Tuesday, August 31, 2010

The Forgotten Man: A New History of the Great Depression

After covering the Great Depression in class-- and the amazing set of bone-headed policies that extended it from a significant downturn to a staggering, more-than-a-decade-long disaster-- my students often ask whether we could have something like that again. And until recently, I had always said that I couldn't imagine us doing what it would take to cause such a calamity again.

These days, I have a different answer. The Great Recession got going-- and is being perpetuated-- by bad policies. And just when you think they might quit messing with the economy, they put their fingers back in the pie again. So, who knows...

The Great Recession opened with an assortment of housing policies over a few administrations, causing a housing bubble. The backdrop included two pricey wars-- one of which shouldn't have happened and one of which should have been much shorter-- as well as President Bush and his Republican Congress passing a dog's breakfast of tax cuts and pursuing massive deficit spending in all realms of government activity.

Under Obama, we've had amazing government spending and debt (including more, futile attempts at "stimulus"), policies that cause higher costs for business (see: health care), and probably worst of all, the inject of tremendous uncertainty into the business decisions that would routinely bring an economy out of a recession (see: tax policy, banking regs, environmental regs). Bush should have known better. Obama didn't know better-- and doesn't seem smart enough to learn the obvious lessons.

Bottom line: It will be, at least, another long 6-9 months. If they keep this up, it could be a long decade.

Why this post today? It's the intro to my review of Amity Shlaes'
The Forgotten Man-- a helpful book for understanding The Great Depression-- and to some extent, The Great Recession. I had heard about it for some time, finally got around to reading it, and now, am finally getting around to blogging about it.

I knew the biggest pieces of the Hoover/FDR policy blunders puzzle: the Smoot-Hawley Tariff Act, four tax increases (including a new tax on labor...brilliant!), and a marked decrease in the money supply under the Fed's passive hand.

Even more important: a variety of policies to keep prices and wages higher-- the inauguration of wage/price floors (including the Supreme Court case against the Schechters for their LOW prices [chapter 8]), the use of "moral suasion" where Hoover persuaded industry to keep wages higher, assorted policies to make farm products and food more expensive (Shlaes notes the pig slaughter/destruction of 1933 to keep pork prices higher; p. 168); and legislation that dramatically strengthened unions and enhanced their bargaining power.

The irony is that we're told that markets could not adjust, but somehow, the same people fail to mention that government was doing everything it could to keep prices and wages from adjusting downward-- exactly what's needed to deal with a recession!

As an aside, it's interesting that Hoover and FDR are so similar to Bush and FDR. Hoover and Bush both have reputations as free-market when they were, in fact, strongly interventionist. And both were modest versions of-- but quite similar to-- what followed. The biggest differences are that:

1.) FDR had a smaller government with which to work, allowing him to try far more intervention and experimentation (the federal government was less than 2% of GDP and smaller than state and local governments [p. 20]; within a year, FDR added 10K pages to the 2,735 pages of federal statute law [p. 202] and increased the staff at the IRS by 45% [p. 205]);

2.) there is not nearly the sense of emergency about today's economy; and

3.) people have (justifiably) less faith in government's ability to fix such things-- or much of anything.

What does Shlaes offer?

She starts with a vignette from 1937-- when it looked like the market was finally going to extricate itself from the government's death grip. But more intervention, including the amazingly stupid initiation of the payroll tax, increased unemployment back to 19%-- in the 6th year of the New Deal (what a success!)-- and driving people to wonder whether the Depression would ever end. (Again, a parallel: we have a tepid recovery-- and quite likely, a "double-dip recession"-- because of our current bone-headed policies.)

I knew about the intervention, but Shlaes describes the "experimentation" of FDR in detail (chapter 5). The most appalling example is his setting the price of gold "from his bed" by various whims: "One day he would move the price up several cents; another, a few more...One morning, FDR told his group he was thinking of raising the gold price by 21 cents. Why that figure? his entourage asked. 'It's a lucky number,' Roosevelt said." (p. 147-148)

Shlaes also depicts the blooming of special interest groups-- and the President's able use of them for political purposes. This emergence makes sense in light of the marked growth of government in this period-- since interest groups enjoy concentrated benefits at the expense of diffuse costs imposed on the general public.

This also relates to the irony and perversion that gives the books its title: "The Forgotten Man". Originally, the term was crafted by William Graham Sumner in 1883 to talk about the little man-- people who could be overlooked or forgotten. In modern political terms, this would refer to those in the general public, who lack political power-- and are likely to be (and are) overlooked by politicians. We see this in a range of unjust policies today. Oddly, FDR and his crew re-worked the term to refer to those in interest groups-- those who had been forgotten (supposedly) and needed to be empowered by the federal government. The fact that their empowerment would come out of the pockets of the (true) forgotten men was never mentioned.

Three little things on FDR to wrap up:

1.) Shlaes describes his efforts to "pack" the Supreme Court-- to subvert the Constitutional safeguards which limited his political efforts. In the run-up to the more aggressive part of that campaign, FDR publicly dissed the Court in a manner reminiscent of President Obama's recent snub in his State of the Union speech. In a speech at Harvard (the alma mater of two of his political enemies), "Roosevelt chose to omit the traditional acknowledgment of the host in his salutation. The audience was shocked, but Roosevelt enjoyed himself." (p. 280) In the margin, I wrote the word "ass".

2.) FDR beefed up tax compliance efforts, but was a hypocrite: "Roosevelt also set out to prove that the intention of taxpayers who failed to complete complex returns correctly was malign: where there was ambiguity, taxpayers ought to be presumed guilty. The was especially disingenuous of the president, for Roosevelt himself would submit an ambiguous tax return for the year 1937." (p. 312)

3.) I have sometimes compared FDR to Reagan in leadership ability: coming to the presidency at a challenging time and moving the country forward-- or at least, leading. Of course, their policies were quite different. But even their styles and dispositions were different: Roosevelt prophesied economic gloom and doom-- whereas Reagan prophesied a hopeful future. I had always pictured Roosevelt as Reagan's parallel in this regard, but apparently, that's not the case.

For those interested in public policy, Shlaes' effort is a must-read. If you're not sure whether you'd be interested, pick it up in a bookstore and read the summary on p. 391-395. If you like that, you'll enjoy the book.


At August 31, 2010 at 1:09 PM , Blogger Keith said...

I've been interested in that book, but time has not been on my side! Thanks for the very insightful breakdown of FDR and comparisons to how stupidity is very good at repeating itself!


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