Old myths about the New Deal

We must reject the Hoover-Roosevelt approach to economic policy.

By Patrick R. Gibbons
  • Tuesday, November 4, 2008

Las Vegas Sun publisher Brian Greenspun this week turned his normal column space over to a former assistant professor of economics at the University of Nevada, Las Vegas, Ropchai Premsrirut, who focused on creating jobs in a shrinking economy.

Premsrirut says he once thought that investing abroad and engaging in free trade were good things, since Americans created jobs overseas as we bought inexpensive foreign-made products.

However, now that the economy has tanked (thanks to government mismanagement), Premsrirut reports his thinking has changed. Unfortunately for him, however, the fundamental truths of economics have not changed.

Premsrirut cites statistics from the Great Depression to argue for the collectivist economic policies pushed by Democratic presidential candidate Barack Obama and his running mate, Joe Biden:

"In 1929, the first year of Herbert Hoover's administration, unemployment was at about 3.2 percent. After the stock market crashed in 1929, unemployment climbed to 8.7 percent in 1930, then to 15.9 percent in 1931. It was 23.6 percent in 1932, and as high as 24.9 percent in 1933, before Franklin D. Roosevelt enacted the "New Deal."

In this quote, Premsrirut pushes the idea that the "New Deal" was not around when the Great Depression was at its worst, thus insinuating that a lack of government intervention made the crisis even worse. What Premsrirut misses, however, is that the historical carnage he cites resulted from precisely the kind of policies he and his favorite politicians are pushing.

Like too many denizens of academia, ex- or present, Premsrirut dwells on incorrect notions of the actual causes of the origin and protraction of the Great Depression.  The reality is that not only did the New Deal make the Depression last about seven years longer than it should have, it was government intervention before FDR took office that pushed the U.S. economy from a minor recession into three financial crises and finally into a Depression.

Contrary to many commonly held misconceptions, FDR literally hijacked many of Herbert Hoover's big-government programs and renamed them.  In fact, Rexford Tugwell, one of the architects of the New Deal, said, "We didn't admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started."

By 1931, Hoover's administration had signed off on a Reconstruction Finance Corporation (which, Henry-Paulson-style, handed out federal money to banks and other favored businesses), had launched a Public Works Administration (government-created jobs for pet projects – ever heard of the Hoover Dam?), had restricted immigration and had loaned $300 million to states to help relieve their budget shortfalls.

Hoover was also big on work-sharing laws that outlawed multiple jobs being done by the same person. For example, only an electrician could work on lighting on a construction site, even if the only job was to flip on the circuit breaker.

To finance these big-government programs, Hoover resorted to deficit spending, accumulating more than $2 billion in 1931. Later, Hoover created sales taxes on a host of goods, and the income tax was virtually doubled. Americans were even taxed if they wrote a bank check.

In 1930, Hoover signed the Smoot-Hawley Tariff Act, which doubled many tariffs (taxes paid on foreign goods) on more than 20,000 goods. This provoked world-wide retaliation, as nations drastically increased their tariffs to keep American goods out.  World trade was crippled as a result, and the American economy was devastated further as productivity decreased while unemployment rose drastically.

Hoover's record was far from the laissez-faire fairy tale we hear so much about from politically skewed textbooks and media outlets. In reality, Hoover was a big spender – creating hordes of programs, subsidizing certain industries, raising taxes and creating work programs. Obama's plan is pretty similar, as is McCain's to a lesser extent.

Almost 90 years after the Great Depression started, the myths about how it began and how it ended remain, particularly among academics and members of the media. The reality is that if we choose today to allow government to fix a problem that it created itself, with more programs and more spending, we would be repeating the mistakes that led to the Great Depression.

Patrick R. Gibbons is a researcher at the Nevada Policy Research Institute.

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