Bill Scher clearly doesn’t like the argument that the government intervention made the Depression of the 1930s great in magnitude. I am flattered that he treats the argument as new and attributes it to me alone, and my book, The Forgotten Man. But Scher is wildly underinformed in this allegation.
For many years now economists and historians of different political backgrounds have been questioning the traditional take on the New Deal. As a reminder: the traditional take is that Hoover hurt the economy because he was a cold man of laissez-faire philosophy. Traditionally, we also heard that Roosevelt’s National Recovery Administration was inspiring. We learned that FDR and his New Deal programs made the country feel better, helped it get back on its feet again, and that World War II cleared the air at the end.
But scholars and economists have been demonstrating the limits of this argument for a long time. Research by his biographer, George Nash, reveals that Hoover was no libertarian. He argued that private property could be a “fetich,” (yes, he spelled it that way) and even wrote of an “increasing tendency to regard right of property not as an object in itself but in the light of a useful and necessary instrument in stimulation of initiative to the individual.” The position of being pro-initiative with a cut-off line sounds familiar — today that cut off is $250,000 in earnings, apparently. In fact Hoover shared a number of traits with FDR — a penchant for high wages in downturns, a penchant for support the union radical John L. Lewis, a habit of blaming the market for trouble. Hoover in fact generated unemployment precisely because he was too progressive and insisted employers pay a prohibitive wage.
The first critics of the New Deal economics were FDR’s own peers. In the 1930s a respectable think tank produced an enormous tome concluding that Roosevelt’s pride, the National Recovery Administration, was on the whole retarding recovery. (The name of that think tank was the Brookings Institution.) A number of economists and journalists spent the 1930s quantifying the way in which the New Deal was doing damage. One was Benjamin Anderson, the economist for Chase National Bank, who concluded that Roosevelt’s pro-union moves had forced companies to give out too much of their profits in wages and therefore denied them the possibility to invest or hire. This argument has lately been updated by Lee Ohanian of UCLA and Harold Cole of Penn. Other New Deal skeptics are interviewed at length in Randall Parker’s books on economists and the New Deal.
Scher says that The Forgotten Man has been “found to have used misleading numbers.” As Scher, quoting some or other, points out, there are differing data on unemployment for the period. The data in The Forgotten Man show unemployment averaging well above ten percent for the decade. Those data are not from some obscure source. They are based off the work of Stanley Lebergott, the authority for the field. The data that Scher praises are the obscurer data. They include make work jobs of short duration. Scher is correct that economy grew off its tiny base in the 1930s. But by the two measures we most frequently use now, unemployment and the Dow, we never got back to the 1920s levels. The data depict a calculus of frustration, the always recovering but never recovered economy. I wrote more about this in the WSJ last winter.
The ideas upon which The Forgotten Man stands come from Nobel Prize winners — Milton Friedman for the monetary aspect (1976), James Buchanan (1986) for the public choice theory. The emphasis on the damages on wage increases without productivity gains comes from Edward Prescott (2004). “In the Great Depression, employment and investment were low because labor market institutions and industrial polices changed, ” Prescott wrote ten years ago in the Minneapolis Fed’s Quarterly Review.
Additional specific work on the New Deal comes from these figures and also, among others, from the coauthors of The Defining Moment – not Jon Alter’s book, which is good and fairly darn skeptical itself. The Defining Moment to which I refer is a book of conference papers edited by Claudia Goldin and Eugene N. White published by the National Bureau of Economic Research almost a decade ago, and, again, including essays by people of all political backgrounds. Last night Senator Obama made the phrase “defining moment” his own so it’s a good time to be aware that many thinkers are debating what kind of defining.