An old piece I wrote for SwiftEconomics regarding liberal Kevin Baker's admission that Barack Obama actually acted a lot like Herbert Hoover during the Great Recession. Of course, he takes the exactly wrong lesson from this. As it appears the United States is likely to head back into recession, this lesson would be worth paying attention to.
There 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%
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)
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
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
(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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