Hoover, FDR, Taxes, and the Great Depression

The 1930s arguably was America’s worst decade for economic policy and economic results.

Herbert Hoover and Franklin Roosevelt both increased the burden of government and the net result was a decade-long depression.

The insult to injury was that some people then blamed free enterprise. Indeed, there are still people who think government actually saved the economy.

Sort of like applauding an arsonist after a fire is extinguished.

Whenever I deal with people who harbor these illusions, I ask them a series of questions, none of which have good answers (at least if the goal if to maintain the illusion).

• Was it the fault of capitalism that the Fed pursued bad monetary policy?
• Was it the fault of capitalism that Hoover imposed protectionism?
• Was it the fault of capitalism that Hoover and FDR expanded intervention?
• Was it the fault of capitalism that Hoover and FDR increased spending?

Today, let’s look at the role of tax policy in the 1930s. Chris Edwards wrote on this topic last week, citing a new book by Art Laffer, Brian Domitrovic, and Jeanne Cairns Sinquefield.

Here are some excerpts from Chris’ article.

Many economists would point to monetary policy mistakes for causing the initial slide into the Great Depression. …But Laffer and coauthors argue that the “chief cause of the Great Depression was taxation.” That is a bold claim because policymakers made many mistakes during the 1930s. …Let’s explore the major tax increases of the 1930s… Herbert Hoover signed the first two laws listed here and Franklin Roosevelt the others.

• Smoot‐​Hawley Tariff Act of 1930.
• Revenue Act of 1932.
• Gold Confiscation.
• Agricultural Adjustment Act.
• National Industrial Recovery Act.
• Alcohol.
• Revenue Act of 1934.
• Revenue Act of 1935.
• Social Security Act of 1935.
• Revenue Act of 1936.
• Revenue Act of 1937.
• Revenue Act of 1938.

State and local governments jacked up taxes during the 1930s. …high earners responded strongly to the income tax increases of the 1930s… the reported incomes of high earners got slugged in the early 1930s and remained low the rest of the decade. This suggests major economic damage. …Despite these taxpayer responses to higher tax rates, …governments did manage to squeeze substantially more money out of the public during the 1930s. Tax revenues as a percentage of GDP rose from 10.3 percent in 1929, to 15.4 percent in 1933, and then to 16.6 percent in 1940. Meanwhile, government spending soared from 9.9 percent of GDP in 1929 to 18.0 percent in 1932, and then remained near the higher level the rest of the decade.

Here’s a chart that accompanied the article showing the aggregate increases in the fiscal burden of government.

You’ll notice that aggregate tax revenues increased by about 60 percent during the 1930s.

Yet tax rates increased by a far greater amount. There’s a lesson to be learned, as I explained last year, about the Laffer Curve.

P.S. Our friends on the left like class-warfare tax increases because they hurt the rich, but they don’t seem to care that everyone else suffers collateral damage.

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Prosperity and Taxation: What Can We Learn from the 1930s

The United States conducted an experiment in the 1980s. Reagan dramatically lowered the top tax rate on households, dropping it from 70 percent to 28 percent.

Folks on the left bitterly resisted Reagan’s “supply-side” agenda, arguing that “the rich won’t pay enough” and “the government will be starved of revenue.”

Fortunately, we can look at IRS data to see what happened to tax payments from those making more than $200,000 per year.

Lo and behold, it turns out that Reaganomics was a big success. Uncle Sam collected five times as much money when the rate was slashed.

As I’ve previously written, this was the Laffer Curve on steroids. Even when you consider other factors (population growth, inflation, other reforms, etc), there’s little doubt that we got a big “supply-side effect” from Reagan’s tax reforms.

Now Biden wants to run this experiment in reverse.

Based on basic economics, his approach won’t succeed. But let’s augment theory by examining what actually happened when Hoover and Roosevelt raised tax rates in the 1930s.

Alan Reynolds reviewed tax policy in the 1920s and 1930s, but let’s focus on what he wrote about the latter decade. He starts with some general observations.

