Learning from history: How Hoover’s pro-labor stance helped cause Great Depression

According to a new study, the pro-labor policies of President Herbert Hoover triggered two-thirds of the drop in the nation’s gross domestic product over the two years that followed the stock market crash of 1929. The study, entitled “What — or Who — Started the Great Depression” by Lee E. Ohanian, a UCLA economist, finds that a series of seemingly “pro-labor” decisions were ultimately the worst things that anybody could have done to an economy that was already reeling from the effects of the crash.

“The recession was three times worse — at a minimum — than it would otherwise have been, because of [Hoover’s actions],” says Ohanian, who is also a professor of economics at UCLA.

The policies that Ohanian cites includes propping up wages, encouraging job-sharing, and urging major industries to hold off massive layoffs. These and other actions, as history shows, contributed significantly to the precipitous decline in productivity in the manufacturing sector and sent overall GDP skidding 18 percent of the 27 percent decline by the fourth quarter of 1931.

The report does not attempt to compare today’s economic situation and the Great Depression – attempts  to do so (as pundits on CNN and FOX frequently have done)  are roundly discredited by reputable economists. However, as Ohanian’s study reveals, Hoover’s actions clearly illustrates the perils of ill-conceived government policies in times of economic upheaval and confusion.

Ohanian, a macroeconomist who specializes in study of economic crises, speculates that Hoover’s response clearly “illustrates the danger of knee-jerk policy reactions in a time of crisis. Almost always when bad policies are adopted, it’s during a period of crisis. The real risk is picking a cure that turns out to be worse than the disease.”

While historians and economists have tried to pinpoint the underlying factors that made the Great Depression so “great,” Ohanian’s study is a refreshing new look that quantifies how Hoover’s policies lead to labor-market distortions that ultimately drove down a badly crippled economic system. The study also challenges Hoover’s reputation as pro-market president.

“This was a president who had served as secretary of commerce under his predecessor, yet many of the mistakes he made were remarkably similar to those later made by Franklin D. Roosevelt, whose reputation is much less market-based and more pro-labor,” says Ohanian.

Other economists have also implicated Roosevelt in prolonging the Great Depression and Hoover’s employment policies have been suspect in actually precipitating the epoch. Often-cited and often misunderstood causes of the Depression include banking failures and large contractions of the money supply. However, neither of these events really started taking effect until the 2nd quarter of 1931 — nearly two years after Hoover installed his fateful wage policies.

Moreover, unemployment did not plague the part of the labor force that was exempt from Hoover’s 1929 wage policy. Farm employment remained surprisingly strong and only fell due to changing climatic conditions of the “Dust Bowl” in 1935. But unlike in the manufacturing sector, agricultural wages fell dramatically, by 30 percent.

“Wages fell substantially, but farm employment rates held steady until the Dust Bowl,” Ohanian said.
Despite continued calls from industry for wage cuts in 1930 and 1931, Hoover held industry to their original promise. By late 1931, manufacturers requested that Hoover provide relief in the form of increasing their ability to collude for price-setting purposes. Hoover denied this request. In response, industry signaled they would no longer support the wage freeze.

“In late 1931, industry finally did cut wages, but it was too late,” Ohanian said. “By this point, the economy was in an unprecedented, full-blown depression.”

Read the study, “What — or Who — Started the Great Depression,” can also be found at www.econ.ucla.edu/people/Faculty/Ohanian.html

Findings of the study are scheduled 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 Research as a working paper.

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