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Great Myths of the Great Depression

jimtimmy2
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5/22/2013 9:44:03 PM
Posted: 3 years ago
The common story of the Great Depression we are told in the media and our history books is simple. Radical free market fundamentalists like Coolidge and Harding let the market run wild with financial deregulation, tax cuts for the rich, and massive spending cuts.

All of this led to a stock market crash and massive depression caused by overproduction. There was too much production and too much inequality so the masses couldn't buy goods and services. And, of course, there was another free market fundamentalist in charge by the name of Herbert Hoover who believed in laissez faire economics and was a liquidationist who believed that markets had to "correct" in order for prosperity to be restored and thus refused to intervene in any major way.

Thankfully, FDR rode in on a statist white stallion and implemented massive public spending, new social programs, price and wage controls, massive subsidies, expansionary monetary policy, and massive new regulations all funded by deficits and taxation largely aimed at capital.

This all helped the economy recover. But, it was not enough. Finally, World War II broke out and justified the kind of massive public spending and deficits needed to bring about real recovery. The command and control economy brought about by the war ended the depression. What happened after the war is another story for another time.

Of course, anyone who knows anything about history or economics knows that this is absolute nonsense. Yet, we hear this story on the news, in our history books, and from our teachers all the time (at least I did).

This is not even what economists believe these days. Economists typically take some variant of the Friedman view that money was way too tight in the late 1920s and early 1930s which lead to the Great Depression and easing of monetary policy was what led to recovery. That view is wrong too, but it is much less wrong than the view dominant among the public. Even hardcore, old fashioned, "progressive" keynesians who really do think massive deficits ended the Depression acknowledge that many parts of the New Deal did more harm than good.

But, let us look at what really happened. First, Hoover, as anyone who knows anything about Hoover knows, was not anything close to a believer in laissez faire. Indeed, Hoover intervened with price and wage fixing, increases in public spending, unprecedented protectionism, and large tax rate increases. Roosevelt's running mate even called Hoover a socialist in the 1932 presidential election. And, later on, Roosevelt's aides would admit that most of FDR's programs were extrapolated from Hoover programs.

As for Harding and Coolidge, these two presidents were closer to the non interventionists that we hear about in the books. However, their policies actually worked pretty well. In the pre Herbert Hoover 1920s, we saw a Depression that Harding inherited turn into unprecedented prosperity and surpluses that went on through Coolidge. The spending cuts and tax rate cuts of these two administrations were quite successful.

The cause of the crash was, actually, the easy money policy of the 1920s (economists get the stance of monetary policy this decade wrong). Low interest rates led to major malinvestment that needed correction. Unfortunately, the interventionist policies of Hoover and FDR artificially kept wages and prices too high not allowing them to correct. And, the anti business policies of FDR led to regime uncertainty that stifled private investment which saw very little to no recovery under him.

Indeed, the New Deal extended the Depression by about seven years. As for World War II, aggregate economic statistics did recover, but standard of living declined. Private consumption and investment plummeted during the war years. The production increased only because of war goods not consumer goods. Consumer welfare declined. All that happened is that we depleted all of the nation's capital in order to build war goods. This led to a temporary bump in GDP and employment but no real economic progress.

Finally, after the war, there were massive spending cuts and tax rate cuts, some of the New Deal was rolled back, and a new environment of business certainty was brought about. Keynesians predicted doom and gloom in the post war demobilization. Free market economists predicted the opposite. It turns out that the free market economists were right, as they always have been.

The real story of the Great Depression is not one of government intervention saving the free market. Instead, it is one of government intervention creating a problem, failing to solve the problem and actually making it worse in the process, and finally getting out of the way to enough of a degree to watch the problem solve itself.
jimtimmy2
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5/22/2013 9:44:56 PM
Posted: 3 years ago
By the way, I have evidence to support all of my claims here, but I am too lazy to source every single claim. If someone disputes a particular claim with an actual intelligent objection (not just saying I need proof), I will gladly find and provide the evidence.

Also, I posted this in economics too, but I meant to post in politics. But, it is quite relevant to both topics.
Ore_Ele
Posts: 25,980
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5/23/2013 12:25:30 AM
Posted: 3 years ago
http://www.usgovernmentspending.com...

Government did not engage in any serious deficit spending to address the collapse of 1929 until 1932 (when our national deficit went from $0.13 billion in 1931 to $1.63 billion in 1932, in 2005 dollars these numbers would be $1.41 billion in 1931 to $20.18 billion in 1932, the rest is in 2005 dollars). Clearly Hoover was not doing much to resolve the situation, at least not until 2 years after the crash when someone bothered to wake him up. Though he did increase military spending over 50% in his 4 years (from $13 billion to $21 billion) and he increased it every year.

Was he an absolutist LF? No. But he wasn't on page with the standard economic thinking of the time which Roosevelt adopted (mostly). And he certainly wasn't an example of classic statist belief. He was his own entity and his own failure.
"Wanting Red Rhino Pill to have gender"
jimtimmy2
Posts: 403
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5/23/2013 12:42:25 AM
Posted: 3 years ago
At 5/23/2013 12:25:30 AM, Ore_Ele wrote:
http://www.usgovernmentspending.com...

Government did not engage in any serious deficit spending to address the collapse of 1929 until 1932 (when our national deficit went from $0.13 billion in 1931 to $1.63 billion in 1932, in 2005 dollars these numbers would be $1.41 billion in 1931 to $20.18 billion in 1932, the rest is in 2005 dollars). Clearly Hoover was not doing much to resolve the situation, at least not until 2 years after the crash when someone bothered to wake him up. Though he did increase military spending over 50% in his 4 years (from $13 billion to $21 billion) and he increased it every year.

Was he an absolutist LF? No. But he wasn't on page with the standard economic thinking of the time which Roosevelt adopted (mostly). And he certainly wasn't an example of classic statist belief. He was his own entity and his own failure.

First, as usual, you make a simple mathematical mistake. When comparing deficits, you measure them as a share of GDP. You don't measure them as dollar amounts even if you adjust for inflation. I don't know how that changes the math, but the numbers you provided are simply comparing apples to oranges.

Now, I can honestly say that I am not sure what the standard economic thinking of the time was. But, if it was the keynesian, statist type of thinking that would come to dominate academia in the coming decades, then Hoover was totally in line with it. And you neglected to mention the tariffs, tax rate hikes, and price and wage fixing.

Even on spending, however, Hoover was a big statist. For some evidence on that look here:

http://www.theatlantic.com...
Ore_Ele
Posts: 25,980
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5/23/2013 1:25:42 AM
Posted: 3 years ago
At 5/23/2013 12:42:25 AM, jimtimmy2 wrote:
At 5/23/2013 12:25:30 AM, Ore_Ele wrote:
http://www.usgovernmentspending.com...

Government did not engage in any serious deficit spending to address the collapse of 1929 until 1932 (when our national deficit went from $0.13 billion in 1931 to $1.63 billion in 1932, in 2005 dollars these numbers would be $1.41 billion in 1931 to $20.18 billion in 1932, the rest is in 2005 dollars). Clearly Hoover was not doing much to resolve the situation, at least not until 2 years after the crash when someone bothered to wake him up. Though he did increase military spending over 50% in his 4 years (from $13 billion to $21 billion) and he increased it every year.

Was he an absolutist LF? No. But he wasn't on page with the standard economic thinking of the time which Roosevelt adopted (mostly). And he certainly wasn't an example of classic statist belief. He was his own entity and his own failure.

First, as usual, you make a simple mathematical mistake. When comparing deficits, you measure them as a share of GDP. You don't measure them as dollar amounts even if you adjust for inflation. I don't know how that changes the math, but the numbers you provided are simply comparing apples to oranges.

First off, that is false. Comparing the deficit to GDP is one way to help gain perspective on the relative size of the deficit, but it does not invalidate looking at the deficit as a whole.

Secondly, lets compare to the GDP then. In 1931 it was 0.17% and in 1932 it was 2.78%.


