Lest the recession become a depression. Requires reading for President Obama
If President Obama is truly a new kind of FDR — arriving on the scene to “save” the American economy from itself — then he would be wise to read Amity Shlaes new-ish history of the Great Depression, The Forgotten Man (HarperCollins, 2007). In the book — a surprisingly fast-moving narrative for such a leaden subject — Shlaes points to about a half-dozen major mistakes that Hoover and FDR made in trying to “correct” the struggling economy of the early 1930s.
Critics of Shlaes will point to her libertarian leanings (she is also the author of The Greedy Hand: How Taxes Drive Americans Crazy And What To Do About It; Mariner Books, 2000), and dismiss the book as mere revisionist history. Yet few on either side of the aisle would disagree with the argument that Shlaes helps advance: The central-planning-like policies Hoover and FDR put into place — trade-killing tariffs, increasing labor costs, price setting and other well-intentioned but nonsensical laws intended to stimulate economic growth — took an economic downturn and turned it into a decade-long depression.
In Shlaes' book, there are two forgotten men: One is the tenant of Hooverville — the starving, neglected individual at the “bottom of the economic pyramid,” in FDR's words. The second is the fellow who did have a job, maybe a small one, but struggled along for a decade waiting for New Dealers' policy magic to create an economic recovery that did not come. Shlaes, a Bloomberg News columnist and a senior fellow at the Council on Foreign Relations, argues that the New Deal led to the special interest groups and pork barrel spending we condemn today. The Forgotten Man does show that the 1930s was the decade in which the struggle between the public and private sectors raged — and the public sector prevailed. “Before the 1930s,” Shlaes writes, “the word ‘liberal' stood for the individual; afterward, the phrase increasingly stood for groups.”
Registered Rep.: You picked an incredible time to publish a historical narrative describing the Great Depression. The events today seem eerily similar to those nearly 80 years ago: Natural disasters such as Katrina, failing financial institutions, dour economic news from around the world and the vilification of the private business sector are making headlines again.
Amity Shales: Yes, you read the paper in the morning and say, “Oh, that sounds familiar.” Back then they had a natural disaster — a flooding of the Mississippi. They had a similar banking crisis following a weather event and a high stock market.
Long story short, the message of The Forgotten Man is that the government — under Hoover and FDR — made the economy worse. And the first mistake of the five or six ways the government made it worse was that they mistook deflation for inflation. Both Hoover and Roosevelt, if you go back to 1932, seemed to be vying to see who could get it more wrong. Roosevelt accused Hoover of conducting an inflationary orgy. Isn't that amazing?
RR: That is amazing given the amount of deflation they were suffering then.
AS: Nobody knew what they were talking about. The second thing they did wrong was to blame the market, to blame the messenger. Hoover blamed short sellers for the crash. Of course, shorts sellers were later found to be beneficial for the stock market; they didn't cause the crash. On the contrary, they do good research and often ferret out trouble. So Hoover was really blaming the messenger — and he berated them as troublemakers possessing dubious moral character. That should sound familiar too: This fall, CEOs and regulators were blaming shorts for the woes of financial stocks. The SEC created a list of stocks that could not be shorted, but the shares plummeted anyway.
RR: Everybody loves to hate the shorts. Someone has to take the blame.
AS: Exactly. Another mistake FDR made was in stoking a prosecutorial zeal in Washington. They strung up the Greenspan of their age — Andrew W. Mellon. Mellon served as the Treasury Secretary in the 1920s and he was a greater figure than Greenspan in the 1990s. He led the charge on five tax cuts in the 1920s. But when things got bad, he became unpopular. [Mellon believed in letting weak banks fail.] The Roosevelt Administration accused him of cheating on his personal taxes. [A grand jury declined to indict him; Roosevelt took the case to civil court.] Yet [the power brokers in] Washington kept Mellon in court just about until he died. They couldn't get him on tax evasion, so they charged one of his companies, Aluminum Company of America, with antitrust. He was a kind of most wanted for the Roosevelt Administration, a poster boy for the supposed evils, the “false prosperity” of the 1920s.
RR: Wow — Mellon was once considered a rock star.
AS: The New Dealers substituted retribution for reform, so that's another big error that you want to be concerned about now. A third one is using crisis as a pretext for pushing through a lot of old reforms that you have been carrying around in your kit. They had long wanted to put through a minimum wage, and now the Depression enabled them to do so via the National Recovery Administration and later laws. What did that have to do with stock prices? They pretended that the wage increase had to do with the stock market because they believed that prices needed to go up. The minimum wage was an economy-wide method of getting up the price of labor — albeit a very clumsy method. But it really didn't have anything to do with what happened in the Crash — or with the deflation they were suffering. The minimum wage was an inappropriate tool for addressing monetary troubles — even a crazy tool.
And there were big costs to it — persistent unemployment, mainly. So the point is, don't use a financial crisis as a pretext for your whole social agenda. Just recently Rahm Emanuel, the new advisor to President Obama, said a crisis should never go to waste. That's a similarly problematic statement.
RR: And Obama seems to be aligned with labor.
AS: Don't raise the cost of labor in a downturn — that's a big lesson. Because Obama now has a possibility of increasing labor costs. There are a number of recent pieces of legislation; one is “card check,” which will take away private ballots in the workplace over unionization votes. And that's what the lawmakers have been pushing for years. And another: Don't do protectionism.
RR: Obama indicated somewhere along the line that he'd like to unilaterally renegotiate NAFTA, the North American Free Trade treaty that Clinton negotiated.
AS: I don't want to bash Obama — I actually like many things he says. But we're about to do protectionism by renegotiating NAFTA, yes. Congress really wants it, and that will hurt us both economically and politically.
RR: What's another lesson of the New Deal?
AS: Another easy mistake is raising taxes. You're not supposed to raise taxes in a downturn. But politicians do it. They undid Mellon's tax-cutting revolution of the 1920s. In the New Deal, they went from a top rate of 25 percent into the 60 percent range for the top rate. FDR and his party poured on the taxes, such as the “undistributed profits tax.” This punished a company for doing something wise: sitting on cash to wait for what management thinks is a better time to invest in its business. Those New Yorker magazine cartoons of wealthy men crying into their martinis were accurate. This was a period when business felt there was no way it could win.