Coyote Blog

Via Carpe Diem:

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%.

Wow, its sure lucky we don’t have a President today reacting to a recession with profoundly pro-labor policies. Otherwise we might be doing something stupid, like screwing secured creditors in favor of routing value to unions or protecting union health benefits at the cost of everyone else’s health care.

A while back I worried that frequent, random, and unprecedentedly extensive Obama interventions in the economy and private commerce could well cause any economic recovery to stagnate as businesses sat on their wallets waiting for more clarity.   Though the ins and outs of the Great Depression are endlessly debated, there is good evidence that the Depression was extended by just this effect, in particular by the effects of the National Industrial Recovery Act, America’s flirtation with Mussolini-style fascism.

Economist MaxedOutMama (who, to her credit, was sounding alarms last year long before most everyone else including me were) says that there is still a lot to be worried about and that businesses are indeed sitting on their wallets:

The rolling four-quarter change for GDP is now -2.5%. Far more frightening is the same figure for gross private domestic investment, which in Q1 was -23.6%, and has now been falling since fourth quarter 2006! Gross private domestic investment is the fundamental driver of this economy and just about every other economy, and at no time can one ever rack up a such a string of GPDI decreases in an economy without generating a pretty intense recession.

That is the first thing on which every realistic economist must stay concentrated. Talk about a credit crisis does not address the fundamental economic operator, and dumping a lot of stimulus money into the economy will not overcome a recession produced by collapsing GPDI unless it boosts domestic investment – which our stimulus package does not.

In fact, I would argue that government actions over the last 6 months, from executive compensation controls to Waxman-Markey to health care “reform” all do just the opposite — suppress investment by increasing uncertainty.

By the way, the inflation I have been promising for a while has obviously not occured yet.    The Fed says they have it under control.

The Federal Reserve signaled Wednesday that the weak economy likely will keep prices in check despite growing concerns that the trillions it’s pumping into the financial system will ignite inflation.

Fed Chairman Ben Bernanke and his colleagues held a key bank lending rate at a record low of between zero and 0.25 percent. And they pledged again to keep it there for “an extended period” to help brace the economy.

Inflation is this massive rock that takes a while to start moving.  The Fed has pushed the rock right to the top of the mountain but says not to worry, if it starts accelerating down the hill they will be able to stop it.   Don’t believe it.

From here and here:

I haven’t checked these numbers, and they are supposed to be all in real dollars, but YMMV.

So we are going to spend 33% of GDP to avoid a recesion, when the worst recession in history (the Great Depression) had a peak-to-trough GDP loss of about 20%.

Update: This chart is obviously based on a lower estimate.  But it does give one pause when considering the “bailout all due to US laissez faire.”