Large increases in marginal tax rates on incomes above $50,000 in the 1930s were almost always matched by large reductions in the amount of high income reported and taxed… An earlier generation of economists found that raising tax rates on incomes, profits, and sales in the 1930s was inexcusably destructive. In 1956, MIT economist E. Cary Brown pointed to the “highly deflationary impact” of the Revenue Act of 1932, which pushed up rates virtually across the board, but notably on the lower‐​and middle‐​income groups.

He then gets to the all-important issue of higher tax rates leading to big reductions in taxable income.

In Figure 1, the average marginal tax rate is an unweighted average of statutory tax brackets applying to all income groups reporting more than $50,000 of income. After President Hoover’s June 1932 tax increase (retroactive to January) the number of tax brackets above $50,000 quadrupled from 8 to 32, ranging from 31 percent to 63 percent. The average of many marginal tax rates facing incomes higher than $50,000 increased from 21.5 percent in 1931 to 47 percent in 1932, and 61.9 percent in 1936. One of the most striking facts in Figure 1 is that the amount of reported income above $50,000 was almost cut in half in a single year—from $1.31 billion in 1931 to $776.7 million in 1932.

Here’s the aforementioned Figure 1. You can see that taxable income soared when tax rates were slashed in the 1920s.

But when tax rates were increased in the 1930s, taxable income collapsed and never recovered.

What’s the lesson from this chart? As Alan explained, the lesson is that high tax rates lead to rich people earning and declaring less taxable income (they still have that ability today).

In the eight years from 1932 to 1939, the economy was in cyclical contraction for only 28 months. Even in 1940, after two huge increases in income tax rates, individual income tax receipts remained lower ($1,014 million) than they had been in the 1930 slump ($1,045 million) when the top tax rate was 25 percent rather than 79 percent. Eight years of prolonged weakness in high incomes and personal tax revenue after tax rates were hugely increased in 1932 cannot be easily brushed away as merely cyclical, rather than a behavioral response to much higher tax rates on additional (marginal) income. Just as income (and tax revenue) from high‐​income taxpayers rose spectacularly after top tax rates fell from 1921 to 1928, high incomes and revenue fell just as spectacularly in 1932 when top tax rates rose.

One big takeaway is that Hoover and FDR were two peas in a pod.

Both imposed bad tax policy.

From 1930 to 1937, unlike 1923–25, virtually all federal and state tax rates on incomes and sales were repeatedly increased, and many new taxes were added, such as the Smoot‐​Hawley tariffs in 1930, taxes on alcoholic beverages in December 1933, and a Social Security payroll tax in 1937. Annual growth of per capita GDP from 1929 to 1939 was essentially zero. …To summarize: all the repeated increases in tax rates and reductions of exemptions enacted by presidents Hoover and Roosevelt in 1932–36 did not even manage to keep individual income tax collections as high in 1939–40 (in dollars or as a percent of GDP) as they had been in 1929–30. The experience of 1930 to 1940 decisively repudiated any pretense that doubling or tripling marginal tax rates on a much broader base proved to be a revenue‐​maximizing plan.

Alan closes with an observation that should raise alarm bells.

It turns out that the higher tax rates on the rich were simply the camel’s nose under the tent. The real agenda was extending the income tax to those with more modest incomes.

The most effective and sustained changes in personal taxes after 1931 were not the symbolic attempts to “soak the rich,” but rather the changes deliberately designed to convert the income tax from a class tax to a mass tax. The exemption for married couples was reduced from $3,500 to $2,500 in 1932, $2,000 in 1940, and $1,500 in 1941. Making more low incomes taxable quadrupled the number of tax returns from 3.7 million in 1930 to 14.7 million in 1940… The lowest tax rate was also raised from 1.1 percent to 4 percent in 1932, 4.4 percent in 1940, and 10 percent in 1941.

The same thing will happen today if Biden succeeds in raising taxes on the rich. Those tax hikes won’t collect much revenue, but politicians will increase spending anyhow. They’ll then use high deficits as an excuse for higher taxes on lower-income and middle-class taxpayers (some of the options include financial taxes, carbon taxes, and value-added taxes).

Lather, rinse, repeat. Until the United States is Europe. And that will definitely be bad news for ordinary people.

P.S. Here’s what we can learn about tax policy in the 1920s. And the 1950s.

P.P.S. The 1920s and 1930s also can teach us an important lesson about growth and inequality.

