Tuesday, July 7, 2009

What Makes a Depression Great Pt. II: The Roosevelt Myth

If Herbert Hoover's policies ground the apple cart that was the U.S. economy to a screeching halt, Franklin Delano Roosevelt's policies tipped the cart over.
Instead of adopting the policies of his predecessors--which were largely no policies at all--and letting the economic downturn correct itself, FDR sought the opportunity to make for himself a legacy that would leave ruin in its wake and set a dangerous precedent that we're seeing bloom into full effect today with Barack Obama's economic policies.  

The New Deal had more than seven years to pull our nation's economy out of the rut that it remained stuck in.  Historically economic depressions didn't last that long to begin with; most downturns lasted around two years and none more than five.  It goes to show that historians don't seem terribly well-versed in economic study and those who are, such as Burton Folsom Jr., Gene Smiley, or Jim Powell, seem suspiciously absent from the textbooks in public schools. History is written by the winners indeed!

But enough speculation, let's take a look at some facts:  While unemployment was at its highest when Roosevelt took office, unemployment numbers stayed in the double-digits all the way into the 1940's and even jumped from 14% to 18% in 1938, five years after Roosevelt's New Deal had gone into effect.  The last economic depression prior to that, in 1921, unemployment was again in the double digits at 11.7% but had dropped to a remarkable 2.4% by 1923.  There apparently was no need for a New Deal then, right?  

So what kept unemployment so high during Roosevelt's administration?  Apologists will claim that without the New Deal unemployment would have been much worse but one has to remember the Great Depression was a global catastrophe and yet the United States suffered the longest and hardest out of all other countries.   Looking just at our northerly neighbors in Canada one can see that their unemployment numbers nearly matched the United States between 1930 and 1931 (8.9% for the U.S. vs. 9.1% for Canada) whereafter the United States would outpace Canada for the remainder of the Depression (The U.S. peaked at 24.9% and Canada peaked at 19.3%) and Canada would end up recovering quicker, it's unemployment numbers reaching a normal level by the 1940's at 4.4% while the U.S. still floundered at nearly 10%.  

One of the biggest contributors to unemployment was FDR adopting Herbert Hoover's wage controls.  Even as prices were dropping in the economy, the government was forcing firms to increase wages.  When you have to pay workers a hefty sum and you're not making any money, the demand for labor drops considerably.  If, immediately after taking office, FDR had allowed wages to adjust freely according to market value, unemployment would have tapered off and started dropping as resources and labor moved from failing businesses to sustainable ones. Instead FDR used the might of the Federal government to enact policies (such as the National Industrial Recovery Act and the National Labor Relations Act) that forced firms to raise wages and prices and limit competition--in effect creating monopolies.  Small businesses couldn't survive because they couldn't undercut the prices of bigger corporations who then used their government-sanctioned cartel status to raise their own prices.  

Essentially what happened is that a minimum price had to be charged for any good.  If you were a small business your operations were run into the ground and then large corporations, now lacking any sort of competition, could charge whatever they wanted for goods and they most certainly didn't price them cheaply.  In a free market such things do not happen because while corporations still want to make large sums of money, competition forces them to behave.

Forcing wages to be high has the same effect.  By using the Wagner Act to give crippling power to labor unions, wages were forced up, union membership doubled, strike days doubled, and unemployment spiked.  Firms weren't going to hire more workers when they were forced to pay the workers more than they were worth, especially when no one was buying any of their products because the prices had to be raised to cover the cost of the labor.  

So with all this meddling in the markets another after effect of these policies was "regime uncertainty".  Essentially this meant that private investors were scared away from investing their money because they remained unsure of the security of their property rights or their ability to even keep the returns on their investments.  This form of "capital strike" slows recovery efforts in the economy because businesses won't have any means to invest in their own machinery or maintenance costs.  In fact, investment dollars ran into the red to the tune of 
-18.3 billion dollars (and that's in 1930's dollars).  Yes, that's a minus sign in front of that figure!  It wasn't until Roosevelt forced all the "New-Dealers" out of his administration on the onset of World War II and brought private industry onboard, filling his war administration with capitalists, that private investment started making a comeback.

As we can see from just a few examples in a long laundry list of policies that FDR put into effect, trying to prop up failing businesses, cutting off competition, and forcing high wages did nothing but exacerbate the length and severity of the Great Depression.  It truly made what would have been just another plain ol' depression into a great one.  And as I will explain in the next installments, what is going on in the economy now is not too far removed.  Stay tuned!

Sunday, July 5, 2009

What Makes a Depression Great Pt. I: The Hoover Myth

      I'm going to sideline my postings on economic fundamentals briefly, break up the monotony, and tackle some things that I think are increasingly important in the here and now.  That subject is the Great Depression.

You might ask "Wait a minute, what does the Great Depression have to do with the here and now?" and my emphatic answer is "lots!"  There is a lot going on in the economy today that ominously echoes events that preceded the 1929 stock market crash and the ensuing Great Depression and I feel it is important for us as citizens to understand what is going on and why--and present it in a format that does away with the partisan finger-pointing we are all so used to seeing and hearing day in and day out.  You will soon realize that there is plenty of blame to go around both back then and today.  But first we need to take out the big free market hammer and bust some myths.  

You see the Bush/Obama dynamic we have been experiencing is in part reminiscent of the Herbert Hoover/Franklin Roosevelt one of the past.   Hoover, then a Republican president during the disastrous stock market crash, was given the full brunt of the blame for the Great Depression and, in fact, he deserves some of this criticism but not for the reasons we think.  History has painted a picture of Hoover as a do-nothing pro-capitalist who sat idly by and watched the American economy flounder like a dying fish in the bottom of a fishing boat but actual facts show us otherwise.  Like George W. Bush, Hoover having a big fat "R" next to his name was no indicator of his fiscal principles and he certainly didn't act in the interest of free market economics or fiscal conservatism.  In fact, nothing could be further from the truth.

Herbert Hoover loved big government, tax hikes and heavy-handed policy on the markets. What he started was then magnified by big spender Roosevelt, much like what was started by Bush has been snowballed by President Obama.  The irony, of course, was that Roosevelt used Hoover's policies of deficit spending against him during the 1932 presidential race by pointing out that Hoover had run more peacetime deficits than any president before him.  

Here is a small smattering of Hoover's sins: he steeply raised income taxes during an economic downturn, he propped up wages artificially which led to staggering unemployment, he imposed massive tax hikes on imported goods which hamstrung the availability of raw materials, he spent more than twice what tax revenues were bringing in, and he ushered in policies that would prove to be the seeds of the New Deal that FDR would soon bring in to deepen and lengthen the depression.  In fact, we as a country very likely would have been better off if we had Hoover the vacuum cleaner sitting in the Oval Office.

So sure, you can blame Hoover for helping to cause a run-of-the-mill economic downturn to balloon into the single most devastating depression in American history but it's for none of the reasons the partisan left has fabricated (and made all the easier by simply pointing out his party designation and hoping that's all that needs to be said).  As we can see just by this short summary, Republicans aren't free of blame (as much as they'd like to make that claim) but it is often because the fundamental fiscal ideologies that they claim as their stance are all but abandoned.  As we will discuss over the next few entries, politics and economics are rarely good bedfellows regardless of the letter next to a politician's name.   This punctuates all the more that the economy's best friend is the political party that doesn't interact with it in the first place.  

So perhaps voting for a vacuum cleaner in 1928 would have been the safer bet for the American economy but make no mistake, regardless of his political affiliations, Herbert Hoover still sucked.