Economic History Lesson

Damon W. Root | August 19, 2008

Amity Shlaes, author of the superb book, The Forgotten Man: A New History of the Great Depression, had a very sharp piece in yesterday's Washington Post on the "five non-monetary missteps" that hindered recovery and helped make the Great Depression worse. As Shlaes notes, these mistakes are as relevant today as they ever were. Here's one:

Assuming bigger government will bring back growth. There's a sense today that Washington has retreated too much from daily lives. Wall Streeters mutter that "the system" (the financial markets) doesn't work anymore. In the 1930s, people didn't just mutter that—they believed it. Public-sector expansion seemed the only way to sustain America's promise. New Deal programs did much to alleviate the pain month to month—many found dignity in six months of work at the Works Progress Administration, the Public Works Administration or the Civilian Conservation Corps. But economics is a competition for scarce capital. Such state solutions tended to suppress the creation of long-term private-sector jobs, as did the aggressive Wagner Act for organized labor. The National Recovery Administration, the New Deal's centerpiece, favored large businesses at the expense of small fry. The new Tennessee Valley Authority and Roosevelt's repressive Public Utility Holding Company Act combined to crowd out private utilities that hoped to light up the South. As for Wall Street, those New Yorker magazine cartoons were accurate: Wall Streeters retreated into their martinis and country houses rather than rebuild. This yielded the "Depression within the Depression" of 1937.

Whole thing here. In our January issue, Nick Gillespie talked with Shlaes about FDR, big government, and the death of classical liberalism. Back in 2004, I looked at how the New Deal made life worse for African Americans.

Comments

|8.19.08 @ 12:10PM|#

It'll be different, this time.

We'll make those government make-work jobs permanent.

Brian Defferding|8.19.08 @ 12:18PM|#

The Washington Post article hits some good points, but misses a few. It talks about how Sarbanes-Oxley is to blame for shipping jobs overseas. Huh? I don't think so. Don't get me wrong, I'm not a fan of the SOX laws, but it ain't that reason why they're going overseas, there is far more to the issue than that.

I do like how it talks about the things which not only helped pave the way for the Depression but also prolonged and increased economic damage. It would be nice to put to bed the argument liberals always throw to libertarians that "it was because of lack of government that caused the depression, and the New Deal saved us from it."

|8.19.08 @ 12:29PM|#

Assuming bigger government will bring back growth.

WTF? Does anyone really still believe that taking money out of the private economy via taxes and cycling it through government will increase growth?

There's a sense today that Washington has retreated too much from daily lives.

WTELF?*

*Sorry for the new acronym, but this struck me as so bizarre that the usual What The Fuck? didn't cover it. WTELF = What The Ever-Lovin' Fuck.

|8.19.08 @ 12:50PM|#

Change in the economy happens at the margins, so SOX may very well be responsible for some businesses hitting the Road to Mumbai. But it's impossible to point to specific businesses that can't point to SOX.

The irony of Sarbanes-Oxley and regulatory "solutions" to the excesses of capitalism is that they discourage small firms in favor of larger corporations. When only huge companies with legions of lawyers are able to handle the regulatory burden, then only huge companies with legions of lawyers will remain.

p.s. Next time a liberal claims the New Deal got us out of the depression, ask them why the New Deal how come the depression only worsened after New Deal, and we didn't get out of it until a decade later.

p.p.s. Bonus. Next time a conservative claims WWII got us out of the depression, ask them why there were major shortages and rationings when the economy was supposedly booming.

|8.19.08 @ 12:52PM|#

I'm not drunk. Really I'm not. I just don't know how to use the "Preview" button.

Alan Vanneman|8.19.08 @ 12:53PM|#

Shlaes' book on the New Deal, while obviously slanted, was worth reading, but her WP article is lame. I agree with her that Democratic opposition to free trade is disgraceful, but it isn't going to cause a depression. Roosevelt raised taxes to 90%! Yes, he did, during WWII, when massive government spending finally ended the GD. It's "interesting" that both Ronald Reagan and W have relied on massive government spending to create "Republican" prosperity.

Conservative|8.19.08 @ 1:02PM|#

Next time a conservative claims WWII got us out of the depression, ask them why there were major shortages and rationings when the economy was supposedly booming.

