Hoover's pro-labor stance helped cause Great Depression, UCLA economist says

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."

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 (www.nber.org) as a working paper.

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.

"Hoover's response illustrates the danger of knee-jerk policy reactions in a time of crisis," he said. "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 economists have long debated the factors that led to the Great Depression, Ohanian's findings are novel because they don't simply pinpoint — they also quantify — the considerable impact of such labor-market distortions. The findings also challenge Hoover's pro-market reputation. "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," Ohanian said.

To isolate the culprit of the Depression, Ohanian spent four years sifting through historic wage data from the Conference Board, information from Hoover's own memoirs and press accounts of the Hoover administration. Ohanian also conducted sophisticated economic modeling that allowed him to see how the economy would have progressed had Hoover's policies not been enacted.

At the time, Hoover was concerned about two potential crises, Ohanian found. He was afraid the stock market collapse of October 1929 would result in a recession with deflation, leading to dramatic wage cuts, as a period of deflation had done just a decade earlier. And because of a series of recent legislative and court decisions that had expanded the power of organized labor, he also worried about the possibility of crippling strikes if such wage cuts were to come to pass.

"Hoover had the idea that if wages were kept high for workers and they shared jobs instead of being laid off, they would be able to buy more goods and services, which would help the economy improve," Ohanian said.

After the 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.

Designed to placate labor and safeguard workers' buying power, the step had an unintended effect: As deflation eventually did set in, the inflation-adjusted value of these wages rose over time, effectively giving workers a raise precisely at the time when companies were least in a position to afford such increases and precisely when productivity was beginning to fall.

"The wage freeze effectively raised the cost of labor and, by extension, production," Ohanian said. "If you artificially raise the price of production, your costs go way up and you pass them on to the customers, and they buy that much less."

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 percent and employment by 35 percent.

Overall, the economy suffered, with the GDP falling by 27 percent. In a situation in which wages would have been expected to fall, they remained at about 92 percent of what they had been two years earlier. When adjusted for deflation, they had actually climbed by 10 percent, Ohanian found. Interestingly, during the dreaded period of deflation a decade earlier, some manufacturing wages fell 30 percent. GDP, meanwhile, only dropped by 4 percent.

"The Depression was the first time in the history of the U.S. that wages did not fall during a period of significant deflation," Ohanian said.

The paper, "What — or Who — Started the Great Depression" is not Ohanian's first research on the underlying causes of this dark period in American history. Along with former UCLA economics professor Harold L. Cole (now a professor of economics at the University of Pennsylvania), Ohanian published research in 2004 indicating that Roosevelt's response also had an unintentionally deleterious effect. By their calculations, fallout from Roosevelt's National Industrial Recovery Act (NIRA) dragged out the Depression for seven years longer than a more market-based response would have.

While several other economists have also implicated Roosevelt in the Great Depression's extensive duration, the UCLA research is unique because it is based on mathematical models that pinpointed the exact extent to which Roosevelt's policies prolonged the Depression, according to the UCLA economists. They calculated that the policies accounted for 60 percent of the Depression's duration.

Similarly, Hoover's employment policies have been cited as a precipitating factor in Depression. But the latest UCLA study uses modern economic tools to quantify the impact of the president's wage freeze and job-sharing policies and also provides a theory for why the major industrial businesses followed Hoover's request. By Ohanian's calculation, Hoover's policies accounted for 18 percent of the 27 percent decline in the nation's GDP by the fourth quarter of 1931.

Often-cited causes of the Depression include banking failures and large contractions of the money supply. The problem is, Ohanian says, neither of these events occurred significantly until mid-1931 — nearly two years after Hoover's fateful wage policies.

Moreover, unemployment did not plague the part of the labor force that was exempt from Hoover's 1929 wage policy. While farm employment would be reduced by Dust Bowl climatic conditions in 1935, at the outset of the Depression it remained surprisingly strong, Ohanian found. In fact, hours clocked in the agricultural sector, which comprised about 30 percent of the workforce at the time, were roughly unchanged through 1931. And 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, Ohanian found. 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."

"What — or Who — Started the Great Depression" can also be found at www.econ.ucla.edu/people/Faculty/Ohanian.html

Both Hoover and Roosevelt share responsibility for the Great Depression, but the seeds of the GD were already sown much earlier, before Hoover became President.

Notably...the crash in real estate....esp. after the Florida land boom and bust in the 20’s (a deja vu moment for today’s economic problems...inflated real estate). So many lost money in the Florida real estate boom-bust.

Also, there was much over-production in the ag sector...and the moves to keep ag prices steady.

Also, the world economy was still a basket-case after World War I. Although Europe was in a slow recovery...it still was hammered by the over-bearing German reparations....and the loss of millions of people (mainly young males) in Britain and France due to World War I...you had fewer producers...and consumers (such facts totally dismissed and/or ignored by the Smoot-Hawley Myth advocates)

The big difference between Hoover and Roosevelt was that Hoover was doing things to buy time....and to keep the economy from even dire results....to keep capitalism alive. Roosevelt wanted to totally change everything, and introduce socialism.

Hoover knew, unlike Roosevelt...that Communism was a destructive force. Hoover led the agency that fed millions of Russians/Soviets in the early 20’s, when the policies of the USSR were starving its people.