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Ranking Presidents on Economic Policy: The Suffocating Statism of Herbert Hoover

Using comparative bar charts, I’ve analyzed the economic policies of Presidents Barack Obama, George W. Bush, Bill Clinton, Ronald Reagan, and Richard Nixon.

My basic conclusion was that economic policy moved in the right direction under Reagan and Clinton and moved in the wrong direction under Obama, Bush, and Nixon. Though I always included the caveat that I was agnostic about whether the various presidents deserved credit/blame for the changes that happened during their tenure.

Now let’s go back in time and look at the unambiguously awful economic record of Herbert Hoover. I’ve written about Hoover’s statism on several occasions and thought there was no need for an overall assessment since there was near-unanimous agreement that he was a failure (even if some people don’t understand why).

But near-unanimous is not the same as unanimous. And I was horrified to read that David Frum actually thinks Herbert Hoover should be some sort of role model for today’s Republicans. Here are some excerpts from his Atlantic column, which looks at a new biography of Hoover.

Hoover commenced his political life as a progressive-leaning Republican. …progressives like Hoover…accepted some increased government regulation of industry…endorsed heavier taxation of inheritances. …it’s possible to imagine a Hoover presidency that signed into law some kind of Social Security system… Hoover’s old party could learn things from his impressive career of public service. …Hoover’s astounding accomplishments and generous impulses have been effaced by polemical narratives written to serve polemical political purposes. Such distortions are offenses against historical memory.

Before we look at his economic policies, I should acknowledge that Frum makes a compelling argument that Hoover was a fundamentally good person with some impressive achievements both before and after his time in the Oval Office.

But my presidential economic scorecards are very dispassionate. I’m only looking at the changes in economic policy that occurred while a president was in office.

And by that very neutral benchmark, Hoover was terrible. Nothing but bad policy.

I give extra weight to the protectionist Smoot-Hawley legislation, which surely must rank among the worst bills ever enacted. The tax hike in 1932 also gets some extra weight because of the radical increase in marginal tax rates (the top rate was increased from 25 percent to 63 percent!).

By the way, this assessment (like all my previous assessments) only includes policies that were adopted.

If I included policies that should have been adopted (sins of omission rather than sins of commission), Hoover would get severely dinged for his failure to prevent a severe contraction of the money supply by the Federal Reserve (those interested in such issues should watch this George Selgin video and read this George Selgin article for more information).

And if you want more information on Hoover’s record, I strongly recommend this article by my buddy from grad school, Steve Horwitz.

By the way, the Wikipedia entry on Herbert Hoover is very accurate in noting that he engaged in “large-scale interventions.”

As president from 1929 to 1933, his ambitious programs were overwhelmed by the Great Depression, which seemed to get worse every year despite the increasingly large-scale interventions he made in the economy.

But it is grossly inaccurate because it says that the economy got worse “despite” that intervention rather than “because of” that intervention.

There’s one other blurb that is worth sharing, just in case anyone thinks that I’m unfairly characterizing Hoover as a statist.

FDR aide Rexford Tugwell would claim in a 1974 interview that “practically the whole New Deal was extrapolated from programs that Hoover started.”

I’ll close by recycling a Center for Freedom and Prosperity video that reviews the anti-market policies of Herbert Hoover and Franklin Roosevelt.

P.S. I heartily encourage this cartoon for anyone who wants an easy way of understanding public policy and the Great Depression.

P.P.S. Looking at presidents from the 20th century, Ronald Reagan and Calvin Coolidge stand head and shoulders above all the others when looking at economic policy, though I’ve never tried to figure out which one is best. Similarly, I haven’t figured out who deserves the “prize” for being the worst president, but I have decided that Hoover, FDR, Wilson, and Nixon are the Four Horsemen of the Economic Apocalypse.

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Everything You Need to Know about Assigning Blame for the Great Depression, Captured by a Cartoon

The Great Depression was an unimaginably miserable period in American history. Income fell, unemployment rose, and misery was pervasive.

But there was still room for political satire in the 1930s. Here’s a cartoon that I shared back in 2012. Based on the notations in the upper right, I gather it’s from the Chicago Tribune, though I don’t know if that’s actually true. And I also don’t know the year.