All the production was directed to the war effort. We were supplying all the allies.
As production was centrally planned and mal-investment was the norm, shortages were produced at home in certain categories.

After the War they destroyed the bulk of the surplus production as Keynesians believed there would be enough "stuff" to last us till 1959.

Russ 2000|8.19.08 @ 1:12PM|#

After the War they destroyed the bulk of the surplus production

My dad's favorite story about being in the service in the early 50's was the time he had to drive Jeeps onto an aircraft carrier in Biloxi so they could be dumped into the ocean.

|8.19.08 @ 1:20PM|#

Even though she only mentioned his name twice, it seemed like the article could be summed up as "Obama's economic plan is a bunch of bad ideas."

RCD: Haven't you listened to Obama? It sure sounds like that's what he believes.

Alan V.: Maybe not the protectionism itself, but in combination with higher taxes, more regulation, etc., it certainly won't help.

|8.19.08 @ 1:46PM|#

All the production was directed to the war effort. We were supplying all the allies. As production was centrally planned and mal-investment was the norm, shortages were produced at home in certain categories.

It know it goes against what your High School civics teacher told you, but WWII did not end the depression. While sometimes necessary, wars are always bad for the economy. They're nothing much more than huge make-work programs.

Depressions are usually defined as massive unemployment. If you look at the graphs, sure enough, unemployment ended with the start of WWII. But no new jobs were created, only billets. The number of private sector jobs actually went down during the war. There was a lot of "production" but it was all war production. Private sector production plummeted.

The graphs again show huge production, but it was all bombers and tanks, not private non-government production. "Production" is the creation of supply to meet demand. But other than the government there was no demand for bombers and tanks. The patriotic may have wished for them, but they were not willing to voluntarily purchase them. Instead they were paid for with massive taxes and extensive borrowing by the government. And even the borrowing required extensive war-bond drives because people weren't willing to buy the bonds either.

A healthy economy doesn't have shortages in every good and a black market in ration books. Yet that was the situation in WWII.

|8.19.08 @ 2:21PM|#

The Washington Post article hits some good points, but misses a few. It talks about how Sarbanes-Oxley is to blame for shipping jobs overseas. Huh? I don't think so. Don't get me wrong, I'm not a fan of the SOX laws, but it ain't that reason why they're going overseas, there is far more to the issue than that.

SOX merely ensures that investment bux leave the USA, along with all those jobs.

|8.19.08 @ 2:27PM|#

All true Brandybuck. Also, the economy wasn't so hot in the late 40s either. It really wasn't until the 50s that growth really took off.

|8.19.08 @ 2:33PM|#

What ended the Depression was the fact that all of our major international competitors had their industrial capacity destroyed in the war.

|8.19.08 @ 2:46PM|#

"What ended the Depression was the fact that all of our major international competitors had their industrial capacity destroyed in the war."

Ding...we have a winner.

The rest of this article is lame. How would you economically describe the last eight years? It seems we're destined to say,"we've never had real free market capitalism."
Just as the Soviet friendlies say, we've never had real communism. Great progress.

Peter K.|8.19.08 @ 3:03PM|#

What ended the Depression was the huge government-created demand caused by WWII, what cause the prosperity of the 50s and 60s was the fact all the major competitors were destroyed and the Cold War (hello internet!) helped (plus NASA (big government!).

Then in the 70s the economy ran into various problems and in the 80s Ronnie Raygun was elected, he shot sunlight rays out his ass and the economy recovered.

Shlaes is just trying to rewrite history.

|8.19.08 @ 3:14PM|#

"What ended the Depression was the fact that all of our major international competitors had their industrial capacity destroyed in the war."


That is a load of crap. That assumes that the death of our competetors helps us and that economics is a zero sum game, which is not true.

T|8.19.08 @ 4:56PM|#

That is a load of crap. That assumes that the death of our competetors helps us and that economics is a zero sum game, which is not true.

Sigh. John, if all the factories in Germany are bombed to rubble, and Germans still want stuff, where do they get it from? The people who don't have rubble where factories used to be, perhaps? So the people who have factories can ramp up production by hiring lots of people. This does good things for both economies. See the cause and effect here?

|8.19.08 @ 5:08PM|#

John, our trade surplus after the war was actually higher than our Marshall Plan payouts during the same time.