There seems to be this move afoot....to blame everything related to the Great Depression on what the GOP did....and give Roosevelt a pass. The Liberal Free Trade Globalist crowd is always looking for ways to cover for Roosevelt (who fathered the modern Free Trade Globalist movement with Bretton Woods, the United Nations, and the UN-originated GATT....now known as the WTO)

I get leery when the emphasis on the Great Depression is solely put on pro-American GOP policies (Smoot-Hawley, etc)

This article doesn't provide enough information, but there is a huge missing factor here. The demand for manufactured products declined sharply, meaning the buying power of consumers had dropped. Aggregate demand for manufactured products did not drop because manufacturing wages remained high, but because the normal customers cut back sharply on their purchases.

What happened to demand, to the buying power of customers for manufactured products? And that demand existed (before the declines) at the old wage levels.

This seems like one more study that focuses too much on one factor, but the article doesn't provide enough information.

Both Hoover and Roosevelt share responsibility for the Great Depression, but the seeds of the GD were already sown much earlier, before Hoover became President.

The seeds for an economic correction had been planted.

The big difference between Hoover and Roosevelt was that Hoover was doing things to buy time....and to keep the economy from even dire results....to keep capitalism alive.

Yeah, just like Dubya.

A move afoot? This has been the foot.

I get leery when the emphasis on the Great Depression is solely put on pro-American GOP policies (Smoot-Hawley, etc)

That's not here. To wit, the 2004 study.

"Almost always when bad policies are adopted, it's during a period of crisis"

Add that statement to Rahm Emanuel's statement:

"You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before."

And what does that tell you? They are drooling at the thought of implementing bad policy.

Now add 8 months of a presidency using the above thought process and you get failure after failure after failure.

The proposition is that we’d have had a recession and not a depression, minus the meddling.

Nothing they discuss would have changed the result of the Fed's action and/or inaction that shrunk the money supply by 30% the first four years after the stock market crash.

They sound like the Smoot-Hawley folks who say the same for their favorite boogieman. It just seems like another very narrow focus. The two links below discuss the GD more thoroughly. From the first link:

The great depression and its offspring, the New Deal, could both have been avoided if the Federal Reserve had performed the task assigned to it. All the Federal Reserve had to do to avoid the Depression and the subversion of the American constitutional order was to purchase $1 billion in government securities during the 10-month period from December 1929 to October 1930. The result would have been an increase, instead of decrease, in high-powered money, and the banking crisis that began in the autumn of 1930 would not have occurred.

he Fed's "Depression" and the Birth of the New Deal

http://www.thefreemanonline.org/featured/the-great-depression-according-to-milton-friedman/

"......you had fewer producers...and consumers (such facts totally dismissed and/or ignored by the Smoot-Hawley Myth advocates)"???

You mean the 1.75% deaths occurring as a consequence of war in the participating nations?

That's barely statistically significant.

Smoot-Hawley had a far greater impact as the largest tax on imported goods in American history. It's also worth noting that it was passed as a consequence of a fateful election where Herbert Hoover had made some campaign promises he couldn't meet ~ (agricultural price supports).

The 1929 stockmarket crash (Oct 29, 1929) ocurred on a day when Hoover was asked to redeclare his position on agricultural prices.

It is wrong to ignore the Smoot-Hawley tariff. For the most part it's comparable to Cap & Trade in what it sets out to do ~ which is to THROTTLE BUSINESS SOMEWHERE.

Markets respond profoundly to that idea, whether you're shutting down Canada and Europe with Smoot-Hawley or shutting down the United States and Mexico with Cap & Trade.

Let's recall the words of then candidate Barak Obama in January 2008: "So if somebody wants to build a coal-powered plant, they can; it's just that it will bankrupt them because they're going to be charged a huge sum for all that greenhouse gas that's being emitted."

Business responds to such language, particularly when the speaker gets elected President.

Hoover just wanted to set up a price support system ~ he ended up destroying industry in the United States by setting up prohibitory taxes on imports of industrial goods from Canada and Europe.

Obama says he wants to reduce so-called Greenhouse Gases but he's going about it by destroying industry in the United States ~ it will not be possible for American manufacturing to export to the rest of the world ~ 'cause ~ we won't be making anything anymore ~ and you may have noticed that it's happening already.

we won’t be making anything anymore ~ and you may have noticed that it’s happening already.

Yeah, I noticed.

I used to have a very much fun business selling heavy equipment to the furniture industry.

All of my customers are gone to China.

Yeah, I noticed.

Liberal Free Trade Globalist crowd is always looking for ways to cover for Roosevelt (who fathered the modern Free Trade Globalist movement with Bretton Woods, the United Nations, and the UN-originated GATT....now known as the WTO

First, Roosevelt was an advocate of managed trade not free trade. He and the brain trusters of the first New Deal were muhc high tariff protectionists. They regarded a closed economy as easier to plan than an open one. For this reason, they scuttled proposals to lower tariffs during the London Conference. Second, FDR did not even start reducing tariffs (never unilaterally) until the 1930s via MFN in response to Hitler's policy of economic warfare in Latin America via barter agreements.

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