But I certainly sympathized with the message since Hoover and Roosevelt were big-spending interventionists.

Hoover saddled the economy with taxes (an increase in the top tax rate from 25 percent to 63 percent!), spending, protectionism, regulation, and intervention. Roosevelt then doubled down on almost all of those bad policies, with further tax rate increases (up to 79 percent, and he even pushed for a 100 percent tax rate in the early 1940s!!), more spending, and lots of additional regulation and intervention.

And here’s a cartoon I posted the previous year. Since I don’t know whether public opinion was on the right side, I don’t know if it accurately captures the mood of taxpayers.

But it’s 100-percent accurate about the instinctive response of politicians. For “public choice” reasons, the crowd in Washington has an incentive to buy votes with other people’s money. One might even say they spend like drunken sailors, but that’s actually an understatement.

But I’m beginning to digress, as is my wont. Let’s get back to satire and the Great Depression.

And I’m going to be creative. That’s because I saw a cartoon on Reddit‘s libertarian page that makes a very general point about government causing a mess and politicians then blaming the private sector. But because I’m a goofy libertarian policy wonk, I immediately thought that this is a perfect summary of what happened in the 1930s.  Hoover and Roosevelt hammered the economy with bad policy, the economy stayed in the dumps for an entire decade, yet the political class someone convinced a lot of people it was all the fault of capitalism.

While I will always view this cartoon as the spot-on depiction of what happened in the 1930s, it obviously applies much more broadly.

Consider the recent financial crisis, which was the result of bad monetary policy and corrupt Fannie Mae/Freddie Mac subsidies. Yet countless politicians blamed greedy capitalism.

Maybe what we have is the cartoon version of Mitchell’s Law. That’s because when politicians cause a problem and blame the free market, they inevitably then claim that the problem justifies giving them more power and control. Lather, rinse, repeat.

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Statist Policy and the 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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Herbert Hoover’s Anti-Market Policies Helped Turn an Economic Downturn into a Great Depression

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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No Matter How Hard He Tries, Obama Will Never Be as Bad as FDR

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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New Video Punctures Myths about Great Depression, Exposes Damaging Impact of Statist Policies by Hoover and FDR

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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Compulsive Spendaholics: The Unfortunate Similarity of Bush/Obama and Hoover/Roosevelt

I’ve pointed out on several occasions that Herbert Hoover was a big-spending Keynesian. Heck, Hoover was pursuing failed Keynesian policies several years before Keynes produced his most well-known book, The General Theory.

Hoover’s big spending was so pronounced that it generated this cartoon in 1932.

Sadly, this cartoon applies just as well today.

Except Bush and Obama take the place of Hoover and Roosevelt – with the same dismal results.

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Here’s More Evidence for Andrew Sullivan about Herbert Hoover’s Big-Government Statism

I had some fun at Andrew Sullivan’s expense a couple of weeks ago, mocking him for asserting that spending cuts today would be repeating the mistakes of Herbert Hoover. That was a rather odd thing for him to write since Hoover boosted the burden of government spending by 47 percent in just four years.

Since it is notoriously difficult to educate Obamaphiles, I’m guessing that he (and others) need some supplementary material.

How about the words of a key aide to Franklin Delano Roosevelt? Would that be considered a legitimate source? One would think so, which means this excerpt from a 2007 book review (the same statement was also cited by PBS) is rather revealing.

FDR aide Rexford Tugwell would claim in a 1974 interview that “practically the whole New Deal was extrapolated from programs that Hoover started.”

The fact that Hoover and Roosevelt were two peas in a big-government pod may be of interest to economic historians, but the real lesson is that interventiondidn’t work for either one of them. That’s what Andrew Sullivan and others need to learn. But since people like that probably won’t listen to me, maybe they’ll be more willing to accept the confession of Roosevelt’s Treasury Secretary.

FDR’s Treasury Secretary, Henry Morgenthau, wrote in his diary: “We have tried spending money. We are spending more than we have ever spent before and it does not work. … We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started … and an enormous debt to boot!”

