The United States is clearly heading towards a full-blown economic depression. Some 26.5 million people have filed for unemployment over the last few weeks — erasing all the employment gains since 2008, with more surely to come — and recent sales data in most economic sectors is apocalyptically bad. The true unemployment rate may already be over 20 percent. It's not at all unrealistic to think the coming decade could resemble the Great Depression of the 1930s.
Indeed, the political reaction is beginning to resemble the '30s in troubling ways already. Congress has passed several enormous economic rescue measures, but it seems the latest bill — containing a boost to the small business bailout, plus some money for hospitals and testing — will be the last one for some time. Senate Majority leader Mitch McConnell is quickly pivoting to austerity, saying that the national debt is too high and suggesting that states should be able to declare bankruptcy instead of being rescued.
The results of this would be nothing less than catastrophic, ensuring the economic crisis would be even worse. And the basic economic misunderstanding and ideological stubbornness behind the impulse shows that America's political class is in desperate need of re-re-learning the lessons of the Great Depression, what it really took to get us out of it, and of the man who refused to fix it, President Herbert Hoover.
For decades, conservatives have been writing preposterous alternative histories trying to absolve conservative policy from exacerbating the Depression. One recent example is a biography, Hoover: An Extraordinary Life in Extraordinary Times, by Kenneth Whyte, which is a lively, readable look at Hoover's long and genuinely astonishing career that nevertheless completely botches the history of the Depression in an attempt to excuse Hoover from his horrible failures.
Whyte casts as much blame as possible on everyone but the president: faulting a corrupt Congress for enacting a big tariff in 1930, the rest of Hoover's party for political fecklessness, and above all Franklin Roosevelt for waging a harsh campaign in 1932 and supposedly refusing to assist Hoover during the transition period from November that year to March 1933 (which is when inaugurations happened at the time).
To begin with, Whyte's narrative of the Depression is grossly wrong. He insists that by 1932, Hoover basically had the problem licked. "Real gross national product, which had declined an average of 9.3 percent a year in 1929, 1930, and 1931, fell a mere 1.3 percent in 1932 … After three years of backbreaking work, Hoover had in fact stopped the depression in its tracks and by most relevant measures forced its retreat."
This doesn't align with how recessions actually work. When an industrialized economy (where most workers get their income and thus their daily sustenance through wages) is hit by some shock, it can fall into a self-perpetuating cycle of collapse. One person's spending is another's income, and so if a big fraction of people lose their jobs, and another fraction stop spending out of fear, then the economy shrinks, businesses fail, and millions are thrown out of work. Those people then lose income and cannot spend, leading to even more business failures and more unemployment, and so on. This can be worsened by deflation — as mass unemployment takes hold and people spend less and less, prices will fall, making money more valuable in the future and thus prompting people to hold onto theirs even tighter.
The government has two main policy levers that affect the whole economy: fiscal policy and monetary policy. The first has to do with taxing and spending, and the second is what the central bank (the Federal Reserve, or Fed) does to affect the supply of credit and prices. If the government cuts taxes and spends more, or the Fed cuts interest rates, then people have more money and the economy will be stimulated. But if the government puts through austerity measures of tax hikes and/or spending cuts, or the Fed hikes interest rates to cut lending, the economy will be slowed.
As Whyte notes, after years of resistance Hoover did approve a modest spending package in 1932, while the Federal Reserve conducted some small purchases of unconventional assets (to try to push money out into the economy). But he quickly pulled back, assuming recovery was just around the corner.
It wasn't. Seen in context, the slight bounce of some economic indicators in 1932 was pitiful indeed. Industrial production did nudge up from a very low base, but personal income continued to fall, as shown in this chart from Milton Friedman and Anna Schwartz's A Monetary History of the United States, which is constructed from National Bureau of Economic Research data:
An important additional factor here is that during the Depression the U.S. was on the gold standard, which limited the state's ability to spend because the state's money was supposed to be backed by a fixed quantity of gold. With a fiat currency system (that is, one that can be printed at will), America can stimulate without limit so long as the economy is depressed, because there can be no inflation so long as there is idle capacity in the form of unemployed workers and idle factories.
Even by the early 1920s many economists had argued it was senseless to tie one's currency to a semi-random commodity, in part because the supply of money was thereby heavily influenced by when miners happened to find new gold strikes. Hoover, however, had an almost theological commitment to the gold standard, viewing it as the foundation of any sound economic policy, and so he flatly refused to consider either fiscal or monetary stimulus at anywhere near the necessary scale to beat the Depression.
