Elizabeth Warren's Great Depression Economics, Part 3

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Posted: Nov 11, 2019 9:41 AM
Elizabeth Warren's Great Depression Economics, Part 3

Source: AP Photo/Cliff Owen

In my first article of this series of four articles, Elizabeth Warren's Great Depression Economics, Part 1, I proposed that we can know and understand future economic results by knowing and understanding past economic patterns and the results they generated. In this article, and the next, I will review economic policies and patterns from the Great Depression which can illustrate similar results today when similar polices are applied at the general government level. History, and its data, show these basic patterns repeat when we study and review policies from the 1910s/20s (Wilson to Harding/Coolidge), 1920s/30s (Coolidge to Hoover/Roosevelt), 1970s/80s (Carter to Reagan), and 2000s/10s (Bush 2/Obama to Trump). If we would learn and apply these lessons from our history, we would greatly increase our prosperity.

The Hoover Administration’s intervention negatively impacted labor.  According to economist Lee Ohanian, and his extensive research into the 1930s and the Great Depression, “Hoover’s program substantially depressed the economy.”[1]  Ohanian reports that Hoover convinced major corporations against reducing wages or laying off workers.  As a result, he promised to keep unions from striking and demanding higher wages post 1929 crash.  Hoover succeeded on both counts, but as a result created a massive labor distortion which caused employment to tumble, as reported previously by Vedder and Gallaway (see The Systematic Implementation of Statism – Part 1 – add hyperlink).

Hoover’s policies “raised real wages substantially above market-clearing levels which in turn kept employment and output low.”[2]  Real wages increased by 10 percent by 1931 and manufacturing working hours declined by over 40 percent, negatively disrupting employment, while manufacturing accounted for 28 percent of employment.[3]  From the period of late 1929 to June 1930, industrial hours fell by 20 percent, then by 40 percent by fall 1931, causing a severe and deep depression and a further distortion of the manufacturing labor market. [4]  The industry did not recuperate.  President Hoover’s meddling devastated manufacturing and the country overall.

Hoover triggered much economic destruction from leading the passage and then with his signing of the Smoot-Hawley Act in June 1930.  This protectionist legislation decimated markets and trade and put the U.S. economy even further into a tailspin, which exacerbated the economy that had been on a natural trend towards recovery.  But after Smoot-Hawley was enacted the economy crashed and would not recover for over a decade. [5]  It wreaked havoc on the U.S. economy in other ways.  For instance, there was a sharp increase on 887 tariffs which impacted 3,218 dutiable commodities, which caused as a further devastating action, as prices fell, the effective rate of these tariffs doubled.  This meant foreigners could not sell their products thus they could not purchase American products which destroyed export sells.  Foreign governments retaliated by increasing tariffs on U.S. goods, further weakening American export markets.  American agriculture was nearly all but destroyed, as farmers lost a third of their market, resulting in tens of thousands of farmer going bankrupt.  Markets like wheat went from $1 per bushel in 1929 to 30 cents per bushel by 1930.[6]  To call Hoover President laissez-faire couldn’t be further from the truth.

Moreover, the day Smoot-Hawley Act was signed, the stock market plummeted 20 points from a recovery which had been building since the Great Crash the previous October.  The stock market continued to fall “almost without respite for the next two years…until it reached a mere 41 two years later [from a previous rebound of 294 in April 1930].  It would be a quarter of a century before the DOW would climb to 381 again.[7]

In 1932 Hoover persuaded Congress to pass the Revenue Act, which was one of the largest tax increases during peacetime in American history.  “It doubled the income tax” with top income bracket “soaring from 24 percent to 63 percent.”[8]  “The range of tax increases was enormous…including personal income taxes, estate taxes, sales taxes, and postal taxes.”[9]  This triple punch on the economy, of taxes, increased spending, and inflationist policy, plunged the country even further into a depression.  The Federal government’s revenue fell in 1932 from $12.4 billion to $11.5 billion,[10] while GNP plummeted from $76.3 to $58.5 billion.[11]  In fact, John Locke saw the estate taxes as immoral and against Natural Law.  Locke states:

His labour hath taken it out of the hands of nature where it was common,[12] and belonged equally to all her children, and hath thereby appropriated it to himself…And amongst those who are counted the civilized part of mankind, who have made and multiplied positive laws to determine property, this original law of nature for the beginning of property, in what was before common…is by the labour that removes it out of that common state nature left it in, made his property who takes that pains about it.[13]

This, among other reasons, is ample justification for limited government.

[1] Lee E. Ohanian, August 2009, “What – or Who – Started the Great Depression,” Working Paper 15258, (Cambridge, MA: National Bureau of Economic Research), p. 3.

[2] Lee E. Ohanian, August 2009, “What – or Who – Started the Great Depression,” Working Paper 15258, (Cambridge, MA: National Bureau of Economic Research), p. 2.

[3] Lee E. Ohanian, August 2009, “What – or Who – Started the Great Depression,” Working Paper 15258, (Cambridge, MA: National Bureau of Economic Research), p. 3 and 5.

[4] Lee E. Ohanian, August 2009, “What – or Who – Started the Great Depression,” Working Paper 15258, (Cambridge, MA: National Bureau of Economic Research), pp. 5-6.

[5] Richard K. Vedder and Lowell E. Gallaway, 1997 (originally publish 1993), Out of Work: Unemployment and Government in Twentieth-Century America, (New York, NY: New York University Press), p. 77, also see footnote 4 on page 105 which cites Vedder and Gallaways’ original research study, “What Caused the Great Depression? A Half Century Reassessment (1985),” which complied the data in Table 5.1, Estimated Monthly Unemployment Rates, November 1929-December 1939.  The unemployment rates from December 1929 through November 1930 began a steady from December 1929 through June 1930 then sputtered through October 1930, and from November 1930 on never recovered through the rest of the decade.

[6] Lawrence W. Reed, 2011 (Originally published in 1981), “Great Myths of the Great Depression,” (Midland, MI: Mackinac Center for Public Policy and Irvington, NY: Foundation for Economic Education), p. 6.

[7] Lawrence W. Reed, 2011 (Originally published in 1981), “Great Myths of the Great Depression,” (Midland, MI: Mackinac Center for Public Policy and Irvington, NY: Foundation for Economic Education), p. 7.

[8] Lawrence W. Reed, 2011 (Originally published in 1981), “Great Myths of the Great Depression,” (Midland, MI: Mackinac Center for Public Policy and Irvington, NY: Foundation for Economic Education), p. 8.

[9] Murray N. Rothbard, 2008 (originally published in 1963), America’s Great Depression, (Auburn, AL: Ludwig von Mises Institute), p. 286.   Unfortunately Secretary of Treasury Andrew Mellon, who had supported Presidents Harding and Coolidge in their superb reduction in taxes and spending, supported Hoover’s desires in the tax increases.  

[10] Murray N. Rothbard, 2008 (originally published in 1963), America’s Great Depression, (Auburn, AL: Ludwig von Mises Institute), p. 288.

[11] Murray N. Rothbard, 2008 (originally published in 1963), America’s Great Depression, (Auburn, AL: Ludwig von Mises Institute), p. 289.

[12] The term “common” is used by Locke to mean land which is wilderness and owned by no one, which is available to anyone who puts their labor and effort into it to make it useable.   Land or resources, being gifted by God, becomes their property, and no one else’s, once one’s labor is applied to it.

[13] John Locke, 1982, ed. Richard Cox (originally published in 1690), Second Treatise of Government, “Book V:  Of Property, Sec. 29 and 30,” (Wheeling, IL: Harlan Davidson, Inc.), p. 19 and p. 20.