conversableeconomist

More Herbert Hoover: Father of the New Deal

Last week I pointed out in Herbert Hoover, Deficit Spender that, contrary to a widespread belief, Hoover didn\’t cut spending or seek to balance the budget. Instead, Franklin Roosevelt ran in 1932 on promise to balance the budget, a promise which he abandoned a few months after taking office. The next day Steven Horwitz published a Cato Briefing Paper called \”Herbert Hoover: Father of the New Deal,\”  with a broader treatment of the actual Herbert Hoover. Here are some tastes of the Horwitz argument (footnotes and citations omitted):
\”The version of Hoover presented in the media’s narrative of Hoover as champion of laissez faire bears little resemblance to the details of Hoover’s life, the ideas he held, and the policies he adopted as president. …\”
\”Hoover had long believed that it was necessary to `transform the structure of the U.S. economy from one of laissez-faire to one of voluntary cooperation.\’ In her biography Herbert Hoover: Forgotten Progressive Joan Hoff Wilson summarizes Hoover’s economic views this way:

Where the classical economists like Adam Smith had argued for uncontrolled competition between independent  economic units guided only by the invisible hand of supply and demand, he talked about voluntary national economic planning arising from cooperation between business interests and the government. . . . Instead of negative government action in times of depression, he advocated the expansion of public works, avoidance of wage cuts, increased rather than decreased production—measures that would expand rather than contract purchasing power.

Hoover was also a long-time critic of international free trade, and favored `increased inheritance taxes, public dams, and, significantly, government regulation of the stock market.\’”
Horwitz provides chapter and verse on how Hoover, as president, increased spending and intervened in the economy. Here\’s an editorial cartoon from 1930 criticizing Hoover for his flood of increased spending. 
As Horwitz points out, leading intellectuals of the Roosevelt administration recognized that Hoover had set the stage for their policies:

\”Rexford G. Tugwell, one of the academics at the center of FDR’s `brains trust\’ said: `When it was all over, I once made a list of New Deal ventures begun during Hoover’s years as Secretary of Commerce and then as president. . . . The New Deal owed much to what he had begun.\’ Another member of the brains trust, Raymond Moley, wrote of that period: 

When we all burst into Washington . . . we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself. The essentials of the NRA [National Recovery Administration], the PWA [Public Works Administration], the emergency relief setup were all there. Even the AAA [Agricultural Adjustment Act] was known to the Department of Agriculture. Only the TVA and the Securities Act was drawn from other sources. The RFC [Reconstruction Finance Corporation], probably the greatest recovery agency, was of course a Hoover measure, passed long before the inauguration.

Late in both of their lives, Tugwell wrote to Moley and said of Hoover, “we were too hard on a man who really invented most of the devices we used.\”
Horwitz argues that Hoover\’s economic policies were deeply misguided. My point here is not to endorse his evaluation of Hoover\’s policies (I think some were more justifiable than others), but just to point out that as a matter of historical fact, it is incorrect to think of Hoover as a radical free market and budget balancer whose policies were overturned by FDR. Indeed, as Horwitz points out, FDR and others saw Hoover during the 1920s as a possible presidential candidate for the Democrats!
Thanks to Arnold Kling at the EconLog website for the pointer.

  

conversableeconomist

Herbert Hoover, Deficit-Spender: Correcting John Judis in The New Republic

In the October 6 cover story for The New Republic, titled \”Doom!\”, John B. Judis admonishes readers to beware the economic lessons of the 1930s–and then proceeds to make a number of incorrect statements about what happened in the 1930s.

In the third paragraph, Judis pats himself on the back for asking Mitt Romney a tough question. Judis asked: \”I want to ask you something about history.You know, when Herbert Hoover had to face a financial crisis and then unemployment, his strategy was to balance the budget and cut spending, and that made things worse. When Roosevelt came in, unemployment was twenty-five and went to fourteen percent by 1937. With deficits. Aren\’t you repeating the Hoover mistake?\”

Before listing the various mistakes here, the actual spending, debt, and deficit numbers starting in 1930, both in nominal terms and as a share of GDP, are readily available in the Historical Tables volume that is published each year with the president\’s proposed federal budget. All numbers I quote here are from the \”Historical Tables\” volume in the 2012 budget. From that source, you can easily confirm the following facts:

1) Hoover\’s budget strategy over his term of office was not to balance the budget. The budget ran a small deficit of -.6% of GDP in 1931, followed by a much larger deficits of 4.0% of GDP in 1932 and 4.5% of GDP in fiscal year 1933 (which, as Judis points out at a different point in his discussion, started in June 1932 and was thus mostly completed before Roosevelt took office in 1933).

