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Two Men Blind to History
Both FDR and Herbert Hoover failed to end the Great Depression. Obama and McCain need to understand why.
We keep being told we’ve learned the lessons of the Great Depression. Have we? McCain and Obama haven’t. On the navigational course we’re offered through the series of perfect storms heading our way, the choice we have is between John McHoover and Herbert Obama.
“While the public monuments of the New Deal are splendid, what made America great, as Hoover recognized, has always been the risk takers”
John McHoover needs to ask why America was the slowest industrialized country to come out of the depression last time. Only in one year before 1940 did unemployment dip below 8 million. National output was cut by more than a half. With similar suicidal rectitude, each European country tried to balance its budget, but Europeans were quicker to adopt the Keynesian solution of financing a deficit when men and machines lie idle. Socialist Sweden, where one in three had been out of work in 1932-3, was back to full employment by 1939. Thanks to massive public investment (in the autobahn, industry—and guns), Germany’s unemployment rate was by 1938 down to 2.1%, Britain’s to 9.3% while America’s soared to 19% in the wake of yet another attempt at budget balancing by FDR in 1936.
By 1938, national incomes in Germany and Britain had exceeded those of 1929. It took until 1941 for that to happen in America when FDR finally went along with the massive deficit financing required to win the war.
Herbert Hoover’s concern to balance the budget led him to call for tax increases when the country was on its knees in 1932.
Herbert Obama does the same. He promises wide-ranging tax increases in a menacing recession, tax increases that will penalize enterprise.
His “tax cuts” are not like President John Kennedy’s, whose tax cut (the largest in US history) did not exclude the middle and upper brackets, “who can thereby be encouraged to undertake additional efforts and...invest more capital." Obama’s “cuts” are more of a welfare program, transferring money from a minority of tax payers to millions of non taxpayers. Millions of small businesses will face increases in marginal rates.
When you put it all together it is quite a deterrent to risk-taking—individuals who pass a threshold of $164,500 of taxable income will pay more tax; McCain’s top rate is 35%, Obama’s is 41%, plus a 5% increase in capital gains tax that might be fuelling some of the stock market panic, and a big increase in payroll tax on incomes above $250,000. Not the way to get people back to work.
The populist rhetoric about fairness is an echo of the silver-tongued Kingfish Huey Long who scared FDR with his slogan, “Every man a king, but no man wears a crown.” Long started a “Share Our Wealth” movement (where have I heard that before?) promising every American family an upper-middle-class fortune without having to work for it, supposedly to be paid for by taking away every last earned cent over a million a year.
Out of fidelity to the special interests in the unions, Herbert Obama also flirts with protectionism. One of the numerous causes of the Great Depression was the Smoot-Hawley Tariff of 1930 that Hoover signed with a gold pen despite the entreaties of a thousand economists that it would lower world trade and invite retaliation. It did.
Obama is not a budget balancer. His program for rebuilding America’s infrastructure is promising. FDR’s Interior Secretary Harold Ickes feared that a quick program of public works invited waste, inefficiency and corruption, but John Maynard Keynes insisted that FDR should weigh the risks of less speed against those of more haste: “He must get across the crevasses before it is dark.” We must surely do the same.
But inspiration aside, FDR cannot be the model. He rejected the advice not just of that clever Brit, John Maynard Keynes the economist, whom he distrusted, but also the advice of the chairman of the Federal Reserve, the peppery Utah banker, Marriner Eccles, who’d seen first-hand what Hoover’s budget balancing had done. FDR went ahead with disastrous tax increases in 1936-7 and so prolonged the depression with a stock market crash and ten million out of work.
If America was to revive, it had to reawaken the “animal spirits” of businessmen, in Keynes’ phrase. Solely increasing the money supply was no use; it was “like trying to get fat by buying a bigger belt.” But throughout the thirties FDR demonized the business community as they stupidly demonized him, and America came out the loser. David Kennedy, a leading historian of the Great Depression, is right: “It wasn’t so much the regulations that the New Deal imposed that intimidated businessmen in the thirties, it was the fear of what new and unknown provocations Roosevelt might unleash.”
Obama demonizes the business community, too, lumping in the bandits of Wall Street with the manufacturers and innovators who dare to earn more $250,000. (Actually, anyone who dares to cross the threshold of $164,500 will pay more in taxes). In this he is closer to FDR than Hoover. But while the public monuments of the New Deal are splendid, what made America great, as Hoover recognized, has always been the risk takers—the Wright Brothers, Philo T. Farnsworth, Thomas Watson, Jr., Malcolm McLean, Herbert Boyer and Robert Swanson, Raymond Damadian, Edwin Land and, in our time, Fred Smith and Steve Jobs.
Obama has a fine team of advisers, but if they’re telling him truths about the history of the Great Depression, he’s listening with one ear.