As the above Keynesian model would predict, it took the gargantuan stimulus programs and policy sea change of the New Deal to bring back actual growth. On the spending side, those programs — including massive public infrastructure projects, spending to control agricultural prices, and the creation of Social Security — amounted to about 40 percent of 1929 economic output, though their stimulative effects were somewhat hampered by simultaneous tax increases, mainly on the rich. Roosevelt also immediately ditched the gold standard, which effectively devalued the dollar and kick-started recovery. He and Congress completely overhauled the banking system, especially with deposit insurance that permanently ended traditional bank runs (though FDR had to be pushed into accepting this). The Depression was officially ended in March 1933, and inflation-adjusted growth came in at 10.7 percent in 1934, 8.9 percent in 1935, and 12.7 percent in 1935.
Now, the New Deal measures were still short of what Keynesians would recommend, and depression did return in 1937 — but that was because Roosevelt got cold feet and attempted once again to balance the budget, enacting Hoover-style austerity measures to reduce borrowing long before full employment had been reached. The Federal Reserve also tightened monetary policy. Sure enough, that knocked the economy back in recession and threw millions out of work. Roosevelt promptly reversed course, but what finally finished off the crisis was the far larger spending on rearmament during the Second World War. Wartime mobilization finally broke through all the political obstacles to stimulus, this time financed largely by borrowing, which drove the national debt to a record that still stands (at least for the moment). Growth exploded once more, and by 1943 unemployment was down to a microscopic 1.9 percent.
Whyte's claim that Roosevelt deliberately sandbagged recovery to benefit himself politically is also the opposite of true. As historian Eric Rauchway writes in his book Winter War, it was actually Hoover who tried to leverage the crisis to get Roosevelt to abandon his entire political program. Hoover thought the New Deal was creeping communism, and ferociously opposed Roosevelt's proposed relief measures. In a speech right before the election, he said FDR's public works projects would "break down our form of government. It would crack the timbers of our Constitution... Free speech does not live many hours after free industry and free commerce die." In another, he said, "so-called new deals would destroy the very foundations of the American system of life."
Whyte claims that Hoover "would have been content to admit defeat and quietly play out the string on his term," and he "would not have contacted Roosevelt again until the inauguration had not conditions deteriorated further." Whyte notes that Hoover did try to sell FDR on Republican policies, but ultimately agrees with Hoover that Roosevelt "preferred to have conditions deteriorate and gain for himself the entire credit for the rescue operation."
In reality, trying to box Roosevelt in was the entire point of Hoover's outreach. "It would steady the economy greatly," Hoover urged in a letter to him, "if there could be prompt assurance that there will be no tampering or inflation of the currency [and] that the budget will be unquestionable balanced[.]" In a letter to ally Senator David Reed (R-Penn.), Hoover admitted he wanted Roosevelt to endorse "the whole major program of the Republican administration" and abandon "90 percent of the so-called new deal." Even when Roosevelt was nearly shot by an assassin in February 1933, Hoover used the opportunity to write him a nine-page harangue demanding once again the New Deal be abandoned.
Roosevelt was a slippery political animal and he surely wanted to hoard as much political credit for himself as possible. But the plain fact is that Hoover was dead against the measures necessary to fight the Depression. The effect of following his advice would have been to prevent recovery. There was no possibility of collaborating on even a banking rescue, because Hoover opposed the national bank holiday that FDR used to quickly solve the crisis when he took power.
Today the circumstances are somewhat different. Unlike Hoover, modern Republicans are stone hypocrites about the national debt, but they are still ideological zealots and willing to risk disaster to obtain their political goals. For the moment they have grudgingly endorsed stimulus because it benefits President Trump politically, but they are already clearly tempted to leverage the crisis to destroy Medicaid and state public employment. If Biden wins in November, you can expect them with 100 percent confidence to instantly turn on a dime and begin demanding immediate austerity to cut the budget deficit, just as Hoover would have done and just as they did from 2010-16 under President Obama. They will try to strangle the economy and then blame the Democrats for it failing to recover.
The broader lesson for today is that depressions are sticky. Today as in 1932, tens of millions of people have been ruined, and those who haven't are anxious about their own financial position. They will tend to save any excess income rather than spending it, to cushion themselves as well as possible. (We saw this from 2010-2013 as well to a lesser extent.) Therefore, to restore prosperity, the government will have to spend whatever it takes to restore full employment, backed by the Federal Reserve. Only when jobs and income are plentiful will people relax and resume their normal activities.
Should Joe Biden win the presidency and Democrats take control of Congress, it will be absolutely imperative for the country and their own political fortunes to restore economic prosperity as fast as possible. If they give up halfway and pivot to austerity, as Obama did in February 2010, they will be blamed for not fixing the crisis, and lose the 2022 midterms as the party did in 2010, foreclosing the possibility of further stimulus.
Hooverism was and is a disastrous failure that nearly destroyed this country, and it may finish the job if his austerity mindset once again takes hold.
Want more essential commentary and analysis like this delivered straight to your inbox? Sign up for The Week's "Today's best articles" newsletter here.