folly. From what I see he is starting to make even GWB, who is among the worst of presidents your country has ever had, look good.

Whether things are fixed with or despite him won't matter, just that it happened on his watch.I don't understand this statement. Like I said, Obama is moving towards becoming the worst president the US has ever had. Why would you wish that on him or the nation?

 
At 8:37 AM, May 28, 2009, Anonymous Granite said...

I guess we'll have to agree to disagree on whether the United States Government has the capacity to irrevokably damage the United States Economy.

I don't understand this statement. Like I said, Obama is moving towards becoming the worst president the US has ever had. Why would you wish that on him or the nation?I just mean that if (as I suspect) things get better in the next few years, Obama will get the credit for it in the history books.

 
At 2:02 PM, May 28, 2009, Blogger VangelV said...

I guess we'll have to agree to disagree on whether the United States Government has the capacity to irrevokably damage the United States Economy.

History is on my side. It shows that Hoover and FDR managed to turn a correction into a Great Depression. As David pointed out, Harding took the opposite approach by reducing the size of government and cutting taxes and he got the opposite results from the two meddling morons.

"I don't understand this statement. Like I said, Obama is moving towards becoming the worst president the US has ever had. Why would you wish that on him or the nation?"

I just mean that if (as I suspect) things get better in the next few years, Obama will get the credit for it in the history books.


Thank you for clarifying the statement but I still see no reason to be optimistic. Obama's massive increase in government spending could make things look better for a short period but has no final solution because it leads to hyperinflation and the death of the USD. While some other countries are in worse shape without adequate saving and capital formation the US is doomed to under perform. From where I stand the US is looking a lot like England after the Second Boer War.

 
At 12:24 PM, May 29, 2009, Anonymous markm said...

In 1932, one of FDR's main campaign themes was balancing the budget, unlike that free-spending rascal Hoover. (Things looked different once FDR was the one spending the money...) Even if they didn't look up the statistics, how could liberals ever have gotten the idea that Hoover wasn't running a large deficit?

Oh, right, the same way they believe in hindsight that the liberal icon that promised "that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe, to assure the survival and the success of liberty" was a peacenik. Given a couple more years to realize what was going on in Vietnam, JFK probably would have chosen to "win hearts and minds" with more Special Forces teams living in the villages rather than bombers napalming them, but that was just a different idea of how to kill the commies. He also endorsed the invasion of Cuba, went right to the brink of nuclear war, expanded our commitment to South Vietnam. But somehow he's idolized by the peace at any price crowd...

When did doublethink become a requirement to be a liberal?

 
At 12:40 PM, October 09, 2009, Blogger razorsharpwit said...

"After the stock market crash, Hoover cut taxes and government expenditure in order to revive the economy. Instead of reviving, things got worse and worse until Roosevelt came in, introduced the New Deal, and so eventually ended the Depression."

Is there an approximate source for this quote?

 
At 3:19 PM, October 09, 2009, Blogger David Friedman said...

"Is there an approximate source for this quote?"

Not really--as I tried to make clear by "roughly as follows," it was my paraphrase of arguments I've encountered online. After I put up the post, I did find a webbed high school history paper that provided one example:

"… when confronted with the Depression, (Hoover) repeatedly cut taxes."

And a quick google finds the following, from encarta:

"Convinced that a balanced federal budget was essential to restoring business confidence, Hoover sought to cut government spending and raise taxes. But in the face of a collapsing economy, this served only to reduce demand further."

http://encarta.msn.com/encyclopedia_761584403/Great_Depression_in_the_United_States.html#s5

 
At 7:33 PM, October 09, 2009, Blogger VangelV said...

"After the stock market crash, Hoover cut taxes and government expenditure in order to revive the economy. Instead of reviving, things got worse and worse until Roosevelt came in, introduced the New Deal, and so eventually ended the Depression."

The exact opposite is true. Before the crash Hoover's Treasury Secretary, Andrew Mellon, had pushed tax cuts that reduced the top income tax rate to 24%. (The top rate used to be more than 70%.)

In a desperate act, Congress passed and Hoover signed the The Revenue Act of 1932. It raised tax rate went up from 25% to 63% and a corporate tax rate was introduced at 15%. In addition, the estate tax was doubled from its previous rate.

Below is a list of the top rate from the first income tax to Hoover.

Revenue Act of 1861 3 % Income > $800
Revenue Act of 1862 5 % Income > $10,000
Revenue Act of 1864 10 % Income > $10,000
Revenue Act of 1894 2 % Income > $4,000
Revenue Act of 1913 7 % Income > $500,000
Revenue Act of 1916 15 % Income > $2,000,000
Revenue Act of 1917 67 % Income > $2,000,000
Revenue Act of 1918 73 % Income > $1,000,000
Revenue Act of 1921 58 % Income > $200,000
Revenue Act of 1924 46 % Income > $500,000
Revenue Act of 1926 25 % Income > $100,000
Revenue Act of 1928 25 % Income > $500,000
Revenue Act of 1932 63 % Income > $1,000,000

And the idea that FDR ended the Depression is a joke. Between him and Hoover they turned what should have been a short and deep contraction (like the one in 1921) into a Great Depression.

As Bog Higgs argued, businesses did not invest because of the regime uncertainty created by the FDR rhetoric and actions and makes a case that the Depression only ended after WWII.

 
At 7:46 PM, October 09, 2009, Blogger VangelV said...

And a quick google finds the following, from encarta:

"Convinced that a balanced federal budget was essential to restoring business confidence, Hoover sought to cut government spending and raise taxes. But in the face of a collapsing economy, this served only to reduce demand further."

http://encarta.msn.com/encyclopedia_761584403/Great_Depression_in_the_United_States.html#s5


I guess that you should not be looking at editorials that are not supported by references and start to pay more attention to the data. According to the number that I have in my spreadsheet Hoover increased the top rate from 25% to 63% and FDR took it to 79% in 1936 as he increased corporate taxes sharply by taxing retained earnings. By 1940 there was a corporate excess profit tax that stood at 50%, which went up to 605 by 1941. By 1942 FDR increased the corporate excess profit tax to 90% and added a 5% Victory tax to individual incomes. By 1943 the excess profit tax went up to 95%. By 1944 the Victory tax was gone and replaced with higher income taxes. FDR died in 1945 and taxes were reduced.

 

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