Monday, September 13, 2010

Mises Academy: The New Deal, Week 2 - Hoover Was Not A Laissez Faire Capitalist!

The second lecture in Tom Woods’s Mises Academy course on the New Deal revolved around Herbert Hoover. We are often taught to think of Hoover as the champion of capitalism and laissez faire, and that his stalwart defense of these ideals was what led the United States into the depths of depression. Paul Krugman, the NY Times, academia, and other leftist outlets attempt to paint the picture of an arch capitalist Hoover whose failure to intervene in the market destroyed jobs and wages of working Americans. This is complete myth.

Hoover was indeed the destroyer of jobs and incomes as the Great Depression began to take shape. But he was no laissez faire capitalist. In fact he was quite the opposite. Hoover led a government assault to attack economic problems from the very beginning. Some examples that we discussed in class:

1.      High Wage Policy - Hoover did everything he could to ensure that wages were kept artificially high. A poor economist, he confused wage rates with wage income. Like many politicians, to include a great many today, Hoover confused wage rates with wage income. The flawed belief is that high wage rates would end the depression. What was lost on Hoover and the interventionists was that higher rates, especially those mandating wage floors, actually make unemployment worse, and reduce wage income.
2.       Farm Policy – Post WWI there were heavy handed moves of the federal government to prop up and subsidize the agricultural sector. The perception was that the American farmers were hit harder than any other sector as a result of the war. The reality is that the farm sector had done relatively well compared to other sectors. In other words, the crisis was exaggerated to justify the subsidization of the sector. An example of this is the price of wheat being pegged by Congress to $2.26/bushel. This was twice the pre-war price. The higher fixed price led wheat producers to produce considerably more wheat to hope on the gravy train. In the short run wheat producers enjoyed concentrated prosperity relative to the rest of the economy. But as time progressed there was an excess supply of wheat that could not be sold. And then, in the correct anticipation that excess wheat would be dumped, the price of wheat plummeted by more than 50%. Woods points out that the cotton industry had a similar experience.
3.      The Smoot-Hawley Tariff – I recall in high school watching Al Gore debate NAFTA with H. Ross Perot. Taking the free trade position (government definition, not classical), Gore held up a picture of Smoot and Hawley, the accomplices to Hoover who caused the Great Depression. The tariff was originally designed to protect the agricultural sector. After being signed into law by Hoover, the Smoot Hawley Tariff raised duties to an average of 59% on over 25,000 goods. Woods pointed out that the tariffs ill effects were greatly assisted by the Hoover High Wage Policy. Citing Vedder and Gallaway of Ohio University, he pointed out that unemployment numbers would have lower by 3.8% if the tariff had not be enacted. Working in tandem to destroy jobs with the tariff, the high wage policy, per Vedder and Gallaway, accounted for 77% of observed rising unemployment from 1929 and 1932.
John T. Flynn
4.      “Associationalism” – This was the idea of creating trade associations in certain sectors that, with encouragement from the government, would coordinate pricing and output in order to keep competition amongst each other “fair.” If this sounds like a cartel to you, you are right on, at least informally. Hoover was a huge proponent of trade associations and trade boards to attempt to plan and coordinate market functions. As a cartel, albeit informal, the door was open to coercion and force when it came to dealing with issues that were not “fair” or “just.”
5.      White House Conferences – On the idea of “associationalism,” Hoover held series of “White House Conferences.” The purpose of these summits was to encourage businessmen to keep wages high and output and expansion up. These summits were derided by critics as some sort of “supreme economic council.” Woods mentions John T. Flynn, who would come to be one of the most outspoken critics of FDR. 

No comments: