Not in the Stars But in Ourselves

by Crocker on September 22, 2011, 5:28 pm

in Economics,Foreign Policy,History,Politics

Yesterday, we polished our crystal ball and tried to grasp the enormity of a world changing before our eyes. There were references to fate and fatalism but the reality is that what we and the Europeans are experiencing is ultimately the work of our own hands. We did it to ourselves. All of it is the result of bad policy and bad decisions made – for the most part – by well-meaning people with the best of intentions.

This, of course, is nothing new. In fact, it’s a historical refrain repeated endlessly by each new generation that fails to heed the lessons of the past. For history – not theory, not visions of modernity, not wishful thinking about the way things should be – is the only empirical guide that we have. In fact, consulting the behavior of our forebears is the only scientific dataset that means anything in the end.

Take our current economic difficulties, for instance. Let’s look at two pieces of historical datum from US history, closely related in time: the so-called “Great Depression” and the now-forgotton Depression of 1920-21.

As to the Great Depression of the 1930s, it didn’t just ‘happen’. It was helped along by very bad – and very interventionist – policy. While the stock market crashed in October 1929, what’s not generally understood is that the U.S. economy took a long time to tank. In fact, it didn’t reach bottom until 1933.

Although President Hoover is generally remembered as a laissez-faire president who did nothing to arrest the slide into oblivion, quite the opposite is true. He was an interventionist and during his administration he and the Congress misstepped badly. As we watch the players today, let’s compare and contrast with policy errors of the past.

Take protectionism, for example. There was a good deal of talk about protectionism while the Democrats controlled Congress. Both during and after the campaign, President Obama discussed renegotiating NAFTA and Senate Democrats have thus far blocked ratification of free trade agreements with Korea and Colombia to please the unions.

And the world watches and listens – more than we do. When Dr. Doom himself, Nouriel Roubini, warned Democrats right after the 2008 election to avoid protectionist measures, for Koreans it was big news. And the Koreans are typical because the global rumor factory begins here. The Koreans, like much of the rest of the world, depend – really depend – on trade. After two years of additional delays, the Colombians have entered into a free trade agreement with Canada that went into effect in August 2011.

But Hoover and the Congress destroyed world trade with a protectionist measure called the Smoot-Hawley Tariff Act of 1930, which raised U.S. tariffs to historically high levels. From the State Department website:

The original intention behind the legislation was to increase the protection afforded domestic farmers against foreign agricultural imports. Massive expansion in the agricultural production sector outside of Europe during World War I led, with the post-war recovery of European producers, to massive agricultural overproduction during the 1920s. This in turn led to declining farm prices during the second half of the decade. During the 1928 election campaign, Republican presidential candidate Herbert Hoover pledged to help the beleaguered farmer by, among other things, raising tariff levels on agricultural products. But once the tariff schedule revision process got started, it proved impossible to stop. Calls for increased protection flooded in from industrial sector special interest groups, and soon a bill meant to provide relief for farmers became a means to raise tariffs in all sectors of the economy. When the dust had settled, Congress had agreed to tariff levels that exceeded the already high rates established by the 1922 Fordney-McCumber Act and represented among the most protectionist tariffs in U.S. history.

Note carefully that what started out as a discrete measure to help farmers metastasized into a goody-bag for every economic sector. Sound familiar?

As Amity Shlaes has chronicled in her book, The Forgotten Man, the rest of the world watched and warned the U.S. not to enact the tariff. But Congress and Hoover didn’t listen. And the damage is told in subsequent retaliation and crippling of trade. Again, from the State Department website:

[The Act] provoked a storm of foreign retaliatory measures and came to stand as a symbol of the “beggar-thy-neighbor” policies (policies designed to improve one’s own lot at the expense of that of others) of the 1930s. Such policies contributed to a drastic decline in international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934.

Note the numbers and the State Department’s parting shot:

More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations.

Indeed. We know how the 1930s turned out.

The Depression of 1920-21 was a different story, however. There was no intervention by the Federal government other than to cut spending and taxes even though there was a dramatic drop in GDP and prices over a period of mere months:

The 1920-21 recession in the United States was brief relative to the Great De­pression of a decade later, but it included a remarkably sharp price deflation. The decline in the GNP price deflator from 1920 to 1921 is the largest one-year percentage decline in the series in the more than 120 years covered. This is true whether the Department of Commerce [1986] estimates or the recently provided Balke and Gordon [1989] or Romer [1989] estimates are used. These estimates produce one-year deflation figures of 18 per­ cent, 13.0 percent, and 14.8 percent, respec­tively. The closest competitor is the 11.5 percent deflation recorded for 1931-32, the third year of the Great Depression.

Annual data for wholesale prices tell a similar story. Wholesale prices declined by 36.8 percent for 1920-21, the largest one-year decline on record, going back at least to the American Revolutionary War pe­riod.

The 1920-21 deflation contains another striking feature. Not only was it sharp, it was large relative to the accompanying decline in real product. The ratio of the percentage decline in the GNP deflator for 1920-21 to the percentage decline in real GNP is 2.6 using the Department of Com­merce figures, 3.7 using the Balke and Gordon data, and 6.3 using the Romer data. By contrast, during 1929-30, the first year of the Great Depression, the GNP deflator declined by 2.7 percent and real GNP by 9.4 percent, for a ratio of 0.3. The ratios of the percentage decline in GNP prices to the percentage decline in real GNP for 1930-31, 1931-32, 1932-33, and 1937-38, the other Great Depressionyears in which real GNP declined, were 1.0, 0.9, 1.2, and 0.3, respectively, all well below the 1920-21 figures.

The lesson here is that the country was up and out of the 1920-21 recession within 18 months and the “Roaring 20s” followed. Think of the failed interventions implemented over the past three years. Every new effort increases the anxiety that stalls economic growth and pushes us further into debt. Would it not have been better simply to fall down the stairs and get it over with rather than endure painful decline that will create the same result in the end?

Again, it’s not in the stars.

Be Sociable, Share!

Previous post:

Next post: