Sunday, December 2, 2012

President Hoover, Depression, and the Fiscal Cliff

According to William Manchester, writing in The Glory and the Dream, our typical beliefs about Herbert Hoover need some expansion. After nearly a decade of post World War I prosperity in the 1920s, which the Republican Party was happy to take credit for, Herbert Hoover won the Republican Party nomination for President in 1928. He was considered to be liberal best known for his role in supervising food relief efforts to Europe during the war; he was berated by Republican business leaders and right-wing politicians.

In 1929 the stock market crashed, and in 1930 the U.S. economy went down hill. Hoover, who was in many ways a very smart guy, simply did not understand what was happening. He thought American commerce would bounce back, and he had a lot of economists to back that view. He thought the problem was mainly one of psychology: "He himself had chosen the word "Depression" because it sounded less frightening than "panic" or "crisis.""

Despite President Hoover's hard work, happy talk, and genuine efforts to revive the economy, things got worse each year, and in particular in the election year of 1932. Later, from the 1940s to the end of the century, economists mostly agreed about what caused the Great Depression. Since the turn of the century much of economic "science" has become mere politics again. The Fiscal Cliff talks in particular are long on rhetoric and short on genuine understanding of our current predicament. I've written about aspects in earlier blog posts, and have seen some fairly good explanations from the like of Robert Reich and others. But Manchester's description is both short and telling, so I am going to reproduce it at length here, from pages 36 and 37 [I added some paragraph breaks to make it easier to read]:

"The real blame lay in the false underpinnings of the Coolidge-Hoover "New Era" prosperity. Seen in perspective, the Depression appears to have been the last convulsion of the industrial revolution, creating a hiatus before the technological revolution. In the aftermath of the World War, the techniques of mass production combined to increase the efficiency per man-hour by over 40 percent. This enormous output of goods clearly required a corresponding increase of consumer buying power—that is, higher wages. But the worker's income in the 1920s did not rise with his productivity. In the golden year of 1929, Brookings economists calculated that to supply the barest necessities a family would need an income of $2000 a year—more than 60% of American families were earning.

"In short, the ability to buy did not keep abreast of the volume of goods being turned out. It was part of the foolishness of the time to argue that the surge in production was no problem, that "a good salesman can sell anything." In practice this meant that while the rich (and many who weren't rich) were speculating in stocks, zealous salesmen were encouraging a kind of mass speculation. Customers of limited means were being persuaded to take products anyhow, the exchange being accomplished by an overextension of credit.

"The stock market, honeycombed with credit in the form of broker's loans, crashed of its own weight, calling into account the million so little deals consummated by commercial travelers who had sold anything and everything to people lacking the means to pay for it. The panic followed, and the country couldn't cope with it. The last extended economic crisis had been in 1893; since then America had become so industrialized that a massive return to the farm was impossible.

"There was a certain rough justice in Herbert Hoover's ascent to the Presidency on the eve of the catastrophe, for as Secretary of Commerce he had been fascinated with productivity and indifferent to the dangerous lack of buying power. Long after he left the White House, he realized what had happened and wrote: "A margin of some thousands ... got too much of the productive pie for the services they performed ... Another margin of some 20% got too little."

So old Hoover, when he had time to sit back and calmly analyze what had happened, came to an understanding diametrically opposed to most Republican businessmen and politicians today. The Rich took more than their share of pie, the workers got less than their share, and the economy came tumbling down.

What goes around comes around, but today there are some significant differences from 1932. There was almost no national debt in 1929, and despite some depression-driven annual deficits, not much in 1932 either. But computer technology has put all kinds of people out of work, while the monetary benefits of it have accumulated in the hands of a tiny number of people.

Last year's Republican rhetoric was that serious national deficit reduction would be good for the economy. When they saw that the only way to achieve that was to raise taxes and cut the military deficit, they changed their tune to singing "the fiscal cliff is bad for you."

What is needed to save the economy is redistribution of wealth. You don't actually need a socialist government to achieve that. If profitable companies would just pay their workers more, the free market system would probably work out, and a better economy would produce more tax dollars. But Steve Jobs (now a capitalist deity) hoarded his money and paid his workers in American stores (and Chinese factories) starvation wages, the same as they would have gotten working the hamburger machines at any fast food joint. Multiply the same behavior by perhaps 2000 large corporations, and a bunch of "small" greedy business guys, and ice that cake with Wall Street shenanigans, and you have our current serious problems.

Barack Obama, meanwhile, is taking a "let them eat cake" position. He wants to keep the "middle class" tax cuts, while restoring the pre-Bush tax rates for the rich. Thus angering a minimal number of voters with tax rises. But those who have jobs now, and especially those who kept jobs during the Great Recession, have benefited from low tax rates while millions lost their homes, or have been mostly unemployed, or are still hoping for any kind of job.

The employed middle class can pay more taxes, and should not gripe about it. Some of that money might be used for deficit reduction, but some should go to hiring the people that are needed to make society and the economy work in the long run. I'd like to see the IRS expanded to make sure there is less tax dodging. I'd like to see the Department of Labor actually help working people get unionized and bargain for higher wages and benefits. And I'd like the Republicans to read the section of the Constitution that says "Congress shall have power to ... establish Post Offices and post Roads;" in other words, the Post Office should get direct federal subsidies with priority over the many expenditures now made for items that are not even mentioned in the Constitution.

There is no cliff. The economy would get better right away if Republican business people would stop praying to Jesus for tax cuts, sold their government bonds, and invested in their work forces. [See Where Have All the Capitalists Gone?]

To the extent a fiscal cliff needs to be avoided, all we need to do is limit spending cuts to the military budget. Watch the "compromise" in which Democrats agree to not cutting the defense budget, and instead create more misery for the people who made the mistake of voting for them.

One last Herbert Hoover note: the U.S. had done well by lending a lot of money to European belligerents during World War I. Hoover allowed for repayment to be suspended, which helped keep world commerce running.

And which nation's economy did best from 1929 to the beginning of World War II? Russia's, then part of the Union of Soviet Socialist Republics. American historians and economists have a way of forgetting that fact, and everything we learned from the Great Depression.

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