David R. Henderson  

Horwitz on Hoover's Economic Policies

Murphy on Fiscal Austerity and... Not from The Onion, Affordable...
Many historians, most of the general public, and even many economists think of Herbert Hoover, the president who preceded Franklin D. Roosevelt, as a defender of laissez-faire economic policy. According to this view, Hoover's dogmatic commitment to small government led him to stand by and do nothing while the economy collapsed in the wake of the 1929 stock market crash. The reality is quite different. Far from being a bystander, Hoover actively intervened in the economy, advocating and implementing polices that were quite similar to those that Franklin Roosevelt later implemented. Moreover, many of Hoover's interventions, like those of his successor, caused the Great Depression to be "great"--that is, to last a long time.
This is from Steven Horwitz, "Hoover's Economic Policies," in The Concise Encyclopedia of Economics. It just came out today.

It's a big deal. So many people, as Steve points out above, get Hoover's economic policies wrong. Russ Roberts recommended that I commission an article setting the record straight and Steve has done a stellar job.

Check out the opening quote from FDR advisor Rexford G. Tugwell:

When it was all over, I once made a list of New Deal ventures begun during Hoover's years as Secretary of Commerce and then as president. . . . The New Deal owed much to what he had begun.

And here's a snippet on Hoover's wage policies:
On wages, Hoover revived the business-government conferences of his time at the Department of Commerce by summoning major business leaders to the White House several times that fall. He asked them to pledge not to reduce wages in the face of rising unemployment. Hoover believed, as did a number of intellectuals at the time, that high wages caused prosperity, even though the true causation is from capital accumulation to increased labor productivity to higher wages.

Once, when I was on a radio interview with Robert Reich, I accused him of advocating "Hoover-type wage policy." If I recall correctly, he didn't know how to handle that. Here is, I think, the link.

This article will be, I predict, quite useful for people who want a quick reference for those whom they want to inform about Hoover's policies.

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CATEGORIES: Regulation , Taxation

COMMENTS (10 to date)
Jim Rose writes:

The Federal Government accounted for 4% of GDP back then. who cared if Hoover did not liked your company.

see Rose, Jonathan D. (2010). "Hoover's Truce: Wage Rigidity in the Onset of the Great Depression," Journal of Economic History

Analyzes President Herbert Hoover's role in causing wage rigidity during the onset of the Great Depression, through two conferences in which he encouraged business leaders to maintain high wages.

New data on the set of firms and trade associations attending these conferences provides evidence that Hoover's conferences delayed the cuts in hourly wages at a small number of large firms, although this result may have been due to characteristics of the particular industries the firms represented.

In a cross-section of industries, there is no evidence that industry representation at the December conference affected the timing of wage cuts.

Daniel Kuehn writes:

I think it is right to say that Hoover was an interventionist much like the early Roosevelt administration, but it's also correct when people say that he did not respond to the depression with any appreciable degree of fiscal activism. Hoover's spending levels were comparable to the spending of the Harding administration a decade earlier. They increased modestly against the Coolidge administration and they continued to increase modestly under Roosevelt, but we really didn't have an active fiscal policy to speak of until WWII. I have more on it here: http://factsandotherstubbornthings.blogspot.com/2012/02/depression-era-austerity.html

Hoover was not laissez-faire. He had a well articulated approach known as "associationalism". But he was not especially activist in the area of fiscal policy. He got his do-nothing reputation for a very good reason.

Daniel Kuehn writes:

The Rose article that Jim cites is a really excellent piece of research. I highly recommend anyone interested in Hoover's economic policy take a look at it.

I also have a short article on the wage conferences here: http://mises.org/journals/qjae/pdf/qjae14_4_3.pdf

Jim Rose writes:

Ohanian used the unionisation threat hypothesis to explain how Hoover's offer of protection from them could influence wages

Rothbard rejected unions and the threat of the same as a cause of high wages from 1929 onwards because about 6% of the workforce was unionised

The trouble with employer cartels is they are unstable and therefore short-lived

Bill Conerly writes:

Keynesian models need sticky prices. So why isn't wage flexibility a part of the standard policy response for high unemployment? Instead, we seem to be Hooverizing the economy more than promoting flexibility.

Jim Rose writes:

New Keynesian macroeconomics gave up on sticky wages sometime ago.

Next, the issue was sticky prices, but that did not hold up well. Prices changed a little too quickly (every 4 months rather than once a year). Menu costs were too thin a reed.

Mankiw has trumpeted sticky information in response to a growing awareness that the new Keynesian model is hard to square with the facts including not generating persistent movements in output following monetary shocks

It vindicates Robert Barro’s ‘New Classical and Keynesians, or the Good Guys and the Bad Guys’:
• Instead of providing new theoretical results and hypotheses for empirical testing, the objective often seems to be to provide respectability for the basic viewpoint and policy prescriptions that characterised the old Keynesian models.
• It may well be more rewarding to look instead for new theoretical insights, empirical hypotheses, and policy implications.

Bellante (1992) likewise noted that the search in Keynesian macroeconomics for microeconomic foundations is to blunt criticism, rather than because it is otherwise useful. The analytical apparatus may change, but the policy conclusions are the same.

Mickey writes:

CEE... another one I wish was on Kindle.

Mark V Anderson writes:

I usually don't listen to audios because they take so much time, but I decided to listen to this one. Even apart from his one-off comment on Hoover (which was to Kuttner, not Reich), David did a tremendous job in that interview trying to beat back the drumbeat of regulation. Amazing how well he diagnosed the financial crisis right at the beginning (the audio was in 2008), when as I recall everyone was flailing around trying to understand what was going on. If only the powers that be had paid him more attention.

Mr. Econotarian writes:

The one thing Hoover did not do is devalue the overvalued dollar due to concerns about "payable in gold" clauses in debt contracts, especially mortgages.

FDR just banned gold clauses, and devalued. Partial recovery was swift in 1933.

Of course all of the regulatory efforts started by Hoover and expanded by FDR dragged out a long stagnation after that.

Jim Rose writes:
Partial recovery was swift in 1933

it was very partial as cole and ohanian have explained because of the new deal.

Total hours worked per adult in 1939 remained 21% below their 1929 level - compared to a decline of 27% in 1933

Per capita consumption remaining 25% below trend level throughout the New Deal; per-capita non-residential investment averaged 60% below trend.

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