Monday, April 27, 2015

Hoover leads decline of economy

There are many people who continue to blame the stock market crash of 1929, and the Great Depression that followed, on the economic policies set forth by Warren G. Harding and Calvin Coolidge (supply-side economics). Yet a better place to find blame would be in the economic policies of Herbert Hoover. 

It is true that the economic miracle that took place during the 1920s was a direct result of Warren G. Harding cutting federal spending by 40 percent, and the tax cuts of both Harding and Calvin Coolidge. 

These events in and of  themselves resulted in good economic times, and when similar events have occurred in later years -- John F. Kennedy, Ronald Reagan, and George W. Bush all cut taxes, although never reined in spending -- similar results were observed, where federal revenue increased and the economy grew. It is quite clear that federal spending and taxes must be kept below a certain level for optimal economic prosperity, as the Laffer Curve suggests.

So, then, what caused the events leading up to the Great Depression?

One theory is that Americans were so indulged in their own happiness during the 1920s that they failed to notice inflation and unemployment were increasing.  There were also not enough regulations in place to monitor business activity, meaning that no one was monitoring to assure workers were getting fair pay and treatment.  There was also little insurance on invested monies to assure it would not become lost in the case of an economic collapse.

To go along with this, you also have to consider beliefs that were prevalent at this time.  During WWI Woodrow Wilson proclaimed that it was the war to end all wars. So there weren't supposed to be any more wars, meaning the world was in a state of world peace.

It was also believed that alcohol was the cause of all crime, so when prohibition was passed there was supposed to be no more crime.  Since there was no crime and no more wars, that meant no more bad people, and therefore there was no pressing need for rules and regulations.  So this also could explain the self absorption without monitors. 

In other words, with the Roaring 20s in full bloom, people believed they had created a euphoric nation, and they figured it would last forever. Evidently they were wrong, but this is what they believed.  So to blame the collapse of the economy solely on the economic policies of Harding and Coolidge is poppycock. 

But something did go wrong, obviously.  Only seven months into his term of Herbert Hoover as president the stock market crashed on Thursday, October 24, 1929.  This resulted in an immediate economic downturn, or recession. Despite what some claim, the economy did not immediately fall into a depression.  Yet poor decisions that followed the crash would lead it into one.

Before the recession people readily invested their money in banks and the stock market, both for safe keeping and to make more money off interest and capital gains.  This system had worked so well during the 1920s that people had no reason to suspect it would ever end.  

Due to the euphoric state of the nation prior to the collapse, Americans were completely caught off guard. Their utter despair at what happened caused them to lose all confidence in the American economic system, particularly the stock market and banking system.  The general consensus now was that these were no places to put your hard earned dollars.  

Now, in lieu of taking risks and investing, people starting tucking their hard earned dollars under their beds, or inside their pillow cases.  The last thing they wanted to do was put it in banks that were not insured, or businesses that were not regulated.  Such lack of trust, and lack of confidence, is what lead to the recession.

What transpired next would have an immediate impact on whether the economy would turn around, whether it would remain in a recession, or whether it would turn into a depression. Since so many people blamed tax and spending cuts on the recession, it only made senses (or so it was suspected) that exactly the opposite was necessary to pull the country out of recession.  

So Hoover did have an opportunity to pull the country out of this downward economic spiral, he just didn't know that all he had to do was create insurance programs to protect invested money, and regulations to assure that people did not cheat, in order to regain the trust of the people. 

Either Hoover was unaware of this, or he simply refused to heed the advice of economic experts who advised such.  However, in Hoover's defense, this was, after all, the first recession of a new kind of economy  -- post 16th amendment, and in a modern, global world.  

Hoover sided with the experts who championed for tax increases, and so instead of cutting taxes, he raised the top marginal income tax from 24 percent to 63 percent by signing the Revenue Act of 1932. 

This was coupled with a rise in tariffs that resulted when Hoover agreed to sign into law the Smoot-Hawley Tariff in 1930.  This "throttled trade."

The combination of these two, the rise in tariffs and tax hikes, meant that he was, in effect, taking more money out of the pockets of people and corporations that were already hurting for money. Employers had less money for hiring, and consumers had less money for spending.  It was this, more so than anything, that caused the economy to spiral into the Great Recession.

So the closest our nation ever came to complete euphoria came during the Roaring 20s, and it was all thanks to Harding and Coolidge.  Yet, perhaps due to lack of experience, neither Harding nor Coolidge had the foresight to create minimal regulations for guiding the economy, and insurance programs for protecting against loss of personal investments. 

Yet Hoover had the opportunity, if not prior to the crash, after it, to return the economy to prosperity. 

But he chose to cave in to the raise taxes and increase spending crowd.  He chose big government solutions as opposed to free market solutions.  And for that reason, he, perhaps justly so, is often blamed for turning the recession into what would become known as the Great Depression.