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Posts Tagged ‘Great Depression’

It’s difficult to promote good economic policy when some policy makers have a deeply flawed grasp of history.

This is why I’ve tried to educate people, for instance, that government intervention bears the blame for the 2008 financial crisis, not capitalism or deregulation.

Going back in time, I’ve also explained the truth about “sweatshops” and “robber barons.”

But one of the biggest challenges is correcting the mythology that capitalism caused the Great Depression and that government pulled the economy out of its tailspin.

To help correct the record, I’ve shared a superb video from the Center for Freedom and Prosperity that discusses the failed statist policies of both Hoover and Roosevelt.

Now, to augment that analysis, we have a video from Learn Liberty. Narrated by Professor Stephen Davies, it punctures several of the myths about government policy in the 1930s.

Professors Davies is right on the mark in every case.

And I’m happy to pile on with additional data and evidence.

Myth #1: Herbert Hoover was a laissez-faire President – Hoover was a protectionist. He was an interventionist. He raised tax rates dramatically. And, as I had to explain when correcting Andrew Sullivan, he was a big spender. Heck, FDR’s people privately admitted that their interventionist policies were simply more of the same since Hoover already got the ball rolling in the wrong direction. Indeed, here’s another video on the Great Depression and it specifically explains how Hoover was a big-government interventionist.

Myth #2: The New Deal ended the depression – This is a remarkable bit of mythology since the economy never recovered lost output during the 1930s and unemployment remained at double-digit levels. Simply stated, FDR kept hammering the economy with interventionist policies and more fiscal burdens, thwarting the natural efficiency of markets.

Myth #3: World War II ended the depression – I have a slightly different perspective than Professor Davies. He’s right that wars destroy wealth and that private output suffers as government vacuums up resources for the military. But most people define economic downturns by what happens to overall output and employment. By that standard, it’s reasonable to think that WWII ended the depression. That’s why I think the key lesson is that private growth rebounded after World War II ended and government shrank, when all the Keynesians were predicting doom.

By the way, Reagan understood this important bit of knowledge about post-WWII economic history. And if you want more evidence about how you can rejuvenate an economy by reducing the fiscal burden of government, check out what happened in the early 1920s.

P.S. If you want to see an economically illiterate President in action, watch this video and you’ll understand why I think Obama will never be as bad as FDR.

P.P.S. Since we’re looking at the economic history of the 1930s, I strongly urge you to watch the Hayek v Keynes rap videos, both Part I and Part II. This satirical commercial for Keynesian Christmas carols also is very well done.

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When major changes occur, especially if they’re bad, people generally will try to understand what happened so they can avoid similar bad events in the future.

This is why, when we’re looking at major economic events, it’s critical to realize that narratives matter.

For instance, generation after generation of American students were taught that the Great Depression was the fault of capitalism run amok. But we now have lots of evidence that bad government policy caused the Great Depression and that the downturn was made more severe and longer lasting thanks to further policy mistakes by Hoover and Roosevelt.

The history textbooks are probably still wrong, but at least there’s a chance that interested students (and non-students) will come across more accurate explanations of what happened in the 1930s.

More recently, the same thing happened after the financial crisis. The statists immediately tried to convince people that the 2008 mess was a consequence of “Wall Street greed” and “deregulation.”

Fortunately, many experts were available to point out that the real problem was bad government policy, specifically easy money from the Fed and the corrupt system of subsidies from Fannie Mae and Freddie Mac.

So hopefully future history books won’t be as wrong about the financial crisis as they were about the Great Depression.

I raise these examples because I want to address another historical inaccuracy.

Let’s go back about 100 years ago to the s0-called “progressive era.” The conventional story is that this was a period when politicians reined in some of the excesses of big business. And if it wasn’t for that beneficial government intervention, we’d all still be oppressed peasants working in sweatshops.

There’s just one small problem with this narrative. It’s utter nonsense.

Let’s look specifically at the issue of sweatshops. Writing for the Independent Institute, Ben Powell looks at the history of sweatshops and whether workers were being mistreated.

He starts with a bit of history.