Now, I can honestly say that I am not sure what the standard economic thinking of the time was. But, if it was the keynesian, statist type of thinking that would come to dominate academia in the coming decades, then Hoover was totally in line with it. And you neglected to mention the tariffs, tax rate hikes, and price and wage fixing.

Those are not Keynesian policies. Deficit spending is. And as he did not willingly engage in deficit spending until really his last year in office (when the crash was in his first year) it is clearly not part of his core economic philosophy. It was something he changed to at the last minute.


Even on spending, however, Hoover was a big statist. For some evidence on that look here:

http://www.theatlantic.com...

Don't argue off another site. If you have arguments, present them, don't just google "Hoover big spender" and select the first link that comes up (which you totally did).

http://qz.com...

By the way, from my first link and the one above, little real change occurred until 1931. The income taxes never changed until FDR's term (considerably after the crash) and government's total revenue (as a % of GDP) never changed a lot, it always fluttered around 4 - 5% of GDP (peaking at 5.3% in 1930 from 4.4% in 1928 and it was back down to 4.5% by 1932). FDR would drag it up to 8.4% by 1938 (before starting to come back down prior to WW2). So no, he never implemented any tax or revenue of any kind which took any significant money out of the hands of the people.
"Wanting Red Rhino Pill to have gender"
jimtimmy2
Posts: 403
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5/23/2013 4:16:26 PM
Posted: 3 years ago
At 5/23/2013 1:25:42 AM, Ore_Ele wrote:
At 5/23/2013 12:42:25 AM, jimtimmy2 wrote:
At 5/23/2013 12:25:30 AM, Ore_Ele wrote:
http://www.usgovernmentspending.com...

Government did not engage in any serious deficit spending to address the collapse of 1929 until 1932 (when our national deficit went from $0.13 billion in 1931 to $1.63 billion in 1932, in 2005 dollars these numbers would be $1.41 billion in 1931 to $20.18 billion in 1932, the rest is in 2005 dollars). Clearly Hoover was not doing much to resolve the situation, at least not until 2 years after the crash when someone bothered to wake him up. Though he did increase military spending over 50% in his 4 years (from $13 billion to $21 billion) and he increased it every year.

Was he an absolutist LF? No. But he wasn't on page with the standard economic thinking of the time which Roosevelt adopted (mostly). And he certainly wasn't an example of classic statist belief. He was his own entity and his own failure.

First, as usual, you make a simple mathematical mistake. When comparing deficits, you measure them as a share of GDP. You don't measure them as dollar amounts even if you adjust for inflation. I don't know how that changes the math, but the numbers you provided are simply comparing apples to oranges.

First off, that is false. Comparing the deficit to GDP is one way to help gain perspective on the relative size of the deficit, but it does not invalidate looking at the deficit as a whole.

Secondly, lets compare to the GDP then. In 1931 it was 0.17% and in 1932 it was 2.78%.

I'm gonna need to see where you are getting those numbers. They may be right, but I'm skeptical.

Anyways, we do compare deficits as a share of GDP. If GDP was 25% back then of what it is now, a deficit 25% of the size of the deficit now would matter a lot more then than it does now. Comparing total deficit numbers doesn't tell us much about the stance of fiscal policy.

Anyways, the worst Hoover interventions were non spending related. He raised tax rates (that was the only kind of "austerity" he actually engaged in), fixed wages and prices, and instituted protectionism. Those were very major interventions.


Now, I can honestly say that I am not sure what the standard economic thinking of the time was. But, if it was the keynesian, statist type of thinking that would come to dominate academia in the coming decades, then Hoover was totally in line with it. And you neglected to mention the tariffs, tax rate hikes, and price and wage fixing.

Those are not Keynesian policies. Deficit spending is. And as he did not willingly engage in deficit spending until really his last year in office (when the crash was in his first year) it is clearly not part of his core economic philosophy. It was something he changed to at the last minute.

Well. Hoover was an economic statist by all measure. Whether or not he was a keynesian, he was a very radical interventionist.