John Talks Joe
Lloyd Grove is editor at large for The Daily Beast. He is also a frequent contributor to New York magazine and was a contributing editor for Condé Nast Portfolio. He wrote a gossip column for the New York Daily News from 2003 to 2006. Prior to that, he wrote the Reliable Source column for the Washington Post, where he spent 23 years covering politics, the media, and other subjects.
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Jacob Bernstein is a senior reporter at The Daily Beast. Previously, he was a features writer at WWD and W Magazine. He has also written for New York magazine, Paper, and The Huffington Post.
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Jeff Madrick is a contributor to the New York Review of Books and a former economics columnist for the New York Times. He is editor of Challenge Magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.
The Charmed Life of a Traitor
Harold Evans, author of two histories of America, is writing his memoir. Editor at large of The Week, he was editor of The Sunday Times from 1967-81 and The Times from 1981-82, founding editor of Condé Nast Traveler, and president of Random House Trade Group from 1990-97.
Accomplices to Murder
Harold Evans, author of two histories of America, is writing his memoir. Editor at large of The Week, he was editor of The Sunday Times from 1967-81 and The Times from 1981-82, founding editor of Condé Nast Traveler, and president of Random House Trade Group from 1990-97.
Obama's Speech and the Burden of History
Harold Evans, author of two histories of America, is writing his memoir. Editor at large of The Week, he was editor of The Sunday Times from 1967-81 and The Times from 1981-82, founding editor of Condé Nast Traveler, and president of Random House Trade Group from 1990-97.
Yes... and the system we have been using thus far is very superior.Heaven forbid that Senator Obama would do anything that might cause a financial crisis WORLD WIDE.Oops. Too late.
The tax cut strategy is working so well. Why would we want to change anything. Call me old fashioned, but I think wealthy people should not be allowed to keep their wealth during times when others are losing all they have.
Perhaps we need to adopt a "Gipper" reverse play. The now questionable trickle down theory of Reagan and "W" needs to be replaced by a trickle up approach.
A trillion dollar infrastructure rescue placed into the hands of those who were caught up in the mortgage crisis and loss of manufacturing jobs should be considered. Good paying jobs would be created . We all would reap the benefits of improved transit, power,roads and bridges. The money earned by the required workers would create demand for which the tax relieved entrepreneurs could easily develop a supply.
Place relief into the hands of the people instead of the directly into the hands of business. Make business work for its rescue by doing what it has always done best.
A hungry business community stands a much better chance of solving today's problems than the sated, protected "fat cat" that has been created by the buyout.
This on of the worst posts I have read about economics. The Kenesian theory is proven to be a bust and the need for something new is critical. Regulations need to be in place in the financial market and our infrastructure needs to be rebuilt which will enable us to be competitive and produce employment.
I cannot believe that the writer would invoke Hoover as a model. Do you really understand what happen to the people under his administration?
Finally, the system was broken under the Republicans and as usual everything they break Democrats fix. I suggest you just step aside and them do their work. YOU are clueless.
I'm looking forward to the next installment of this post -- the one that subjects John McHoover's tax program to the same sort of analysis as displayed here with Herbert Obama's. "John McHoover needs to ask why America was the slowest industrialized country to come out of the depression last time" is, unfortunately, a much too superficial analysis.
So Europe exited the Great Depression faster than America, exercising the prudent use of deficit financing...what about their tax policy during this time?
My dear Mr. Evans my advice is to comfort yourself with your college copies of Ayn Rand because out here in the real world your ideology is toast. Where is the forum on this webzine for Noble Prize winners in economics?
Uh uh, returning marginal tax rates to Reagan-like levels will chill the ":animal spirits" of entrepreneurs?
Real entrepreneurs innovate because they must. The question is, is there sufficient capital to invest?
There's plenty of capital, which is part of the reason behind the frenetic search for novel investment vehicles. What the economy lacks is consumer demand. We need more jobs and higher wages if we want the economy to grow.
"Supply Side" is an ideology, not an economic theory. May I suggest Evans restrict his writing to his areas of competence?
You forget that half of the problem with our economy is outside the control of the President. Americans aren't making widgets anymore. We are a country full of "Associate Regional Sales Managers" and are importing more goods than we are exporting. Full of sound and fury, signifying nothing; it's no wonder our economy is tanking. All we are selling is talk, and talk is cheap (because it has little resale value). We use phrases like "leveraging assets" and "facilitate" this or that, but do we manufacture something that we can sell to Chinese citizens? No, but the reverse sure is going on. America is only exporting wealth, and largely to China, because they have the best business model of all: they make things.
The second big problem is that we are already redistributing wealth, but from the bottom up. Congress passed a $700 billion bailout plan, but did anyone check the Census Bureau's website to see how many Americans are paying taxes, then divide up the money? I did. The bailout cost each taxpayer $4,913 (assuming you divide up the bill evenly). So, first, you take money from average people. Then, you pump more money into the market to ease the burdens of those who have plenty. The only problem with putting more dollars out there is that you decrease the value of the dollar.
Don't bail them out, let them get killed by up-and-coming competitors who didn't foolishly gamble their money. And pray that someone, somewhere opens a factory that employs Americans and actually makes something someone can buy.
I really enjoyed the author's book "They Made America", which is very different from a Randian screed (as opposed to what other commenters have said). Focusing on Obama, since I hope/think that he will be the one to take on the reins, the swing towards a planned economy is troubling.
For all of his advantages, Obama is and he thinks like a lawyer and a senator. This is great for issues like getting rid of Guantanamo Bay, recapturing our civil liberties, and somehow revitalizing major executive branch institutions that have been rotting for 8 years. However, it also belies an "allocation by deliberation" idea that will dry up opportunities for genuine innovators. Historically, the best innovators were never grant-writers and form-filers. Maybe Obama can dole out the handouts in a more efficient way, but somehow the legalistic burdens of transparency would seem to point to the same form-filing, powerpoint culture that characterizes beurocratic largesse.
Notably, the Chinese bureaucrats are more dedicated and are smarter than their American counterparts. But they don't trust their people, and they have suffered for it. I, for one, welcome the reminder that the best way out of this is the American way and not the Chinese way. This doesn't mean a rush to trickle-down economics, or a reversal of wealth redistribution goals. But, let's not delude ourselves into thinking that wealth redistribution will be the *engine* of growth; rather it should be viewed as the necessary price of stability and only a puzzle piece towards the equality of opportunity goal.
Sounds a little too simple to me, Sir Harold.
We both lived the Depression of 1929 and, tho too young to have appreciated it at the time, I'm surprised that you weren't better informed by your parents about the workout.
Quite simply, the US populace got itself in incredibly deepin the 20s. Porters and shoeshine boys were managing margin stock accounts. They along with most everyone else were totally wiped out in the Crash. Don't think that happened on near the scale elsewhere.
Had we gone beyond the WPA, which was of some help, to massive rearmament as was done elsewhere in the world, we might have come out of the dark days faster and, as well, have been better prepared for the totalitarian threats that faced us in the 1940s. After all, the economy of the US really only turned around during and after WWII.
I thank all the commentators on my contribution. I wrote as an economist and historian, not a politician, so I am at a loss to understand why âfrankly speakingâ believes I have advocated the policies of Herbert Hoover when in fact I criticized John McCain for following Herbert Hoover in obsessing about balancing the budget. Keynes was proved right that raising taxes and cutting spending were exactly the wrong things to do in a depression.Neither Hoover nor FDR ever understood how much demand had to be stimulated to get people back to work, so it is all very well for "franklyspeaking" to say the interest rate structure needs to be fixed but low interest rates, one of the causes of the housing mania, cannot fix the economy when no business enterprise wants to take advantage of them for fear of higher taxes. As for regulation, the key missing piece of regulation was the refusal by the Democrats in Congress to control the reckless spending of Freddie Mac and Fanny Mae.
Personally I don't think anyone, Obama, McCain or even the brightest of Noble prize winning economists would be able to "fix" our economy at this point. The reality is, money has been borrowed too easily at all levels of society by those who cannot pay it back and there is nothing that can be done now to reverse this history. Either the lenders have to take their losses and fold, as many have already, or the economy must shrink to compensate for a renewed effort on the part of borrowers to repay their loans and go without taking new ones. The latter solution is the direction we are heading towards now, where we will see a massive loss of jobs, profits and closing of companies in response to a lack of consumer spending, that up to now, has largely been funded by the way of easy credit.
The discussion being waged by many regarding the tax plan of each candidate and a perceived redistribution of wealth one way or the other is largely academic at this point. Set the taxes to 0% for everyone if you want, it still won't be enough to avert the oncoming wave of economic disaster that is rolling towards us in the wake of a decade of unsustainable living.
"the key missing piece of regulation was the refusal by the Democrats in Congress to control the reckless spending of Freddie Mac and Fanny Mae."
The only problem with this assertion is that the Democrats didn't control Congress at the time the legislation was being passed (2005). The House vote was largely inconsequential, and the steering committee of the Senate decided other measures were more important. If blame is to be placed, it's on the Republicans.
We can't ignore Marriner Eccles's other saying regarding the Depression: "In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped." It's all well and good to decry raising taxes and cutting spending as the death knell of a depressed economy, but one cannot ignore the enormous wealth disparity extant in this country. If Obama's raising taxes on the wealthy, it's because they're the only ones with money to tax.
Thank you.
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