Sweatshops are an important stage in the process of economic development. As Jeffery Sachs puts it, “[S]weatshops are the first rung on the ladder out of  extreme poverty”. …Working conditions have been harsh and standards of living low throughout most of human history. …Prior to the Industrial Revolution,  textile production was decentralized to the homes of many rural families or artisans, and output was limited to what could be produced on the  spinning wheel and hand loom. …Yarn spinning was mechanized in 1767 with the invention of the spinning jenny, and water power was harnessed shortly  thereafter. With these inventions and steam power later, large-scale textile factories that are similar to today’s sweatshops emerged. The conditions in these  early sweatshops were worse than those in many Third World sweatshops today. In some factories, workers toiled for sixteen hours a day, six days per week.

Then he looks at what actually happened in Great Britain, which is where sweatshops began.

Yet workers flocked to the mills. …sweatshop workers…were attracted by the opportunity to earn higher wages than they could elsewhere. In fact, economist Ludwig von Mises defended the factory system of the Industrial Revolution,…writing, “The factory owners did not have the power to compel anybody to take a factory job. They could only hire people who were ready to work for the wages offered to them. Low as these wage rates were, they were nonetheless more than these paupers could earn in any other field open to them.” …Mises’s argument is supported by historical evidence. Economist Joel Mokyr reports that workers earned a wage premium of 15 to 30 percent by working in the factories compared with other alternatives. The transformation of Great Britain during this time was dramatic. As economist and historian Donald McCloskey describes it, “In the 80 years or so after 1780 the population of Britain nearly tripled, the towns of Liverpool and Manchester became gigantic cities, the average income of the population more than doubled… Peter Lindert and Jeffery  Williamson similarly find impressive gains in the standard of living between 1781 and 1851. Farm labor’s standard of living went up more than 60 percent,  blue-collar workers’ standard increased more than 86 percent, and overall workers’ standard increased more than 140 percent. Along with this increase in  the standard of living came a decrease in the share of women and children working beginning sometime between 1815 and 1820.

Ben then looks at the American experience. Once again, he finds that sweatshops allowed workers to earn more income than they could by staying on the farm.

And this was part of a process that enabled the United States to become much richer over time.

…workers flocked to the mills. At first, in the cities north of Boston it was mainly rural women and girls who left the farm to populate the early textile mills.  During the 1830s in Lowell, a woman could earn $12 to $14 a month (in 1830s dollars) and after paying $5 for room and board in a company boarding house  would have the rest left over for clothing, leisure, and savings. It wasn’t uncommon for women to return home to the farm after a year with $25 to $50 in a  bank account. This was far more money than they could have earned on the farm and often more disposable cash than their fathers had. …much like in Great Britain, living standards improved over time. In 1820, before the Industrial Revolution, annual per capita income in the United States stood at a little  more than $2,000. By 1850, it had grown by 50 percent to more than $3,000 and then doubled again by 1900 to more than $6,600. Along with the rise in  incomes came improvements in working conditions and greater consumption.

Eventually, of course, the sweatshops disappeared. But Ben explains that it was because of higher living standards rather than government intervention.

Sweatshops are eliminated mainly through the process of industrialization that raises a country’s income. The increased income comes from increased  worker productivity, which raises the upper bound of compensation. The increased productivity isn’t just in one firm, but in many firms and industries, and  thus workers’ next-best alternatives improve, raising the lower bound of compensation. As the economy grows, the competitive process pushes wages up.  Because health, safety, leisure, and so on are normal goods, workers demand more of their compensation on these margins as their total compensation increases. The result is the eventual disappearance of sweatshops.

Now let’s look at the broader issue of whether the “progressive era” was bad news for big business.

The answer is yes and no. Politicians imposed lots of legislation that was bad for the free market, but the crony capitalists of that era were big supporters of intervention.

Tim Carney elaborates in a column for the Washington Examiner.

Every American knows the fable of the Progressive Era and that “trust buster” Teddy Roosevelt wielding the big stick of federal power to battle the greedy corporations. We would be better off if more people knew the work of the man who dismantled this myth: historian Gabriel Kolko… His thesis: “The dominant fact of American political life” in the Progressive Period “was that big business led the struggle for the federal regulation of the economy.”

Here’s what really happened.