Even on spending, however, Hoover was a big statist. For some evidence on that look here:

http://www.theatlantic.com...

Don't argue off another site. If you have arguments, present them, don't just google "Hoover big spender" and select the first link that comes up (which you totally did).

Except that is not at all what I did. I actually read her blog and remember her posting about this. Nice attempt to be clever though. And, if another source gives the numbers, there is no problem linking to them.


http://qz.com...

By the way, from my first link and the one above, little real change occurred until 1931. The income taxes never changed until FDR's term (considerably after the crash) and government's total revenue (as a % of GDP) never changed a lot, it always fluttered around 4 - 5% of GDP (peaking at 5.3% in 1930 from 4.4% in 1928 and it was back down to 4.5% by 1932). FDR would drag it up to 8.4% by 1938 (before starting to come back down prior to WW2). So no, he never implemented any tax or revenue of any kind which took any significant money out of the hands of the people.

If you knew anything about tax policy, you would know marginal tax rates matter a lot. Hoover dramatically increased marginal tax rates which was a big deal. I'm surprised you didn't know this very obvious fact that tax rates matter at least as much as tax revenue.
Ore_Ele
Posts: 25,980
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5/23/2013 8:02:54 PM
Posted: 3 years ago
At 5/23/2013 4:16:26 PM, jimtimmy2 wrote:
At 5/23/2013 1:25:42 AM, Ore_Ele wrote:
At 5/23/2013 12:42:25 AM, jimtimmy2 wrote:
At 5/23/2013 12:25:30 AM, Ore_Ele wrote:
http://www.usgovernmentspending.com...

Government did not engage in any serious deficit spending to address the collapse of 1929 until 1932 (when our national deficit went from $0.13 billion in 1931 to $1.63 billion in 1932, in 2005 dollars these numbers would be $1.41 billion in 1931 to $20.18 billion in 1932, the rest is in 2005 dollars). Clearly Hoover was not doing much to resolve the situation, at least not until 2 years after the crash when someone bothered to wake him up. Though he did increase military spending over 50% in his 4 years (from $13 billion to $21 billion) and he increased it every year.

Was he an absolutist LF? No. But he wasn't on page with the standard economic thinking of the time which Roosevelt adopted (mostly). And he certainly wasn't an example of classic statist belief. He was his own entity and his own failure.

First, as usual, you make a simple mathematical mistake. When comparing deficits, you measure them as a share of GDP. You don't measure them as dollar amounts even if you adjust for inflation. I don't know how that changes the math, but the numbers you provided are simply comparing apples to oranges.

First off, that is false. Comparing the deficit to GDP is one way to help gain perspective on the relative size of the deficit, but it does not invalidate looking at the deficit as a whole.

Secondly, lets compare to the GDP then. In 1931 it was 0.17% and in 1932 it was 2.78%.




I'm gonna need to see where you are getting those numbers. They may be right, but I'm skeptical.

My very first source gives government spending (broken down by program) for every year going back to the 1800's.


Anyways, we do compare deficits as a share of GDP. If GDP was 25% back then of what it is now, a deficit 25% of the size of the deficit now would matter a lot more then than it does now. Comparing total deficit numbers doesn't tell us much about the stance of fiscal policy.

The number alone, no. What I was doing was showing how vastly different they changed. A 1500% increase (or something like that) in 1 year (but it was still 3 years after the crash).


Anyways, the worst Hoover interventions were non spending related. He raised tax rates (that was the only kind of "austerity" he actually engaged in), fixed wages and prices, and instituted protectionism. Those were very major interventions.

Links for taxes? As the link I showed, indicated no increased taxes until 1933 and no real increase in revenue.



Now, I can honestly say that I am not sure what the standard economic thinking of the time was. But, if it was the keynesian, statist type of thinking that would come to dominate academia in the coming decades, then Hoover was totally in line with it. And you neglected to mention the tariffs, tax rate hikes, and price and wage fixing.