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Andrew Sullivan Has No Idea What He’s Talking about, but I Agree with His Conclusion

Even though he’s become rather partisan in recent years, I still enjoy an occasional visit to Andrew Sullivan’s blog. But I was rather amused last night when I read one of his posts, in which he was discussing whether government spending helps or hurts economic performance. He took the view that a bigger public sector stimulated growth, and criticized those who wanted to reduce the burden of government spending, snarkily observing that, “The notion that Herbert Hoover was right has become quite a dogged meme on the reality-challenged right.”

Since I’m one of those “reality-challenged” people who prefer smaller government, I obviously disagreed with his analysis. But his reference to Hoover set off alarm bells. As I have noted before, Hoover increased the burden of government during his time in office.

But maybe my memory was wrong. So I went to the Historical Tables of the Budget and looked up the annual spending data. As you can see from the chart, it turns out that Hoover increased government spending by 47 percent in just four years (if you adjust for falling prices, as Russ Roberts did at Cafe Hayek, it turns out that Hoover increased government spending by more than 50 percent).

I suppose I could make my own snarky comment about being “reality-challenged,” but Sullivan’s mistake is understandable. The historical analysis and understanding of the Great Depression is woefully inadequate, and millions of people genuinely believe that Hoover was an early version of Ronald Reagan.

I will say, however, that I agree with Sullivan’s conclusion. He closed by saying it would be “bonkers” to replicate Hoover’s policies today. I might have picked a different word, but I fully subscribe to the notion that making government bigger was a mistake then, and it’s a mistake now.

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Real-World Evidence for Regime Uncertainty?

There certainly are logical reasons to think that Obama’s policies are dampening economic growth. Investors and entrepreneurs have little reason to produce and take risks, after all, when they know the burden of government is going to climb. Especially when you add uncertainty to the mix.

Here’s a chart showing Federal Reserve data on the cash holdings of non-financial corporations. As you can see, there’s been a big jump in recent years. That’s certainly an indication that people are keeping money on the sidelines.

On the other hand, there’s been a long-term upward trend in the amount of cash companies are holding, so it’s a good idea to be cautious about drawing any sweeping conclusion from the recent jump. All we can say for sure is that bad policy reduces incentives for productive behavior. This is why bigger burdens of government are associated with slower growth.

And if there is a lot of very bad policy, a nation can suffer a lengthy period of stagnation or decline. Roosevelt and Hoover in the 1930s would be a good (or should we say bad?) example of this worst-case result.

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Obama’s Policy Failure, Part II

In a previous post, I commented on a Wall Street Journal column by former Senator Phil Gramm, calling attention to evidence that the economy is under-performing compared to what happened after previous recessions. This is an important issue, particularly when you compare the economy’s tepid performance today with the strong recovery following the implementation of Reaganomics. But there was another part of the column that also is worth highlighting. Much of what we are seeing from the Obama Administration is disturbingly reminiscent of the anti-growth policies of Hoover and Roosevelt, particularly the punitive class-warfare mentality. Here’s how Senator Gramm characterizes the similarities.

Today’s lagging growth and persistent high unemployment are reminiscent of the 1930s, perhaps because in no other period of American history has our government followed policies as similar to those of the Great Depression era. …The top individual income tax rate rose from 24% to 63% to 79% during the Hoover and Roosevelt administrations. Corporate rates were increased to 15% from 11%, and when private businesses did not invest, Congress imposed a 27% undistributed profits tax. In 1929, the U.S. government collected $1.1 billion in total income taxes; by 1935 collections had fallen to $527 million. …The Roosevelt administration also conducted a seven-year populist tirade against private business, which FDR denounced as the province of “economic royalists” and “malefactors of great wealth.” … Churchill, who was generally guarded when criticizing New Deal policies, could not hold back. “The disposition to hunt down rich men as if they were noxious beasts,” he noted in “Great Contemporaries” (1939), is “a very attractive sport.” But “confidence is shaken and enterprise chilled, and the unemployed queue up at the soup kitchens or march out to the public works with ever growing expense to the taxpayer and nothing more appetizing to take home to their families than the leg or wing of what was once a millionaire. . . It is indispensable to the wealth of nations and to the wage and life standards of labour, that capital and credit should be honoured and cherished partners in the economic system. . . .” The regulatory burden exploded during the Roosevelt administration, not just through the creation of new government agencies but through an extraordinary barrage of executive orders—more than all subsequent presidents through Bill Clinton combined. Then, as now, uncertainty reigned. …Henry Morgenthau summarized the policy failure to the House Ways and Means Committee in April 1939: “Now, gentleman, we have tried spending money. We are spending more than we have ever spent before and it does not work . . . I say after eight years of this administration we have just as much unemployment as when we started . . . and an enormous debt, to boot.”

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Is Obama the Next Hoover or the Next FDR?

Jonah Goldberg writes in National Review that President Obama is beginning to look like the next Herbert Hoover. This is rather ironic since the left wanted him to become the next Franklin Delano Roosevelt, ushering in a new era of politically-popular statism.

…the Great Depression discredited laissez-faire economics for a generation or more. Hoover, who was hardly the “market fundamentalist” FDR made him out to be, suffered largely from the (bad) luck of the draw, giving Democrats a chance to argue for a new deal of the cards. For reasons fair and unfair, Obama, who inherited a bad recession and made it worse, every day looks more like a modern-day Hoover, whining about his problems, rather than an FDR cheerily getting things done. Inadequate to the task, Obama is discrediting the statism he was elected to restore. 

Jonah makes a compelling case, particularly from a political perspective. But if we look just at economic policy, the Obama-as-FDR analogy is more accurate. Hoover was a big-government interventionist with failed policies. That’s a pretty good description of Bush. FDR got elected in 1932 by promising to fix the mess, which is akin to Obama’s hope and change message in 2008. And, just like FDR, Obama then continued the big-government interventionist policies of his predecessor. The only difference is that Roosevelt somehow was able to remain popular even though his policies kept the nation mired in depression for another decade. Obama, by contrast, is veering dangerously close to becoming another Jimmy Carter. Tom Sowell has some key details about the timing and impact of the Hoover-Roosevelt policies.

The history of the United States is full of evidence on the negative effects of government intervention. For the first 150 years of this country’s existence, the federal government did not think it was its business to intervene when the economy turned down. All of those downturns ended faster than the first downturn where the federal government intervened big time– the Great Depression of the 1930s. …if you look at the facts, they go like this: Unemployment never hit double digits in any of the 12 months following the big stock market crash of 1929 that is often blamed for the massive unemployment of the 1930s. Unemployment peaked at 9 percent, two months after the October 1929 crash, and then began drifting downward. Unemployment was down to 6.3 percent by June 1930, when the first big federal intervention occurred. Within six months, the downward trend in unemployment reversed and hit double digits for the first time in December 1930. What were politicians to do? Say “We messed up”? Or keep trying one huge intervention after another? The record shows what they did: President Hoover’s interventions were followed by President Roosevelt’s bigger interventions– and unemployment remained in double digits in every month for the entire remainder of the decade. There is another set of facts: The record that was set in 1929 for the biggest stock market decline in one day was broken in 1987. But Ronald Reagan did nothing– and the media clobbered him for it. Then the economy rebounded and there were 20 years of sustained economic growth with low inflation and low unemployment. Can you imagine Barack Obama doing another Ronald Reagan?

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Government Intervention and the Great Depression

Citing a scholarly book by Richard Vedder and Lowell Gallaway, Tom Sowell concisely explains that government intervention caused the Great Depression.

Right here and right now there is a widespread belief that the unregulated market is what got us into our present economic predicament, and that the government must “do something” to get the economy moving again. FDR’s intervention in the 1930s has often been cited by those who think this way. …Although the big stock market crash occurred in October 1929, unemployment never reached double digits in any of the next 12 months after that crash. Unemployment peaked at 9 percent, two months after the stock market crashed– and then began drifting generally downward over the next six months, falling to 6.3 percent by June 1930. This was what happened in the market, before the federal government decided to “do something.” What the government decided to do in June 1930– against the advice of literally a thousand economists, who took out newspaper ads warning against it– was impose higher tariffs, in order to save American jobs by reducing imported goods. This was the first massive federal intervention to rescue the economy, under President Herbert Hoover, who took pride in being the first President of the United States to intervene to try to get the economy out of an economic downturn. Within six months after this government intervention, unemployment shot up into double digits– and stayed in double digits in every month throughout the entire remainder of the decade of the 1930s, as the Roosevelt administration expanded federal intervention far beyond what Hoover had started. If more government regulation of business is the magic answer that so many seem to think it is, the whole history of the 1930s would have been different.