Many corporate titans in the early 20th Century, buying into the pervasive hubris of the day, believed that a state-managed economy was the inevitable end of a rational society—the conclusion of what Standard Oil’s top lobbyist Samuel Dodd called the “march of civilization.” Competition, in their eyes, was destructive redundancy. “Competition is industrial war,” James Logan of the U.S. Envelope Company wrote in 1901. “Ignorant, unrestricted competition carried to its logical conclusion means death to some of the combatants and injury for all.”  Steel baron Andrew Carnegie constantly strove to turn the steel industry into a cartel and keep prices high. Competition, however, always had a way pulling prices down. As Carnegie wrote in 1908, “It always comes back to me that Government control, and that alone, will properly solve the problem.” Kolko also showed how the socialists welcomed corporate-state collusion to advance monopoly as part of “progress.”

And, as Tim explains, it’s still happening today.

This has its echoes in contemporary progressive politics… When conservatives challenged Obamacare’s individual mandate, the White House had the backing of the insurance industry and the hospital lobby. After Obama won at the Supreme Court, liberal Bill Scher wrote in the New York Times that progressive victories historically flow from the Left’s alliances with Big Business. …Liberal scholar William Galston at the Brookings Institution explains the economics at play. “Corporations have sizeable cash flows and access to credit markets, which gives them a cushion against adversity and added costs,” he wrote in 2013, explaining why the big guys often welcome regulation.

In other words, big business often is the enemy of genuine capitalism and free markets.

Not only did the big companies, including insurance and pharmaceuticals, support Obamacare.

They’re now supporting the corrupt Import-Export Bank.

And they’re perfectly happy to support higher taxes, at least when the rest of us are being victimized.

They also supported the sleazy TARP bailout.

The moral of the story is not just the big business can be just as bad as big labor. The real moral of the story is captured by this poster.

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There have been many truly awful presidents elected in the United States, but if I had to pick my least favorite, I might choose Herbert Hoover.

I obviously have disdain for Hoover’s big-government policies, but I also am extremely irritated that – as Jonah Goldberg explained – he allowed the left to create an utterly bogus narrative that the Great Depression was caused by capitalism and free markets.

Indeed, the Center for Freedom and Prosperity produced a video demonstrating that the statist policies of both Hoover and Roosevelt helped trigger, deepen, and lengthen the economic slump.

Building on that theme, here’s a new video from Prager University that looks specifically at the misguided policies of Herbert Hoover.

Amen. Great job unmasking Hoover’s terrible record.

As I explained when correcting a glaring error by Andrew Sullivan, Hoover was a big-government interventionist. Heck, even FDR’s inner circle understood that the New Deal was simply an extension of Hoover’s statist policies.

In other words, FDR doubled down on Hoover’s awful record. And with awful results. We have a better understanding today of how the New Deal caused the downturn to be deeper and longer.

This Tom Sowell video is definitely worth watching if you want more information on that topic.

And here’s something else to share with your big-government friends. The Keynesian crowd was predicting another massive depression after World War II because of both a reduction in wartime outlays and the demobilization of millions of troops. Yet that didn’t happen, as Jeff Jacoby has succinctly explained. And if you want more details on how smaller government helped restore growth after WWII, check out what Jason Taylor and Rich Vedder wrote for Cato.

P.S. I’ve compared Bush and Obama to Hoover and Roosevelt because of some very obvious similarities. Bush was a big-government Republican who helped pave the way for a big-government Democrat, just as Hoover was a big-government Republican who also created the conditions for a big-government Democrat.

The analogy also is good because I suspect political and economic incompetence led both Hoover and Bush to expand the burden of government, whereas their successors were ideologically committed to bigger government. We know about Obama’s visceral statism, and you can watch a video of FDR advocating genuinely awful policy.

The good news is that Obama will never be as bad as FDR, no matter how hard he tries.

P.P.S. It’s also worth mentioning that a very serious downturn in 1921 was quickly ended in part thanks to big reductions in the burden of government spending. Your Keynesian friends will also have a hard time explaining how that happened.

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Last year, I explained with considerable relief that President Obama would never be as bad as Franklin Roosevelt.

Yes, Obama has imposed a class-warfare tax hike, pushed through Obamacare, and squandered $billions on a faux stimulus (perfectly captured by this cartoon). But that’s trivial compared to the damage caused by FDR (and Hoover).

“I’ve tried, but it’s time for me to admit I’m not as bad as FDR”

Obama’s policies, to be sure, have contributed to an extremely weak expansion.

That’s bad, but FDR’s statism helped extend the Great Depression – by an additional seven years according to scholarly research! That’s a much worse track record.

But that doesn’t mean Obama doesn’t want to be as bad as FDR. Indeed, one of his top advisers seems very happy that the President’s second inaugural address was reminiscent of Roosevelt’s so-called Second Bill of Rights.

Here’s some of what Cass Sunstein wrote for Bloomberg.

Obama is updating Franklin Delano Roosevelt’s Second Bill of Rights. …Roosevelt announced the Second Bill of Rights in his State of the Union address in 1944. With the Great Depression over, and the war almost won, FDR declared that we “have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence.” …Then he listed them:

  • The right to a useful and remunerative job in the industries or shops or farms or mines of the nation.
  • The right to earn enough to provide adequate food and clothing and recreation.
  • The right of every farmer to raise and sell his products at a return which will give him and his family a decent living.
  • The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad.
  • The right of every family to a decent home.
  • The right to adequate medical care and the opportunity to achieve and enjoy good health.
  • The right to adequate protection from the economic fears of old age, sickness, accident and unemployment.
  • The right to a good education.

…the Second Bill was meant to specify the goals of postwar America… Obama took more such steps. …Obama’s second inaugural did not refer explicitly to the Second Bill of Rights, but it had an unmistakably Rooseveltian flavor. …Obama emphasized “that a great nation must care for the vulnerable, and protect its people from life’s worst hazards and misfortune.” …Having helped America to survive its greatest economic challenge since the 1930s, the current occupant of that office is giving new meaning to those commitments, and making them his own.

I guess we have to give Sunstein credit for chutzpah. We’re suffering through the weakest expansion since the end of World War II, and he wants us to be grateful for Obama’s policies since they supposedly “helped America to survive.”

Wow, I’d hate to see his idea of failure.

But here’s the good news. America will have gridlock for the next two years, and probably the next four years.

The bad news is that we won’t take necessary steps to reform entitlements, but the good news is that we won’t make things worse with the kind of statist policies outlined in FDR’s fake Bill of Rights.

Yes, I expect Republicans to screw up on some of the small issues and give the White House a few minor victories, but I can’t imagine them approving any big Obama initiatives, even if their opposition is driven only by partisanship rather than principle.

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I’ve explained on many occasions that Franklin Roosevelt’s New Deal was bad news for the economy. And the same can be said of Herbert Hoover’s policies, since he also expanded the burden of federal spending, raised tax rates, and increased government intervention.

So when I was specifically asked to take part in a symposium on Barack Obama, Franklin Roosevelt, and the New Deal, I quickly said yes.

I was asked to respond to this question: “Was that an FDR-Sized Stimulus?” Here’s some of what I wrote.

President Obama probably wants to be another FDR, and his policies share an ideological kinship with those that were imposed during the New Deal. But there’s really no comparing the 1930s and today. And that’s a good thing. As explained by Walter Williams and Thomas Sowell, President Roosevelt’s policies are increasingly understood to have had a negative impact on the American economy. …what should have been a routine or even serious recession became the Great Depression.

In other words, my assessment is that Obama is a Mini-Me version of FDR, which is a lot better (or, to be more accurate, less worse) than the real thing.

To be sure, Obama wants higher tax rates, and he has expanded government control over the economy. And the main achievement of his first year was the so-called stimulus, which was based on the same Keynesian theory that a nation can become richer by switching money from one pocket to another. …Obama did get his health plan through Congress, but its costs, fortunately, pale in comparison to Social Security and its $30 trillion long-run deficit. And the Dodd-Frank bailout bill is peanuts compared to all the intervention of Roosevelt’s New Deal. In other words, Obama’s policies have nudged the nation in the wrong direction and slowed economic growth. FDR, by contrast, dramatically expanded the burden of government and managed to keep us in a depression for a decade. So thank goodness Barack Obama is no Franklin Roosevelt.

The last sentence of the excerpt is a perfect summary of my remarks. I think Obama’s policies have been bad for the economy, but he has done far less damage than FDR because his policy mistakes have been much smaller.