Those are not Keynesian policies. Deficit spending is. And as he did not willingly engage in deficit spending until really his last year in office (when the crash was in his first year) it is clearly not part of his core economic philosophy. It was something he changed to at the last minute.


Well. Hoover was an economic statist by all measure. Whether or not he was a keynesian, he was a very radical interventionist.

That just goes to show that "statist" is too broad of a term to have any real accuracy in what you are saying. While he may have been some branch of statism, it should be noted that he was vastly different than most statists (as I showed by comparing his stuff to FDR, or we could compare to Keynes)





Even on spending, however, Hoover was a big statist. For some evidence on that look here:

http://www.theatlantic.com...

Don't argue off another site. If you have arguments, present them, don't just google "Hoover big spender" and select the first link that comes up (which you totally did).


Except that is not at all what I did. I actually read her blog and remember her posting about this. Nice attempt to be clever though. And, if another source gives the numbers, there is no problem linking to them.

Oh, it was just coincendence




http://qz.com...

By the way, from my first link and the one above, little real change occurred until 1931. The income taxes never changed until FDR's term (considerably after the crash) and government's total revenue (as a % of GDP) never changed a lot, it always fluttered around 4 - 5% of GDP (peaking at 5.3% in 1930 from 4.4% in 1928 and it was back down to 4.5% by 1932). FDR would drag it up to 8.4% by 1938 (before starting to come back down prior to WW2). So no, he never implemented any tax or revenue of any kind which took any significant money out of the hands of the people.

If you knew anything about tax policy, you would know marginal tax rates matter a lot. Hoover dramatically increased marginal tax rates which was a big deal. I'm surprised you didn't know this very obvious fact that tax rates matter at least as much as tax revenue.

The only thing he did really was Smoot-Hawley, which is how the government generated its revenue for over 100 years. He took it too high and revealed that government needed to change to progress. Which FDR did. He repeal Smoot Hawley and cranked up the income tax. Those are vastly different views on how government ought to generate funds and cannot be labeled together under the same umbrella.

http://en.wikipedia.org...
"Wanting Red Rhino Pill to have gender"
jimtimmy2
Posts: 403
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5/23/2013 9:21:07 PM
Posted: 3 years ago
At 5/23/2013 8:02:54 PM, Ore_Ele wrote:
At 5/23/2013 4:16:26 PM, jimtimmy2 wrote:
At 5/23/2013 1:25:42 AM, Ore_Ele wrote:
At 5/23/2013 12:42:25 AM, jimtimmy2 wrote:
At 5/23/2013 12:25:30 AM, Ore_Ele wrote:
http://www.usgovernmentspending.com...

Government did not engage in any serious deficit spending to address the collapse of 1929 until 1932 (when our national deficit went from $0.13 billion in 1931 to $1.63 billion in 1932, in 2005 dollars these numbers would be $1.41 billion in 1931 to $20.18 billion in 1932, the rest is in 2005 dollars). Clearly Hoover was not doing much to resolve the situation, at least not until 2 years after the crash when someone bothered to wake him up. Though he did increase military spending over 50% in his 4 years (from $13 billion to $21 billion) and he increased it every year.

Was he an absolutist LF? No. But he wasn't on page with the standard economic thinking of the time which Roosevelt adopted (mostly). And he certainly wasn't an example of classic statist belief. He was his own entity and his own failure.

First, as usual, you make a simple mathematical mistake. When comparing deficits, you measure them as a share of GDP. You don't measure them as dollar amounts even if you adjust for inflation. I don't know how that changes the math, but the numbers you provided are simply comparing apples to oranges.

First off, that is false. Comparing the deficit to GDP is one way to help gain perspective on the relative size of the deficit, but it does not invalidate looking at the deficit as a whole.

Secondly, lets compare to the GDP then. In 1931 it was 0.17% and in 1932 it was 2.78%.




I'm gonna need to see where you are getting those numbers. They may be right, but I'm skeptical.

My very first source gives government spending (broken down by program) for every year going back to the 1800's.

