Deficits, Dollar, Dubiously Free Trade, Federal Reserve, Live and Learn, Taxes, Treasury, Trust

If Only Barack “Hoover” Obama was Barack “Harding” Obama

hooverobamaThere is a persistent myth floating around that Herbert Hoover sat back and fiddled while America burned during the Great Depression, á la Nero. Then, Franklin Roosevelt came riding in as the knight in shining armor to save the American economy through massive government intervention. With this myth firmly intact, government intervention is seen as an absolute necessity to deal with our current financial crisis.

The truth is embarrassingly different however: Hoover did plenty of intervening and to my knowledge, very little fiddling. Given this, I was pleasantly surprised to see a piece in Harper’s magazine by Kevin Baker called “Barack Hoover Obama: The Best and the Brightest Blow it Again.” The piece is written from a liberal perspective, asserting that Obama, by attempting not to rock the boat too much, hasn’t done enough intervening. This echoes many liberal economists, such as Paul Krugman, who said of the original $787 billion stimulus package that, “to appease the centrists, a plan that was already too small and too focused on ineffective tax cuts has been made significantly smaller…” (1)

Baker states, “…that we are at one of those rare moments in history when the radical becomes pragmatic, when deliberation and compromise foster disaster.” Or in other words, Barack Obama has the opportunity to vastly remake American society and the American economy. Instead, he has chosen to play it safe. Baker elaborates:

“Much like Herbert Hoover, Barack Obama is a man attempting to realize a stirring new vision of his society without cutting himself free from the dogmas of the past–without accepting the inevitable conflict.  Like Hoover, his is bound to fail.” (2)

What’s nice to see is that liberals are finally starting to realize that Hoover did not adopt a laissez-faire approach; Herbert Hoover was a protectionist and supported Theodore Roosevelt’s short lived progressive party. When the stock market crashed, Hoover ignored the advice of his Treasury Secretary, Andrew Mellon, and decided to attempt unprecedented government intervention to stabilize the economy. He proclaimed, “no laissez-faire, no unchanneled and unimpeded course of nature, no invisible hand will do it for us.” (3) So as we might expect, Hoover did plenty, much more than any U.S. president before him:

– He increased taxes on top wage earners from 25% to 63%

– He increased government spending by 47%

– He ran a deficit of 4.5% of GDP

– Against the wishes of over 1000 economists, he signed the Smoot-Hawley Tariff, effectively shutting down international trade

– He established the Reconstruction Finance Corporation to make loans to the state governments

– He appropriated money for public works construction (think Hoover Dam)

– He met with major industry leaders and put significant pressure on them to maintain wages at current levels, despite the amount of money in the economy falling by one-third. This led, predictably, to massive unemployment. (4)

This misconception gets so absurd that during the 1932 campaign, Franklin Roosevelt’s first vice president, John Garner, accused Herbert Hoover of “leading the country down the path of socialism.” (5) Furthermore, FDR brain-truster, Rexford Tugwell admitted that, “most of what [Hoover] began would be taken over by Roosevelt and then called the New Deal.” (6)

FDR and Hoover; Much More Similar Than We Are Lead to Believe

FDR and Hoover; Much More Similar Than We Are Lead to Believe

Now that we can admit Hoover did more than any president before him in fighting off an economic recession, what should we conclude from this? In an interview with Stephen Colbert, Baker concludes that “Hoover was a great man, probably kept more people from starving to death than anyone in history… what he was trying to do was expand the role of government, he just couldn’t quite get himself to do it [enough].” (7) So let me get this straight: The first time the Federal Government significantly intervenes to stop an economic downturn just happens to be at the beginning of the worst depression in American history, thus proving the government didn’t do enough? Again, at least Baker is honest, but he is also, oh how can I put this kindly… incredibly dense. He simply assumes that the government helps the economy by spending money that it can only get from taxing the population, or running deficits (taxes in the future). This is the broken-window fallacy. As economist Henry Hazlitt explains:

“A young hoodlum, say, heaves a brick through the window of a baker’s shop… [however] this misfortune has its bright side. It will make business for some glazier… After all, if windows were never broken, what would happen to the glass business… The logical conclusion from all this would be… that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor… But the shopkeeper will be out $250 that he was planning to spend on a new suit… They have forgotten the potential third party involved, the tailor… They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made.” (8)

Simply put, the government can’t create anything; it can simply reshuffle the deck. So why should anyone assume that public spending “kept people from starving to death?”

Baker would have been well served to look just a little further into the past, to the not-so-great depression of 1920. Warren Harding, usually decried by historians, was, in fact, an incredible depression fighter. Jim Powell, of the Cato Institute, describes what he had to take on:

“Harding inherited [Woodrow] Wilson’s mess—in particular, a post–World War I depression that was almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933 that FDR would later inherit. The estimated gross national product plunged 24 percent from $91.5 billion in 1920 to $69.6 billion in 1921. The number of unemployed people jumped from 2.1 million to 4.9 million.” (9)

So what did Harding do? He cut government spending from $6.3 billion in 1920, to $5 billion in 1921, to $3.2 billion in 1922. This would amount to a negative stimulus package! Income taxes were left as is and corporate taxes were cut. (10) There was no push for new regulations and the Federal Reserve did nothing (it didn’t begin open market operations until 1922). (11)

Warren Harding: Depression Fighter Extraordinaire

Warren Harding: Depression Fighter Extraordinaire

What was the result? By 1922 unemployment was down to 6.7% and the Roaring Twenties had begun. The economy set new production records year after year until the infamous Black Tuesday on October 29th, 1929; a downturn, that was dealt with in a much different and obviously less effective way. (12)

A comparison of how Hoover and Harding dealt with these severe downturns and the results that came from the policies they pushed through is quite elucidating. It’s nice to see that liberals such as Kevin Baker have finally come to realize what Hoover actually did. Now it would be nice if they could simply draw the proper logical conclusions from their realizations.

___________________________________________________________________________________________________

(1) Paul Krugman, “What Have the Centrists Wrought,” New York Times, 2/7/2009, http://krugman.blogs.nytimes.com/2009/02/07/what-the-centrists-have-wrought/?apage=2

(2) Kevin Baker, “Barack Hoover Obama: The best and the brightest blow it again,” Harper’s Magazine, July 2009, http://www.harpers.org/archive/2009/07/0082562

(3) Quoted from Tom Woods, 33 Questions About American History You’re Not Supposed to Ask, Pg. 182, Random House Inc., Copyright 2007

(4) See Ibid., Pg. 180-188, Amity Shlaes, The Forgotten Man, Pg. 85-104, and Murray Rothbard, America’s Great Depression

(5) Quoted in Otto Freidrich, Hays Gorey and Ruth Mehrten Galvin, “F.D.R.’s Disputed Legacy,” Time Magazine, 2/1/1982, http://www.time.com/time/magazine/article/0,9171,954983-4,00.html

(6) Quoted from Tom Woods, 33 Questions About American History You’re Not Supposed to Ask, Pg. 188, Random House Inc., Copyright 2007

(7) Kevin Baker, Interview with Stephen Colbert, Colbert Report, 7/29/2009, http://www.comedycentral.com/colbertreport/full-episodes/index.jhtml?episodeId=240118

(8) Henry Hazlitt, Economics in One Lesson, Pg. 11-12, Laissez Faire Books, Copyright 1996

(9) Jim Powell, “Not-So-Great Depression,” Cato Institute, 1/7/2009, http://www.cato.org/pub_display.php?pub_id=9880

(10) Ibid

(11) Malcom Mitchell, “The Dangers of Deflation,” Investment Policy Magazine, September 2003, http://www.investmentpolicy.com/dangers_deflation.html

(12) Jim Powell, “Not-So-Great Depression,” Cato Institute, 1/7/2009, http://www.cato.org/pub_display.php?pub_id=9880

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2 thoughts on “If Only Barack “Hoover” Obama was Barack “Harding” Obama

  1. Herbert Huber says:

    I dont think this post is particularly informative vis a vis the current economic mess. At the time Hoover was president, the national debt as a percentage of GDP was either zero or single digit negative. In fact, the government ran surpluses in the 1920s.

    The federal government runs consistent deficits today, and if one adds state deficits, then the total size of the deficit and accumulated debt is mind boggling.

    How can any economist defend public spending today, when it is a) already out of control, and b) places in enormous interest expense burden on the taxpayer and c) has a clear crowding out effect on private sector investment, not because capital costs are too high, but because their is no wealth with which to spend.

    The economy needs to be restructured, and that means shifting output to the private sector. If the government wants to stimulate the economy, then cut taxes on fixed asset capital investment to zero, or allow the private sector to write off manufacturing fixed capital investments.

    Like

  2. Andrew says:

    Absolutely Herbert, the only point I was making is that Herbert Hoover was not a do-nothing laissez faire type like we are often lead to believe. So it’s nice the Kevin Baker at least admitted that. It would be nice if he admitted it was the wrong policy then and that, especially given our current state, it’s the wrong policy now too.

    Like

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