The only way an economy can grow is by reducing internal inefficiencies or bringing in money from outside. The former happened during the war, with restrictions on consumer goods, and the latter happened after, with increased demand for American goods. If neither of these is happening, increasing govt spending is just a shell game, and will be revealed as such very quickly.

|8.19.08 @ 5:11PM|#

It seems we're destined to say,"we've never had real free market capitalism." Just as the Soviet friendlies say, we've never had real communism. Great progress.

We shouldn't just say that, we should point out how the free-market aspects of our economy have helped and the other aspects have hindered growth. Stalin's useful idiots aren't going to be able to do that.

|8.19.08 @ 5:23PM|#

The only way an economy can grow is by reducing internal inefficiencies or bringing in money from outside.

Oh my God! A real live mercantilist! I thought they all died out in the mid 19th century! Don't be scared, just hold still. We'll find a nice zoo for you to live in...

p.s. A couple of links to WWII and the Great Depression:
http://www.fee.org/Publications/the-Freeman/article.asp?aid=4593
http://www.fee.org/publications/the-freeman/article.asp?aid=4975

|8.19.08 @ 5:38PM|#

Maybe you could point to a way to grow an economy that does not reduce inefficiency or bring money in from outside?

Or you could just keep throwing labels at those who dare question your beliefs. I can tell that you passed fifth-grade history since you have a passing familiarity with mercantilism, but it's clear you may have just as well called me "poop head".

|8.19.08 @ 6:11PM|#

Let's see. The global economy as a whole has been growing fairly well during the past few decades. Is that because we're importing money from outside? Last time I checked there wasn't an outside to import money into the globe from.

The "reducing inefficiency" part is fine, it's the "bring money in from outside" part that is mercantilist.

International trade is beneficial to the economy, but it's not because we're importing Francs or Marks, it's because trade in and of itself is beneficial. I know of no modern economist who still holds to the idea that the importation of money is the driving factor in growth.

Invisible Finger|8.19.08 @ 6:12PM|#

One way to reduce inefficiency is by cutting the size and scope of government. But who wants to do that? You don;t need to bring money in from the outside, you need to stop throwing money already on the inside into economic sinkholes. Ultimately, the only way to grow an economy is with technological innovation.

All true Brandybuck. Also, the economy wasn't so hot in the late 40s either. It really wasn't until the 50s that growth really took off.

And that was only an illusion resulting from the Bretton Woods scheme which collapsed in 1971 because price-fixing schemes always collapse. At times productivity outpaced inflation, but that can only last so long (as the 1920's showed) and only a conversion to a F.I.R.E. economy kept the illusion of paper-based productivity going. A F.I.R.E. economy is not a real economy, and that is what we are going through now. But the will to sustain the F.I.R.E. economy is still greater than the will to emerge from it; both presidential candidates say as much and hired campaign managers and economics advisors who have spent their entire careers in F.I.R.E. occupations.

|8.19.08 @ 6:31PM|#

If your measure of the health of an economy is how much people can produce, you might say that World War II ended the Depression.

But you would be mistaken: The measure of the health of an economy is how much people can consume. Household consumption dropped throughout the Depression, dropped further in 1937, and dropped like a stone during the War.

The only thing that makes World War II look like a recovery is that people didn't mind directing the national industrial focus to making things for the express purpose of destroying them. There was a consensus that the need was dire, and the population considered their household sacrifices worthwhile for the cause of winning the war.

If you actually consider World War II to be a recovery, then you should think that any recession can be solved by taking unemployed people out into the prairie and having them dig ditches on the odd numbered days and fill them in on the even numbered days. It's the same thing.

Invisible Finger|8.19.08 @ 6:42PM|#

John, our trade surplus after the war was actually higher than our Marshall Plan payouts during the same time.

Yeah, from 1950-1962 or so. You're looking at a 12-year bubble based on price-fixing as normal, while ignoring the subsequent crash of the bubble that resulted from the same price-fixing.

|8.19.08 @ 6:45PM|#

Incidentally, the economic fallacy that wars end depressions is one and the same with the presumed economic miracle of 1930's Germany.