I particularly like that Sowell compares the 1929 and 1987 stock market crashes. The market actually fell more in 1987, but Reagan wisely did nothing and the economy continued growing.

The very fact that we still remember the stock market crash of 1929 is remarkable, since there was a similar stock market crash in 1987 that most people have long since forgotten. What was the difference between these two stock market crashes? The 1929 stock market crash was followed by the most catastrophic depression in American history, with as many as one-fourth of all American workers being unemployed. The 1987 stock market crash was followed by two decades of economic growth with low unemployment. But that was only one difference. The other big difference was that the Reagan administration did not intervene in the economy after the 1987 stock market crash– despite many outcries in the media that the government should “do something.”

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The New Deal Hurt the Economy

A great column in the Wall Street Journal explains how FDR’s policies hurt the economy. That is true, but the really interesting part of the column for me is that it explains how Roosevelt (and then Truman) were convinced the economy would return to depression after World War II unless there was another giant Keynesian plan. Fortunately, Congress said no. This meant there was no repeat of the Hoover-Roosevelt mistakes of the 1930s and the economy was able to recover and enjoy strong growth:

FDR did not get us out of the Great Depression—not during the 1930s, and only in a limited sense during World War II. Let’s start with the New Deal. Its various alphabet-soup agencies—the WPA, AAA, NRA and even the TVA (Tennessee Valley Authority)—failed to create sustainable jobs. In May 1939, U.S. unemployment still exceeded 20%. European countries, according to a League of Nations survey, averaged only about 12% in 1938. The New Deal, by forcing taxes up and discouraging entrepreneurs from investing, probably did more harm than good. …His key advisers were frantic at the possibility of the Great Depression’s return when the war ended and the soldiers came home. The president believed a New Deal revival was the answer—and on Oct. 28, 1944, about six months before his death, he spelled out his vision for a postwar America. It included government-subsidized housing, federal involvement in health care, more TVA projects, and the “right to a useful and remunerative job” provided by the federal government if necessary. Roosevelt died before the war ended and before he could implement his New Deal revival. His successor, Harry Truman, in a 16,000 word message on Sept. 6, 1945, urged Congress to enact FDR’s ideas as the best way to achieve full employment after the war. Congress—both chambers with Democratic majorities—responded by just saying “no.” No to the whole New Deal revival: no federal program for health care, no full-employment act, only limited federal housing, and no increase in minimum wage or Social Security benefits. Instead, Congress reduced taxes. Income tax rates were cut across the board. …Corporate tax rates were trimmed and FDR’s “excess profits” tax was repealed, which meant that top marginal corporate tax rates effectively went to 38% from 90% after 1945. Georgia Sen. Walter George, chairman of the Senate Finance Committee, defended the Revenue Act of 1945 with arguments that today we would call “supply-side economics.” If the tax bill “has the effect which it is hoped it will have,” George said, “it will so stimulate the expansion of business as to bring in a greater total revenue.” He was prophetic. By the late 1940s, a revived economy was generating more annual federal revenue than the U.S. had received during the war years, when tax rates were higher. Price controls from the war were also eliminated by the end of 1946. …Congress substituted the tonic of freedom for FDR’s New Deal revival and the American economy recovered well. Unemployment, which had been in double digits throughout the 1930s, was only 3.9% in 1946 and, except for a couple of short recessions, remained in that range for the next decade.

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Is Obama Planning to Repeat the Mistakes of Hoover and Roosevelt?

Art Laffer has a compelling column in the today’s Wall Street Journal discussing how higher tax rates under Presidents Hoover and Roosevelt played an important role in driving the economy into a ditch during the 1930s. The interesting question, of course, is the degree to which President Obama is going to repeat these mistakes. We already see that some of the mistakes that happened during the Great Depression are being replicated, including higher government spending (with a big help from Bush), more government regulation, and protectionism. The good news, so to speak, is that Obama is moving policy in the wrong direction in small steps, whereas Hoover and Roosevelt took giant leaps. So while it is likely that our long-term growth rate will be dampened, hopefully there will not be a lengthy period of economic stagnation: