Monday, August 31, 2009

Hoover's Pro-Labor Policy Caused Great Depression

UCLA -- Pro-labor policies pushed by President Herbert Hoover after the stock market crash of 1929 accounted for close to two-thirds of the drop in the nation's gross domestic product over the two years that followed, causing what might otherwise have been a bad recession to slip into the Great Depression, a UCLA economist concludes in a new study.

"These findings suggest that the recession was three times worse — at a minimum — than it would otherwise have been, because of Hoover," said Lee E. Ohanian, a UCLA professor of economics.

The policies, which included both propping up wages and encouraging job-sharing, also accounted for more than two-thirds of the precipitous decline in hours worked in the manufacturing sector, which was much harder hit initially than the agricultural sector, according to Ohanian.

"By keeping industrial wages too high, Hoover sharply depressed employment beyond where it otherwise would have been, and that act drove down the overall gross national product," Ohanian said. "His policy was the single most important event in precipitating the Great Depression."

After the stock market crash, Hoover met with major leaders of industry and cut a deal with them to either maintain or raise wages and institute job-sharing to keep workers employed, at least to some degree, Ohanian found. In response, General Motors, Ford, U.S. Steel, Dupont, International Harvester and many other large firms fell in line, even publicly underscoring their compliance with Hoover's program. Reluctant to lower wages due to Hoover's entreaties, employers in the manufacturing sector responded by reducing the work week and laying off workers. By September 1931, the manufacturing sector was already hurting: Hours clocked by workers had fallen by 20% (see chart above) and employment by 35%.

Overall, the economy suffered, with the GDP falling by 27%. In a situation in which wages would have been expected to fall, they remained at about 92% of what they had been two years earlier. When adjusted for deflation, they had actually climbed by 10%, Ohanian found. Interestingly, during the dreaded period of deflation a decade earlier, some

manufacturing wages fell 30%. GDP, meanwhile, only dropped by 4%.

The findings are slated to appear in the December issue of the peer-reviewed Journal of Economic Theory and were posted today on the website of the National Bureau of Economic Reasearch as a working paper (full paper here).

Hoover's approach is unlikely to be considered today as a means of responding to economic crisis, but it does illustrate the perils of ill-conceived government policies in times of economic upheaval and confusion, says Ohanian, a macroeconomist who specializes in economic crises.

Originally posted at
Carpe Diem.


At 8/31/2009 10:02 PM, Blogger PeakTrader said...

There are differences on causality:

The Great Depression of 1929 - Could It Happen Again?
By Kimberly Amadeo,

According to Ben Bernanke, the stock market crash and the subsequent Depression were actually caused by tight monetary policies that the Federal Reserve instituted at that time.

Bottom line...thanks to the Fed, there was just not enough money in circulation to get the economy going again. Instead of pumping money into the economy, and increasing the money supply, the Fed allowed the money supply to fall 30%.

My comment:

Given the credit freeze after Lehman failed, in Sep '08, the economy fell off a cliff, and there was too little money chasing too many assets and goods.

At 9/01/2009 12:33 AM, Anonymous Anonymous said...

Note that Bernanke also had that a lot of banks failed wiping a lot of money out.
On another point consider that Hoover was likley concerned about rebellion and revolution. The US had gotten more urbanized since the crash before and booze was not available as a pain killer at the time. (prohibition). Given the Bonus march and concern about a (Facist,Communist) revolution at the time he was trying to keep society stable.

At 9/01/2009 1:40 AM, Blogger Fred said...

Key background: Hoover was a big believer in the economics of Foster & Catchings -- i.e. the brand of Keynesian economics developed _before Keynes_ which did more to change the thinking of politicians and economists than even the work of Keynes.

At 9/01/2009 9:26 AM, Blogger juandos said...

Then: The Forgotten Man

Now: America's Record Recession

The only difference is time...

At 9/01/2009 9:49 AM, Anonymous Junkyard_hawg1985 said...

I think this oversimplifies Hoover's screw-up. He also made two other significant awful decisions. First, he signed the Smoot-Hawley tariff act which destroyed trade. He also raised the top income tax rate from 25% to 63% making investment by the wealthy less appealing. The pro-labor policy may have hurt, but it was minor compared to these two items.

At 9/01/2009 11:49 AM, Blogger juandos said...

"First, he signed the Smoot-Hawley tariff act which destroyed trade. He also raised the top income tax rate from 25% to 63% making investment by the wealthy less appealing"...

Bravo! Bravo!

It never hurts to hear the complete history lesson repeated...

Thanks for that Junkyard_hawg1985...

At 9/01/2009 11:57 AM, Blogger juandos said...

We can thank the socialist/pro labor policies of FDR's New Deal for prolonging the Depression by seven years...

At 9/01/2009 1:24 PM, Anonymous gettingrational said...

I read the article and came away with this conclusion: Hoover liked collusion among business interests and/or monopoly positions. The favored companies then wanted to keep out unions so they kept wages at a point where unions would not be voted in ( higher wages, strikes, work rules, more holidays would be avoided).

In the articles and other articles it is stated that the monopoly companies stayed in business, with profits (substantially lessened) during the Depression. There was no one cause but the inelasticity of wages on the part to of colluding businesses a major cause of this economic castophre.

I don't think the Justice Department has been effective in identifying colluding business practices (such as trade associations mentioned in the article) whose main purpose is to divide up the business pie for themselves since 1990.

At 10/01/2009 4:48 AM, Anonymous protein supplements said...

I think hoover made significant awful decision when he signed the Smoot-Hawley tariff act which destroyed trade.


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