I’ve commented many times about the misguided big-government policies of both Hoover and FDR, so I can say with considerable admiration that this new video from the Center for Freedom and Prosperity packs an amazing amount of solid info into about five minutes.

Perhaps the most surprising revelation in the video, at least to everyone other than economic historians, is that America suffered a harsh depression after World War I, with GDP falling by a staggering 24 percent.

But we don’t read much about that downturn in the history books, in large part because it ended so quickly.

The key question, though, is why did that depression end quickly while the Great Depression dragged on for a decade?

One big reason for the different results is that markets were largely left unmolested in the 1920s. This meant resources could be quickly redeployed, minimizing the downturn.

But this doesn’t mean the crowd in Washington was completely passive. They did do something to help the economy recover. As Ms. Fields explains in the video, President Harding, unlike Presidents Hoover and Roosevelt, slashed government spending.

New Video Punctures Myths about Great Depression, Exposes Damaging Impact of Statist Policies by Hoover and FDR is a post from Cato @ Liberty - Cato Institute Blog

After three years and $4 trillion in combined deficit spending, unemployment remains stubbornly high and the economy sluggish. That people are still asking what the government can do to stimulate the economy is mind-boggling.

That the Keynesian-inspired deficit spending binge did create jobs isn’t in question. The real question is whether it created any net jobs after all the negative effects of the spending and debt are taken into account. How many private-sector jobs were lost or not created in the first place because of the resources diverted to the government for its job creation? How many jobs are being lost or not created because of increased uncertainty in the business community over future tax increases and other detrimental government policies?

Don’t expect the disciples of interventionist government to attempt an answer to those questions any time soon. It has simply become gospel in some quarters that massive deficit spending is necessary to get the economy back on its feet.

The idea that government spending can “make up for” a slow-down in private economic activity has already been discredited by the historical record—including the Great Depression and Japan’s recent “lost decade.”

Our own history offers evidence that reducing the government’s footprint on the private sector is the better way to get the economy going.

Take for example, the “Not-So-Great Depression” of 1920-21. Cato Institute scholar Jim Powell notes that President Warren G. Harding inherited from his predecessor Woodrow Wilson “a post-World War I depression that was almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933 that FDR would later inherit.” Instead of resorting to deficit spending to “stimulate” the economy, taxes and government spending were cut. The economy took off.

Similarly, fears at the end of World War II that demobilization would result in double-digit unemployment when the troops returned home were unrealized. Instead, spending was dramatically reduced, economic controls were lifted, and the returning troops were successfully reintegrated into the economy.

Therefore, the focus of policymakers in Washington should be on fostering long-term economic growth instead of futilely trying to jump-start the economy with costly short-term government spending sprees. In order to reignite economic growth and job creation, the federal government should enact dramatic cuts in government spending, eliminate burdensome regulations, and scuttle restrictions on foreign trade.

The budgetary reality is that policymakers today have no choice but to drastically reduce spending if we are to head off the looming fiscal train wreck. Stimulus proponents generally recognize that our fiscal path is unsustainable, but they argue that the current debt binge is nonetheless critical to an economic recovery.

There’s no more evidence for this belief than there is for the existence of the tooth fairy.

Not only has Washington’s profligacy left us worse off, our children now face the prospect of reduced living standards and crushing debt.

This article originally appeared in a PolicyMic debate between the Cato Institute’s Tad DeHaven and Demos senior fellow Lew Daly. Check out Daly’s piece here.

We’ve Had Enough Government ‘Stimulation’ is a post from Cato @ Liberty - Cato Institute Blog

Even though he’s become more partisan in recent years, I still enjoy an occasional visit to Andrew Sullivan’s blog. But I was disappointed last night when I read one of his posts, in which he discussed whether government spending helps or hurts economic performance. He took the view that a bigger public sector stimulates growth, and criticized those who want to reduce the burden of government spending, snarkily observing that, “The notion that Herbert Hoover was right has become quite a dogged meme on the reality-challenged right.”

Since I’m one of those “reality-challenged” people who prefer smaller government, I obviously disagree with his analysis. But his reference to Hoover set off alarm bells. As I have noted before, Hoover increased the burden of government during his time in office.

But maybe my memory was wrong. So I went to the Historical Tables of the Budget and looked up the annual spending data. As you can see from the chart (click for larger image), it turns out that Hoover increased government spending by 47 percent in just four years. (If you adjust for falling prices, as Russ Roberts did at Cafe Hayek, it turns out that Hoover increased real government spending by more than 50 percent.)

I suppose I could make my own snarky comment about being “reality-challenged,” but Sullivan’s mistake is understandable. The historical analysis and understanding of the Great Depression is woefully inadequate, and millions of people genuinely believe that Hoover was an early version of Ronald Reagan.

I will say, however, that I agree with Sullivan’s conclusion. He closed by saying it would be “bonkers” to replicate Hoover’s policies today. I might have picked a different word, but I fully subscribe to the notion that making government bigger was a mistake then, and it’s a mistake now.

Andrew Sullivan Has No Idea What He’s Talking about, but I Agree with His Conclusion is a post from Cato @ Liberty - Cato Institute Blog

The standard Keynesian policy proposal for a weak economy is to have the government spend more money, and run deficits to do so.  Clearly much of current government spending is being financed by borrowing.  So current conditions are not subject to the New Deal critique that it was mostly paid for by taxes, as during the Great Depression. Current federal expenditures have increased about 41% since the housing market peaked in 2006.  Has all this government spending generated many jobs?  While keeping in mind that correlation is not the same as causality, it is interesting that the trend in government spending and total non-farm employees mirror one another, but not in the way you’d like.  The more the government has spent, the more people have lost their jobs.  The simple correlation between government spending and jobs has been a negative 0.9.   Also worth noting is that both the decline in jobs and increase in government spending began well before the financial crisis of Sept 2008.  In fact, almost 2 million jobs were lost between the beginning of the recession in Dec 2007 and the financial crisis in Sept 2008.  Again, I won’t pretend this proves anything, however, it does suggest to me that continued massive government spending is not going to turn around the job market.

On Government Spending and Job Creation is a post from Cato @ Liberty - Cato Institute Blog

There’s a great piece in the spring issue of The Independent Review on Federal Reserve Chairman Ben Bernanke by San Jose State Professor Jeffrey Rogers Hummel.  Although a bit long, its well worth the read for anyone wanting to understand both Bernanke’s thinking and his actions during and since the financial crisis.

First, Prof. Hummel discusses the differences between Bernanke’s and Milton Friedman’s explanations for the Great Depression.  Those that debate whether Bernanke’s actions, especially the quantitative easings, would be approved of by Friedman will get a lot out of this discussion.  From this comparison, you get the point that Friedman was concerned about overall credit conditions and liquidity, whereas Bernanke is less focused on the monetary factors than on the impairment of credit intermediation, which explains his support of selective bailouts.

Hummel’s comparison of Greenspan and Bernanke is also insightful, particularly since many (myself included) often lump the two’s policies together.  From the analysis, it is clear that Greenspan falls into the Friedman camp, his “rescues” were of the financial system in general, and not of specific firms.

One might say a bailout is a bailout, so what’s the difference between rescuing the system and rescuing individual firms within the system?  Certainly that’s a view I have some sympathy for.  The “Greenspan put” was as much a contributor to reckless risk-taking as anything else.  Hummel, however, discuses why this difference ultimately matters, and why it shows Bernanke to fit the role of economic central planner.  In short, the facts are presented that during the financial crisis, Bernanke did not actually increase overall liquidity by much, he re-directed it to those firms he deemed most important.  This process of reducing liquidity to some sectors while re-directing it to others, arguably less efficient sectors, goes a considerable distance in explaining some of the decline in both aggregate demand and consumption in 2008.

Again, the piece is one of the more accessible and insightful I’ve read on Bernanke in quite a while.

Ben Bernanke: Central Planner is a post from Cato @ Liberty - Cato Institute Blog

Carrying on an annual tradition dating back to President Franklin Roosevelt, President Obama issued a proclamation on Friday declaring this third week in May “World Trade Week.”

Of course, every week is world trade week at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, but in order to do our part as good citizens, we’ve organized a book forum this Tuesday, May 17, at 4 p.m. on a new book by Dartmouth College economist Douglas Irwin, titled, Peddling Protectionism: Smoot-Hawley and the Great Depression.

The Smoot-Hawley tariff bill is a fitting subject for any World Trade Week. As we note in the invitation:

More than 80 years after its passage, the Smoot-Hawley Tariff Act of 1930 still resonates in today’s debate over trade policy. Advocates of trade blame the law for deepening the Great Depression and warn of the economic damage from a reversion to protectionism. Skeptics of trade say its impact has been exaggerated. Economist and historian Douglas Irwin tells the messy and, at times, amusing story of how Congress dramatically raised tariffs in 1930 just as the world was plunging into depression, and analyzes the economic consequences of the most infamous trade bill ever enacted by Congress. Irwin then draws important lessons that can help today’s trade policymakers avoid the costly mistakes of the past.

Professor Irwin will talk about his book and answer questions about this turning point in U.S. trade history. There is still time to sign up here to attend the event in person at Cato’s F.A. Hayek Auditorium, or you can watch the live video feed online here.

Celebrating ‘World Trade Week’ by Remembering Smoot-Hawley is a post from Cato @ Liberty - Cato Institute Blog

A recurring concern we have heard since the financial crisis erupted is that banks are simply not lending, and that this is holding back economic activity.  If only banks would lend, the economy would grow.  As usual, the truth is a little more complex. 

Unlike in the Great Depression, and despite about 300 bank failures, the balance sheets and deposits of insured commercial banks and thrifts has been steady, if slowly, expanding throughout the financial crisis and recess.  Banks have continued lending during this time; however, they have changed who they are lending to.  Over the last two years we have witnessed a massive shift from lending to the private sector to lending to the public.

The chart below shows banking business lending and bank holdings of U.S. government securities.   The chart suggests that the approximately $500 billion increase in bank lending to Uncle Sam came at the expense of a $400 billion decline in lending to private business.  If one assumes that bank balance sheets have either been stable or increased slightly, then a loan to the government must off-set a loan otherwise made somewhere else.

While its hard to exactly measure the job impact of this reduced business lending, some estimates have been made on the impact of SBA lending.  According to one study, every $41,600 in new small business loans is associated with 1 new job created.   While this number should be taken with a grain of salt, it implies that the $400 billion reduction in business lending has cost over 9 million jobs.  Of course, one might argue that the half-trillion in lending to the govt has created or “saved” some jobs.  Accepting the difficulty of coming up with a reliable estimate, I think its fair to say that on net a few million jobs have been lost due to this shift of lending from the private to the public sector.

Also of interest is that since the financial crisis, and despite the failures of Fannie and Freddie, commercial banks and thrifts have increased their holdings of Fannie/Freddie/Ginnie securities by over $300 billion.

Textbook economics usually teaches that government crowding out of private investment only really occurs when we are near full-employment.  Yet looking at the balance sheets of our commercial banks and thrifts, would suggest that U.S. Treasuries and Agency securities have crowded out significant lending that would otherwise go to the private sector.   But this should come as no surprise, since banks can borrow for close to zero and invest risk-free in government debt, earning a nice spread of 3 to 4 percentage points.

Banks Are Lending, but to Whom? is a post from Cato @ Liberty - Cato Institute Blog

One of the topics Chris Edwards will be discussing with Glenn Beck this evening (5:00 EST, Fox) is the “Not-So-Great Depression” of 1920-21.

Cato Senior Fellow Jim Powell notes that President Warren G. Harding inherited from his predecessor Woodrow Wilson “a post–World War I depression that was almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933 that FDR would later inherit.”

However, instead of calling for bigger government to right the economy, as President Obama did upon inheriting George Bush’s mess, Harding pushed for spending and tax cuts.

The result?

With Harding’s tax and spending cuts and relatively non-interventionist economic policy, GNP rebounded to $74.1 billion in 1922. The number of unemployed fell to 2.8 million— a reported 6.7 percent of the labor force— in 1922. So, just a year and a half after Harding became president, the Roaring Twenties were underway. The unemployment rate continued to decline, reaching an extraordinary low of 1.8 percent in 1926. Since then, the unemployment rate has been lower only once in wartime (1944), and never in peacetime.

The following chart shows federal spending from 1920 to 1940:

Cutting Government Spending in a Recession is a post from Cato @ Liberty - Cato Institute Blog

On its front page today, the Washington Times reports that expanded powers for the Federal Reserve are being opposed by “odd allies.”  The Fed’s imperial over-reach for additional regulatory powers is being opposed by Democrats and Republicans, and liberals and conservatives alike.  As well it should be.  As Senator Shelby observed, “Anointing the Fed as the systemic-risk regulator will make what has proven to be a bad bank regulator even worse.”

The regulation of financial services failed conspicuously to prevent the worst financial crisis since the Great Depression.  The Fed failed most conspicuously as it was charged with oversight of all the major banks, including notably Citigroup and Bank of America. Bank regulation now functions to insulate banks from the consequences of their own bad acts.  The regulatory system enables banks to engage in excessive risk taking.

The Obama Administration and Chairman Barney Frank of the House Financial Services Committee propose that an expanded role for the Fed and generally more of the same will improve matters. Instead, the proposed legislation will worsen the situation by codifying the status of the major financial institutions as “too-big-to-fail.”  It would thereby provide them with special legal status.  We have all seen this movie and how it ends.  Fannie Mae and Freddie Mac had such a status and collapsed.  Do we need 20 more such disasters?

Three cheers for all those opposing this destructive piece of legislation. End “too-big-to-fail” instead.

Fed Opposed by Left and Right is a post from Cato @ Liberty - Cato Institute Blog

• Why there’s no way to enforce a ban on texting while driving.

• How onerous financial rules will only delay economic recovery and dampen long-term growth.

• It’s time to start over on health care reform: “If you’re going the wrong way down a road, the answer isn’t to step on the gas, but to turn around.”

• Is the current recession the worst since the Great Depression? You might be surprised…

• When “history” dials the wrong number.

• Podcast: Will the GOP of 2010 Be led by ideas?

Wednesday Links is a post from Cato @ Liberty - Cato Institute Blog

Recent weeks have seen a swirl of speculation over whether President Obama will or will not re-appoint Ben Bernanke to the Chairmanship of the Federal Reserve Board, when his current term as Chair expires in January 2010. Almost all of the debate has centered on his actions as Chairman. This narrow focus misses an important piece: his actions, and words, as a Fed governor during the build-up of the housing bubble.

What should have been Bernanke’s greatest strength as a Fed governor and later chair, his understanding of monetary theory and his knowledge of the Great Depression, has ended up being a weakness. While correct in his analysis of the role of “debt deflation” — where the deflation increases the real burden of debts and correspondingly weakens the balance sheet of both households and businesses — in the deepening of the Great Depression; his obsession with slaying the Great White Whale of Deflation provided intellectual cover for the Fed’s ignoring and contributing to the housing bubble. Like the proverbial general, he was fighting yesterday’s battle, rather than today’s.

While core inflation was moderate and increasing at a decreasing rate between 2001 and 2005, this measure ignores the dramatic up-tick in house prices during those years. First, housing makes up the single largest expense for most households, ignoring housing, especially after one subtracts out energy and food from the definition of inflation, gives a narrow and distorted picture of inflation. Even if one were to focus solely on rents, the 2000s were an era of increasing housing costs.

Separate from the impact of housing prices on inflation is the role which housing plays as the collateral for the primary piece of household debt: a mortgage. Even were the US to suffer a bout of mild deflation and the real burden of their mortgages increased, this would likely have little impact on household balance sheets in an environment of increasing home prices.

Admittedly Bernanke was then only a “governor” and not yet Chair of the Fed, but he was the Fed’s loudest voice when it came to combating deflation and arguing for lower rates. Additionally there have been zero public acknowledgements by either Bernanke or the Fed that its policy earlier this decade contributed to the housing bubble and financial crisis. Without admitting to the occasional mistake, we have no way of judging whether Bernanke has learned from any of his mistakes, and hence less likely to repeat them.

In weighing Bernanke’s record at the Fed, judgement should not solely consider his actions as Chair, but also consider his words and deeds while the housing bubble was inflating. How one responds to a impending disaster is as important as to how one helps to clean up after the disaster has struck.

Bernanke’s Part in the Housing Bubble is a post from Cato @ Liberty - Cato Institute Blog

President Barack Obama appears to have learned something compared to candidate Obama: protectionism isn’t to America’s advantage.  Unfortunately, it is not clear that Congress has learned the same lesson.  Three free trade agreements negotiated by the Bush administration remain in limbo, while no one is pushing to reinstate the president’s so-called fast track negotiating authority.

And past protectionist actions are now bearing ill fruit.  The “stimulus” bill required that construction money be spent in the U.S.  Although the provision was amended in response to foreign criticism, some Canadian firms have been adversely affected.  So Canadian cities have begun boycotting American products.

Reports Reuters:

Canadian municipal leaders threatened to retaliate against the “Buy America” movement in the United States on Saturday, warning trade restrictions will hurt both countries’ economies.

The Federation of Canadian Municipalities endorsed a controversial proposal to support communities that refuse to buy products from countries that put trade restrictions on products and services from Canada.

The measure is a response to a provision in the U.S. economic stimulus package passed by Congress in February that says public works projects should use iron, steel and other goods made in the United States.

The United States is Canada’s largest trading partner, and Canadians have complained the restrictions will bar their companies from billions of dollars in business that they have previously had access to.

“This U.S. protectionist policy is hurting Canadian firms, costing Canadian jobs and damaging Canadian efforts to grow our economy in the midst of a worldwide recession,” said Sherbrooke, Quebec, Mayor Jean Perrault, also president of the federation that represents cities and towns across Canada.

The municipal officials meeting at the federation’s convention in Whistler, British Columbia, endorsed the measure despite complaints by Canadian trade officials.

Trade Minister Stockwell Day told the group on Friday that Ottawa was actively negotiating with Washington to get the “Buy American” restrictions removed.

Thankfully, this bilateral spat isn’t likely to spark another Great Depression.  However, it illustrates how protectionism is self-defeating.  Other countries will not stand by silently as American legislators attempt to bar their products from the American market.  And U.S. workers will be the ultimate victims as the cycle of retaliation spreads.

Echoes of Smoot-Hawley is a post from Cato @ Liberty - Cato Institute Blog

On Meet the Press last Sunday, Sen. Chuck Schumer (D-NY) said

Those on the hard right say, “Cut government spending, let’s go back to the old Reagan days.” Well, the last president who did this when we were in this type of situation was Herbert Hoover.  Herbert Hoover said the government should do nothing when we were in a recession, not a depression.  We did nothing and it related [sic] to a depression.

Reality check: Did President Hoover cut federal spending during the recession that became a depression? Not by a long shot.

Source: OMB

Federal spending was $3.1 billion (those were the days!) in 1929, the year Hoover took office and the stock market crashed. It rose modestly for two years, then shot up in 1932. It dropped a bit in nominal terms in 1933, though deflation meant that the real budget increased. Then, presumably reflecting Roosevelt’s policies, it shot up again in 1934. In real terms, the federal budget was almost twice as high after Hoover’s four years as it was when he took office.

President Bush, President Obama, and Senator Schumer are all supporting Herbert Hoover’s failed policy of increasing spending to fight recession. Let’s hope they don’t have the same results and turn a recession into a Great Depression.

Cato adjunct scholar Ilya Somin dissects the “Herbert Hoover did nothing” fallacy at Volokh.com.

Chuck Schumer Endorses Hoover Plan is a post from Cato @ Liberty - Cato Institute Blog

There has been much recent debate about whether or not President Franklin Roosevelt’s New Deal policies increased the nation’s economic pain during the Great Depression or led to its end. In today’s Cato Daily Podcast, Regulation Magazine managing editor Thomas A. Firey reveals why erroneous stories about the effects of the New Deal survive despite decades of economic research that tell a different, more nuanced story:

Listening to the fight today among commentators on the left and the right talking about the New Deal and making various claims about it, as far as a stimulus—they’re almost all wrong, and what’s most disturbing to me as an economic historian is this is actually pretty well-plowed ground, so I don’t know how they can be wrong and how no one’s calling them out on it….

…The two stylized stories, the one that nothing got better and the other that the New Deal miraculously fixed everything—both are very clearly wrong when you look at the numbers. But no one wants to tell the real story, because, first of all, it doesn’t fall nicely in an ideological story on either side, and, second of all, it requires work. You have to read stuff and do research and care about the facts, and, let’s be honest, in this political environment, very few people do those things or care about the facts.

More from Firey on the effects of the New Deal.

Add the Cato Daily Podcast to your RSS Feed.

What Did the New Deal Do? is a post from Cato @ Liberty - Cato Institute Blog