2) Hoover did not cut spending. In nominal terms, federal spending went from $3.3 billion (!) in 1930 to $4.6 billion in 1933.  Given price deflation during that time, the real increase in government spending would have been larger. With the economy declining in size, federal outlays more than doubled from 3.4% of GDP in 1930 to 8.0% of GDP in fiscal year 1933.

3) Because of this pattern, it would be hard to find an economic historian to argue that fiscal tightness was a significant factor in worsening the Great Depression from 1929 to 1932. The economic literature has for half a century focused on how overly tight monetary policy deepened the Depression, and has noted at length how the dysfunction of monetary policy at that time worked through banks and the financial system and through the exchange rate to hinder the economy. It would also be hard to find an economic historian to argue that the primary reason for the drop in  unemployment rates from 1933 to 1937 was a surge of expansionary fiscal policy.

4) During the 1932 presidential campaign, Franklin Roosevelt promised to wipe out the Hoover budget deficits and instead to run a balanced budget. In his first few months after taking office, FDR tried to put this policy into effect–before soon abandoning it. For a source, here is a description from the quick history at the Franklin D. Roosevelt American Heritage Center Museum: \”Roosevelt promised in his 1932 campaign that he would end the deficits that had plagued the Hoover administration and restore a balanced budget. This he never did, and eventually he would come to consider deficit spending a useful and necessary response to recession. In 1933, however, he remained committed to fiscal orthodoxy, and on 10 March he asked Congress to pass legislation cutting government salaries and veterans\’ benefits. Both Houses passed the Economy Act within days, despite protests from some progressives who argued correctly that the measure would add to the deflationary pressures on the economy… The New Deal soon departed from these conservative beginnings.\”

It gets worse. Judis writes (a bit smugly) how Romney evaded his question, and then writes: \”But he [Romney] seemed to be suggesting that the premise of my question was flawed because deficits are much larger today and will probably continue unabated. And they are larger–but that is because our GDP and government are also larger.\”

But deficits as a share of GDP are much larger now than than they were in the Great Depression. The two biggest deficits in the 1930s were 5.5% of GDP in 1936 and 5.9% of GDP in 1934. The budget deficit was 10.0% of GDP in 2009, 8.9% of GDP in 2010, and (estimated) 10.9% of GDP in 2011.

Judis believes that additional fiscal stimulus is warranted. I supported both the Bush fiscal stimulus package in 2008 and the Obama stimulus package in 2009, although I had some disagreements with their design and targetting. While I do think it\’s tremendously important to get the U.S. deficits under control in the middle term, I wouldn\’t try to slash the deficit in the short run with unemployment still  up around 9%.

But the notion that the Great Depression was an example of highly active fiscal stimulus and the Great Recession was not is upside-down. Recent years have seen a far larger fiscal stimulus in response to a lower unemployment rate than in the 1930s. During the Great Depression, Franklin Roosevelt faced unemployment rates of 25% and continued the Hoover policy of budget deficits, running deficits no larger than 5.9% of GDP and more usually in the range of 3-4% of GDP through the 1930s. During the Great Recession, the U.S. economy experienced unemployment of nearly 10%, and has responded with fiscal stimulus on the order of 10% of GDP.

And the elephant in the room, which Judis doesn\’t discuss, is the accumulation of debt. After all of the deficits of the 1930s, the total ratio of federal debt held by the public still totaled only 44.2% of GDP in 1940. Throughout the 1930s, the federal government had a lot of capacity to borrow–and could then still ramp borrowing much higher to finance the fighting of World War II. But in 2011, total federal debt held by the public is an estimated 72% of GDP. Looking ahead over the next decade, the federal government has a lot less capacity to borrow.

ADDED: For a follow-up on the post on October 4, see my post on  More Herbert Hoover: Father of the New Deal.

conversableeconomist

Is the Great Depression is the Right Analogy for the Great Recession?

\”Economic History and Economic Policy,\” which is available at his website. He begins (footnotes omitted):

\”This has been a good crisis for economic history. It will not surprise most members of this audience to learn that there was a sharp spike in references in the press to the term \”Great Depression\” following the failure of Lehman Bros. in September of 2008. More interesting is that there was also a surge in references to \”economic history,\” first in February of 2008, with growing awareness that this could be the worst recession since you know when, and again in October, coincident with fears that the financial system was on the verge of collapse. Journalists, market participants, and policy makers all turned to history for guidance on how to react to this skein of otherwise unfathomable events.\”

Eichengreen discusses with care and detail whether analogies are chosen because they are the best example, or because they are a salient example almost within living memory, or because they deliver an already-selected policy conclusion. Drawing on a wide variety of political and economic examples, Eichengreen points out that since historical episodes never precisely match present events, often the most productive way to use history in making economic policy is not to use a single analogy, but instead to consider a number of somewhat relevant episodes, and to compare and contrast the events, policies, and outcomes.   He makes the provocative point that the choice of analogy has a tendency to guide policy responses. In the case of the analogy from the Great Depression to the Great Recession:

\”The analogy legitimated certain responses to the collapse of economic and financial activity while delegitimating others. It legitimized the notion that the Fed should respond aggressively to prevent the collapse of a few investment funds from precipitating a cascade of financial failures. This reflected the widespread currency of Friedman and Schwartz‘s interpretation of the Great Depression – that what had made the Depression great was the inadequate response of the Federal Reserve. … The analogy with the Great Depression informed the policy response to the crisis more generally. The Federal Deposit Insurance Corporation increased deposit insurance coverage to $250,000 per depositor exactly one day after press references to the Great Depression peaked. The action was presumably informed by the view of the banking panics of the Great Depression as runs by uninsured depositors, and the historical interpretation, widely shared, that those panics had played a key role in the contraction of the money supply and the impairment of the payments system. The analogy with the Great Depression similarly lent legitimacy to the argument that the Congress and Administration should respond with fiscal stimulus. This reflected the \”lesson\” of history that the depth and duration of the Depression were attributable in no small part to the fact that fiscal stimulus was not used to counter the collapse of private demand. …

The analogy with the Great Depression also delegitimized the temptation to respond with protectionist measures designed to bottle up the remaining demand. This reflected the lesson, widely taught to undergraduates and invoked by policy makers, that the Smoot-Hawley Tariff aggravated the crisis of the 1930s. In fact, this \”lesson\” of history is not supported by modern research, which concludes that Smoot Hawley played at most a minor role in the propagation of the Depression.\”

Eichengreen points out that these policy lessons are not the only possible lessons from the Great Depression, and that choosing other historical episodes might have emphasized other lessons. 

\”Did we need a new Neal Deal? Well, that depended on whether you sided with historians who argue that the New Deal helped to end the Depression or only prolonged it. Did we need a jolt to the exchange rate to vanquish deflationary expectations? The answer depended on whether your view was that Roosevelt‘s decision to take the U.S. off the gold standard in 1933 was the critical decision that transformed expectations and ended deflation or whether you thought it was a sideshow. For those attempting to move from metaphor to analogy, this was a reminder that the distilled, authoritative incapsulation of the period remains a work in progress.
Although the Great Depression was clearly the dominant base case in discussions of the 2008-9 crisis, there were other possible analogies. There was the 1873 crisis, driven by an investment boom and bust like that of the period leading up to 2007, which led to the failure of brokerage houses, in parallel with the problems in 2008 of the investment banks. There was the 1907 crisis, in response to which J.P. Morgan organized a lifeboat operation that resembled in important respects the 2008 rescue of Bear Stearns by none other than JP Morgan & Co.\”

Eichengreen also makes the point that the connection from past to present also works in reverse: for example, current economic events will alter our historical understanding of the policy reactions to the Great Depression.

\”The mainstream narrative is that the experience of the Depression led to a series of institutional and policy innovations making it less likely that something similar thing would happen again. American economic historians refer in this connection to federal deposit insurance, unemployment insurance, Social Security, the Securities and Exchange Commission, the concentration of monetary-policy-making authority at the Federal Reserve Board, and automatic fiscal stabilizers. Historians of other countries have similar list. Although the stabilizing impact of particular entries on these lists has been disputed, the thrust of the dominant narrative is clear.

We now have had a graphic reminder that we have less than fully succeeded in corralling threats to economic and financial instability. While policy responses may avoid the repetition of past threats, they are no guarantee against future threats. Markets tend to adapt to stabilizing policy innovations in ways that render those innovations less stabilizing. As memories of the earlier crisis fade, policy makers themselves become more likely to consort with market participants in this effort. I suspect that we will now see more attention to these longer-term adaptations to the legacy of the Great Depression and less to the short-term policy response.\”