Okay. I found actual numbers here. First, on government spending. The government spent $2.96 Billion in 1928, the last full year before Hoover took office. The government spent $4.66 Billion in 1932, the last full year Hoover was in office.

As for deficits, in 1928 we had a $960 Million surplus. In 1932, that surplus had turned into a $2.74 Billion deficit.

As a share of GDP, I could only find numbers back to 1930. Still, in 1930, government spending was 3.4% of GDP and we had a surplus of 0.8% of GDP. By 1932, that had turned into government spending that was 6.9% of GDP and a deficit that was 4% of GDP.

Not exactly a budget cutter.

And, these numbers come from the White House:

http://www.whitehouse.gov...



Anyways, we do compare deficits as a share of GDP. If GDP was 25% back then of what it is now, a deficit 25% of the size of the deficit now would matter a lot more then than it does now. Comparing total deficit numbers doesn't tell us much about the stance of fiscal policy.

The number alone, no. What I was doing was showing how vastly different they changed. A 1500% increase (or something like that) in 1 year (but it was still 3 years after the crash).

You have to look at size of deficit relative to the economy the deficit is in.



Anyways, the worst Hoover interventions were non spending related. He raised tax rates (that was the only kind of "austerity" he actually engaged in), fixed wages and prices, and instituted protectionism. Those were very major interventions.

Links for taxes? As the link I showed, indicated no increased taxes until 1933 and no real increase in revenue.

Hoover raised the top rate from 25% to 63%. It is marginal tax rates that really matter for incentives and Hoover increased those dramatically.

http://en.wikipedia.org...




Now, I can honestly say that I am not sure what the standard economic thinking of the time was. But, if it was the keynesian, statist type of thinking that would come to dominate academia in the coming decades, then Hoover was totally in line with it. And you neglected to mention the tariffs, tax rate hikes, and price and wage fixing.

Those are not Keynesian policies. Deficit spending is. And as he did not willingly engage in deficit spending until really his last year in office (when the crash was in his first year) it is clearly not part of his core economic philosophy. It was something he changed to at the last minute.


Well. Hoover was an economic statist by all measure. Whether or not he was a keynesian, he was a very radical interventionist.

That just goes to show that "statist" is too broad of a term to have any real accuracy in what you are saying. While he may have been some branch of statism, it should be noted that he was vastly different than most statists (as I showed by comparing his stuff to FDR, or we could compare to Keynes)

Not really. Tax hikes, price and wage fixing, increased public spending, and protectionism sounds like standard statism.






Even on spending, however, Hoover was a big statist. For some evidence on that look here:

http://www.theatlantic.com...

Don't argue off another site. If you have arguments, present them, don't just google "Hoover big spender" and select the first link that comes up (which you totally did).


Except that is not at all what I did. I actually read her blog and remember her posting about this. Nice attempt to be clever though. And, if another source gives the numbers, there is no problem linking to them.

Oh, it was just coincendence

I guess so.





http://qz.com...

By the way, from my first link and the one above, little real change occurred until 1931. The income taxes never changed until FDR's term (considerably after the crash) and government's total revenue (as a % of GDP) never changed a lot, it always fluttered around 4 - 5% of GDP (peaking at 5.3% in 1930 from 4.4% in 1928 and it was back down to 4.5% by 1932). FDR would drag it up to 8.4% by 1938 (before starting to come back down prior to WW2). So no, he never implemented any tax or revenue of any kind which took any significant money out of the hands of the people.

If you knew anything about tax policy, you would know marginal tax rates matter a lot. Hoover dramatically increased marginal tax rates which was a big deal. I'm surprised you didn't know this very obvious fact that tax rates matter at least as much as tax revenue.

The only thing he did really was Smoot-Hawley, which is how the government generated its revenue for over 100 years. He took it too high and revealed that government needed to change to progress. Which FDR did. He repeal Smoot Hawley and cranked up the income tax. Those are vastly different views on how government ought to generate funds and cannot be labeled together under the same umbrella.

http://en.wikipedia.org...

You ignore the price and wage fixing and tax hikes. And, SH actually did a lot of harm.