If you can convince the populace that their industrial output should be directed to filling the sky with airplanes and the fields with tanks, all for the glory of the Reich or -- on the other side -- in defense against the Reich, then the economy looks productive. After all, it is much easier to plan for next year's military hardware requirements than it is to plan for next year's automobile features or kitchen color schemes. Factories can be filled with apparently productive activity.

But people themselves are not materially better off. Since that should be the end goal of an economy, the economy is not healthier or better than it would be without the military production. Measuring factory output without considering household gain is a pastime fraught with error.

Invisible Finger|8.19.08 @ 6:50PM|#

If you actually consider World War II to be a recovery, then

I think when people say that, they really mean the years immediately following the end of WWII.

But even then we tend to ignore all the government giveaways and protectionism that spurred so much of that growth. The surplus turned into a deficit pretty quickly.

|8.19.08 @ 6:52PM|#

What ended the Depression was the fact that all of our major international competitors had their industrial capacity destroyed in the war.

What ended the Depression was that after fifteen years of privation leading up to 1945, American household demands were easy to read, so industrial output could quickly be directed to fulfill them.

The fact that other economies' industrial plants were in rubble was "good" for some high-profile industries in the US. But the economy of the US as a whole was of course worse off than if those other countries could trade with the US and produce for the US consumer. You'd be daft to think anything else.

Would the US be better off or worse off if Europe had virtually no industrial output today? Why do you think the US was better off with that circumstance in 1945?

|8.19.08 @ 7:40PM|#

What ended the Depression was that after fifteen years of privation leading up to 1945, American household demands were easy to read, so industrial output could quickly be directed to fulfill them.

Come again? So you're saying that depressions automatically end after 15 years? Why didn't the depression end in 1940, is 10 years not enough?

|8.19.08 @ 7:48PM|#

I mean, the idea that the depression continued simply because industry couldn't figure out what Americans needed until 1945 is laughable. Food, shelter, untattered clothes, all would have been in high demand.

|8.19.08 @ 8:24PM|#

Why didn't the depression end in 1940, is 10 years not enough?

World War II was essentially a reset on the economy, bringing capital that was sidelined back into industrial employment to create the easy-to-read demand for war materiel. Once off the sidelines, that capital was brought to bear for consumer needs after the war.

Why couldn't consumer needs be figured out before 1940? Largely because the government kept forcibly misallocating capital and human resources. Economies are complex beasts: Imagining they can be managed from Washington is hubris at its best.

|8.19.08 @ 8:47PM|#

RC Dean wrote: "WTF? Does anyone really still believe that taking money out of the private economy via taxes and cycling it through government will increase growth? "

Just liberals like Larry Kudlow.

|8.19.08 @ 9:03PM|#

"Would the US be better off or worse off if Europe had virtually no industrial output today? Why do you think the US was better off with that circumstance in 1945?"

Er, today would be vastly different because Europe would be buying from Asia or Latin America.

The US was the main industrialized nation post-WW2, and our productive capacity was virtually untouched, unlike the rest of the major industrial powers.

As a *short-term* matter, having everyone's money (or gold) rolling into the US and our manufactured products rolling out is not a bad place to be.

It's not like there was *no* trade going the other way. My father owns a sliderule marked "Made In Occupied Japan". I'm sure smaller industries and luxury goods makers (French fashion designers, German brewers, etc) were able to get back up and running fairly quickly.

|8.19.08 @ 10:07PM|#

Let me be completely tactless: The Great Depression ended because Franklin Delano Roosevelt died. He worsened and prolonged Hoover's depression, and quickly instituted new overreaching government programs anytime recovery looked to be in sight. And while I can't blame him for starting WWII, he did keep his economic controls in place during war, exacerbating the wartime privations.

But if you still think war is good for the economy, then why not advocate the same policies in peacetime? Why not draft everyone and produce bombers and tanks round the clock? We can dump them all in the ocean, giving us exactly the same effect as a war but without the overt loss of life.

|8.20.08 @ 1:09AM|#

Er, today would be vastly different because Europe would be buying from Asia or Latin America.

I don't understand what you are getting at here at all.

The US was the main industrialized nation post-WW2, and our productive capacity was virtually untouched, unlike the rest of the major industrial powers.

I do not dispute this. I dispute claims that this explains why the US economy recovered after World War II. Indeed, if Europe were the economic equal of the US in a free trade regime after 1945, the recovery of the US economy would have been that much stronger.