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Why Obanomics = Hoovernomics
Gerard Jackson
Economic and historical illiterates are trying to promote Obama's brand of corporatism by accusing McCain of following in the steps of Herbert Hoover. Yet the striking thing about Hoover's economic views is that they are not much different from Obama's. Hoover believed in protectionism, so does Obama, Hoover believed that higher taxes were necessary, so does Obama. Hoover believed in greater government intervention in the market place. So does Obama. Hoover believed in protecting real wages no matter what, so does Obama.
I am going to do what the political bigots in the Democratic Party and their media lackeys refuse to do — and that is take a look at Hoover's economic record.
Before the rise of Keynesianism the "orthodox" economic prescription for depressions was to allow the market to liquidate the malinvestments that the preceding boom had created, and allow prices and costs to adjust to proper market conditions. This policy was based on the insight that supporting unsound investments and trying to hold prices, especially wage rates, at boom-time levels would deepen and prolong a depression. The 1920-21 financial crisis was the last time in American history that the wisdom of this policy was allowed to do its work.
The very short but sharp American post-war economic contraction that lasted from late 1918 to early 1919 was quickly followed by a massive credit expansion that generated the 1919-20 boom that the Federal Reserve belatedly checked by raising the discount rate. This triggered the sharpest and fastest depression in US history. Wholesale prices peaked in May 1920 and then plummeted by 56 per cent, levelling out in June 1921.
About 75 per cent of this unprecedented price drop occurred between August and February, a mere 6 months. Despite this severe price fall, average non-agricultural wages declined by only 11 per cent. By August 1921 the economy was on the road to recovery. Though unemployment rose from 1.2 per cent in 1920 to 11.2 per cent in 1921, it had fallen to 1.7 per cent in 1923. What brought about this remarkable recovery was the very "economic orthodoxy" that ill-informed journalists and academics now sneer at.
Now this is where Hoover enters the picture. The Harding administration had pursued a largely laissez-faire policy during the 1920-21 depression, allowing wages and other costs and prices to fall until the necessary price adjustments and liquidations had been made. Hoover, on the other hand, strongly opposed this policy, proposing large-scale interventionist policies as a more compassionate and effective alternative.
On his return from Europe shortly after the war, he touted his "Reconstruction Program" that was based on government planning euphemistically called "voluntary" but which relied on "central direction." From the moment he was appointed Secretary of Commerce in March 1921 Hoover set about trying to intervene in the economy, designing several policies that he thought would help end the depression. Fortunately for America the depression ended before Hoover's interventionist schemes could do any damage. That the laissez-fair policy of "leave it alone" ended the depression so swiftly was a lesson Hoover never learnt.
At one time economists understood that during deflationary periods it was vital that prices, especially money wages, be allowed to adjust to the new monetary conditions. Only by this means could market clearing prices be established. It should have been obvious that boom-time money wage rates could not be maintained during a deflation without causing lasting widespread unemployment, particularly when we that "all of the bank credit inflation of 1922 to 1929 was wiped out in the short space of the three years following 1929". (C. A. Phillips, T. F. McManus, R. W. Nelson, Banking and the Business Cycle: A Study of the Great Depression in the United States, The Macmillan Company, 1937, p.168)
Hoover, however, detested "orthodox" thinking on wage rates and protectionism, believing instead that living standards were a product of high real wages and not capital accumulation. He made his rejection of the "old economics" clear in a speech on 12 May 1926, which is worth quoting at some length:
There is a marked change . . . in the attitude of employers and employees. . . . it is not so many years ago that the employer considered it was in his interest to use the opportunities of unemployment and immigration to lower wages irrespective of other considerations. The lowest wages and longest hours were then conceived as the means to obtain lowest production costs and largest profits. Nor is it so many years ago that our labor unions considered that the maximum of jobs and the greatest security in a job were to be attained by restricting individual effort.
But we are a long way on the road to conceptions. The very essence of production is high wages and low prices, because it depends upon a widening range of consumption, only to be obtained from the purchasing-power of high real wages and increased standard of living. (Herbert Hoover, The Memoirs of Herbert Hoover: The Great Depression 1929-1941, The MacMillan Company: New York, 1952, p. 108).
This was the "new economics" that Hoover and others now preached and which became the prevailing dogma of the time. One could easily be forgiven for thinking that Hoover was a Keynesianism before Keynes was. Yet he is still being painted by ignoramuses as a laissez-faire fanatic.
When depression struck in 1929, Hoover, as president, was now free to implement his interventionist (or should I say Keynesian) schemes that gave the world the Great Depression. Hoover reacted swiftly, persuading the country's industrialists to maintain money wage rates at a predepression levels. Alarmed by these interventionist policies, Secretary of Treasury Mellon urged Hoover to allow the depression to follow its natural course as had all previous administrations. Hoover scornfully dismissed Mellon and his supporters as "leave-it-alone-liquidationists".
Two courses were open to us. We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and to the Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put that program in action. No Government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times. . . . For the first time in the history of depressions, dividends and profits and the cost of living have been reduced before wages have been sacrificed. (Hoover's acceptance speech, 11 August 1932)
Right to the very end Hoover remained oblivious to the economic consequences of punishing profits and of holding wage rates above market clearing rates. In 1929 the two-way division between employees and corporations was 81.6 per cent and 18.4 per cent respectively. In 1933 employees share had rocketed to 99.4 per cent, payrolls fell from $32.3 billion to $16.7 billion and unemployment rose to a horrific 25 per cent.
Hoover made three horrible blunders: He supported tariffs which undoubtedly contributed considerably to a fall in international trade. He made the awful mistake of thinking that the purchasing power theory of wages was valid. The result was a tragic and unprecedented level of unemployment. These gross errors were compounded by an unparalleled increase in taxes which, incidentally had the overwhelming support of the congressional Democrats.
Although Hoover lost the election Hoovernomics won in the person of Franklin Delano Roosevelt whose economic policies were Hoover's writ large.
The result of Roosevelt's atrocious economic bungling was the longest and deepest depression in US history, the blame for which the Democrats are still pinning on Hoover. Yet he was the man who denounced proponents of "economic orthodoxy" as "reactionary . . . bitter-enders" and "liquidationists".
The man who supported the 1930 disastrous Smoot-Hawley tariff, who fixed wage-rates, implemented public works, established the Reconstruction and Finance Corporation, restrained competition, drastically raised taxes and government spending; the president who intervened in the economy on an unprecedented scale, breaching every tenet of laisezz-fair economics has gone down in history as an uncompromising defender of the free market. If only that were true.
The Great Depression was not inevitable but the bitter fruit of the interventionist policies of Hoover and Roosevelt. Theirs was the kind of interventionism that Obama and his fellow economic illiterates are straining at the leash to impose on America.
Many Americans are fearful — and I don't blame them — that their country would never recover from an Obama presidency. (I personally believe that if Obama is elected Americans won't know what hit them). What they do not know is that the inexorable power of economics laws — laws he does not believe exist — would, as they did with Carter, reduce him to a one-term president and keep the Democrats out of the Oval Office for another generation.
As Adam Smith said: "There is a great deal of ruin in a country". Then again the same could have been said of Argentina until Peron — another Latin American Obama — finally ruined the country.
Gerard Jackson is Brookesnews' economics editor
BrookesNews.Com
Monday 13 October 2008