Myths of the Fall

I often disagree with Robert Reich, but nonetheless find his arguments quite interesting. From what I gather, his forthcoming book (After Shock) is going to situate the financial collapse and the troubled recovery in a longer record of declining wages (a product of the decline of manufacturing) and growing inequality (a product of these declines and changes in tax policy). I have not read the book, but I have heard Mr. Reich speculate that the decline in the savings rate and the growing levels of indebtedness resulted from the disjunction between expectations of improving levels of consumption and the stagnation of real wages for much of the population. There is likely much to this argument, although the fully developed argument would have to take a host of additional factors into account.

Having heard Mr. Reich on NPR the other evening, I dropped by his blog to see if I could find a written version of his argument. No such luck. However, I came upon his critique of the Republican Pledge in an posting entitled “Republican Economics as Social Darwinism.” Let me quote:

John Boehner, the Republican House leader who will become Speaker if Democrats lose control of the House in the upcoming midterms, recently offered his solution to the current economic crisis: “Liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate. It will purge the rottenness out of the system. People will work harder, lead a more moral life.”

Actually, those weren’t Boehner’s words. They were uttered by Herbert Hoover’s treasury secretary, millionaire industrialist Andrew Mellon, after the Great Crash of 1929.

But they might as well have been Boehner’s because Hoover’s and Mellon’s means of purging the rottenness was by doing exactly what Boehner and his colleagues are now calling for: shrink government, cut the federal deficit, reduce the national debt, and balance the budget.

And we all know what happened after 1929, at least until FDR reversed course.

I remain somewhat stunned that the standard issue story of the Great Depression and the Hoover administration continue to find an audience.  It is not as if the data is hard to find. One can go to the OMB’s Historical Tables (Table 1.1 ) and discover the following:

  • 1929: the federal government ran a surplus of $732 million
  • 1930: the federal government ran a surplus of $738 million
  • 1931: the federal government ran a deficit of $462 million
  • 1932: the federal government ran a deficit of $2.7 billion. In dollar terms, this was larger than the deficit in FDR’s first year in office ($2.6 billion)

Compare:

Reich’s claim: The Hoover administration’s response to depression was “shrink government, cut the federal deficit, reduce the national debt, and balance the budget.”

and…

The OMB’s data: As a percentage of GDP (Table 1.2), the deficit incurred during Hoover’s last year in office was 4 percent of GDP. During the decade of the 1930s,  the federal government would run higher deficits in 1933 (4.5 percent of GDP), 1934 (5.9 percent of GDP), and 1936 (5.5 percent of GDP). But its deficits would be the same as Hoover’s last year in 1935, and smaller in 1937 (2.5 percent GDP), 1938 (.1 percent GDP) and 1939 (3.2 percent GDP).

To compare Hoover’s 1932 spending record to more recent years, a deficit of 4 percent of GDP was greater than the US government incurrent from any time from 1993 through 2008. It ballooned to 9.9 percent of GDP (2009) and is estimated to hit 10.6 percent this year (2010).

The Republican Pledge suggests that we can move to a balanced budget via reductions in discretionary spending and an extension of tax cuts, with no serious discussion of entitlements (another myth worth rejecting).

I wonder if we can have serious discussions of large economic policy questions when we work with inaccurate caricatures of the past. The Left tells a story of Hoover and Mellon, champions of laissez faire, heartlessly shrinking the government in the wake of the depression and Roosevelt riding in on a white horse to save the nation’s economy.  The Right tells a story—equally inaccurate—of Great Society social engineers inflating the size of government until Ronald Reagan rode into town, explained that government was the problem, not the solution, and reduced the size and role of government, unleashing the marvels of the market and the private sector.

3 thoughts on “Myths of the Fall

  1. People who cite Mellon’s famous lines always forget that they were ignored by Hoover, who did all the things you mentioned instead.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s