“Hey, don’t sell me short. Just wait to see how much havoc I can wreak if reelected!”

Moreover, Obama has never proposed anything as crazy as FDR’s “Economic Bill of Rights.” As I pointed out in my article, this “would have created a massive entitlement state—putting America on a path to becoming a failed European welfare state a couple of decades before European governments made the same mistake.”

On the other hand, subsequent presidents did create that massive entitlement state and Obama added another straw to the camel’s back with Obamacare.

And he is rigidly opposed to the entitlement reforms that would save America from becoming another Greece.

So maybe I didn’t give him enough credit for being as bad as FDR.

P.S. Here’s some 1930s economic humor, and it still applies today. And I also found this cartoon online.

And here’s a good Mini-Me image involving Jimmy Carter. I wasn’t able to find one of Obama and FDR.

If anybody has the skill to create such an image, please send it my way.

P.P.S. The symposium also features an excellent contribution from Professor Lee Ohanian of UCLA.

And from the left, it’s interesting to see that Dean Baker of the Center for Economic and Policy Research basically agrees with me.

But only in the sense that he also says Obama is a junior-sized version of FDR. Dean actually thinks Obama should have embraced his inner-FDR and wasted even more money on an even bigger so-called stimulus.

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I’ve linked before to Professor George Selgin’s masterful video on the Federal Reserve’s horrible track record, and I’ve done my own video on the origin of central banking.

These types of posts often generate questions about what reforms we should support, and a lot of people ask about the gold standard. I’m not a monetary economist, so I’m not in a position to give competent answers. Fortunately, Prof. Selgin has decided to provide a very useful analysis of the issue.

Writing for a British paper, he explains that a genuine gold standard worked very well before World War I, but it probably wouldn’t work today because governments are so untrustworthy.

Of all the reasons usually given for condemning the gold standard, perhaps the most common is the claim that it was to blame for the Great Depression. What responsible politician, gold’s critics ask rhetorically, wants to relive the 1930s? But the criticism misses its mark. Fans of the gold standard are no more anxious to repeat the 1930s than their critics are. Their nostalgia is instead for the interval of exceptional international monetary stability that prevailed from the mid-1870s until World War I. That was the era of the classical gold standard – a standard policed by the citizens of participating countries, all of whom were able to convert their nations’ paper money into gold. This classical gold standard can have played no part in the Great Depression for the simple reason that it vanished during World War I, when most participating central banks suspended gold payments. (The US, which entered the war late, settled for a temporary embargo on gold exports.) Having cut their gold anchors, the belligerent nations’ central banks proceeded to run away, so that by the war’s end money stocks and price levels had risen substantially, if not dramatically, throughout the old gold standard zone. …the gold standard that failed so catastrophically in the 1930s wasn’t the gold standard that some Republicans admire: it was the cut-rate gold standard that Great Britain managed to cobble together in the 20s – a gold standard designed not to follow the rules of the classical gold standard but to allow Great Britain to break the old rules and get away with it. …the collapse of the gold-exchange standard forever undermined the public’s confidence in governments’ monetary promises; and absent such confidence there can be no question of a credible, government-sponsored gold standard, classical or otherwise. Sometimes with monetary systems, as with life, you can’t go home again.

I’m also glad that he explains that the gold standard was not responsible for the Great Depression. If you want to know more about that issue, including the damaging impact of statist policies by Hoover and FDR, this video is an excellent introduction.

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I’ve commented many times about the misguided big-government policies of both Hoover and FDR, so I can say with considerable admiration that this new video from the Center for Freedom and Prosperity packs an amazing amount of solid info into about five minutes.

Perhaps the most surprising revelation in the video is that America suffered a harsh depression after World War I, with GDP falling by a staggering 24 percent.

But we don’t read much about that downturn in the history books, in large part because it ended so quickly.

The key question, though, is why did that depression end quickly while the Great Depression dragged on for a decade?

One big reason for the different results is that markets were largely left unmolested in the 1920s. This meant resources could be quickly redeployed, minimizing the downturn.

But this doesn’t mean the crowd in Washington was completely passive. They did do something to help the economy recover. As Ms. Fields explains in the video, President Harding, unlike Presidents Hoover and Roosevelt, slashed government spending.

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