In a recent column, Nobel-prize laureate economist Paul Krugman referred to the states' governors, legally bound to balance their budgets in good times and in bad, as "50 Herbert Hoovers."
It's a rather slipshod historical metaphor, but a common one: Hoover caused the Great Depression, people say; Franklin Roosevelt rescued us from it.
The facts, however, are quite different. Hoover was by no means a bad president, and Roosevelt's reputation far exceeds his actual reach. (And Hoover's post-presidential record rivals Jimmy Carter's in terms of public service.)
Hoover and Roosevelt were well-intentioned, but they were products of their times. The economic problems of their day overwhelmed the common economic wisdom.
The Great Depression was caused by a perfect storm of events and bad policy: a growing bubble amid an economic boom — this time caused by automobiles and radios — (a bubble economy — sound familiar? Every recession is preceded by some kind of bubble); weakness in the farm sector caused by over-production; bad monetary and fiscal policy; bad trade policy; and, ultimately, a lack of any social safety net in which to catch the fallen.
But all of this wasn't Hoover's fault. The Hoover administration, like the latest Bush administration, did not push for any kind of regulation that might have curbed Wall Street's excesses. But neither did the administration of then-New York Gov. Franklin Roosevelt.
Hoover was, at one time, extraordinarily popular. A self-made millionaire from a career as a mining engineer, he had been an able administrator during and after World War I, helping to avert starvation in Europe by organizing food aid. Of course, the pressure the government put on farmers to produce more led to excess capacity following the war, which led to decades of low prices for farmers. That contributed to the Great Depression.
Hoover served the nation in the 1920s as secretary of commerce. In that time, he wrote a paper that suggested if the U.S. were to fall into another economic panic, as they were called then, the country should engage in a broad program of public works spending to get things moving again. (Sound familiar?)
Had Hoover stuck to his convictions, history might be different. Unfortunately for everyone, he didn't.
By 1928, people were urging Hoover to run for president, including his friend, Roosevelt. He handily beat Democrat Al Smith, and took office.
When the bottom dropped out of the economy in 1929 and 1930, Hoover sought to get his recovery plan moving, accelerating public works spending and creating the Reconstruction Finance Corporation, which helped bail out banks and other corporations. A record number of banks failed in the Depression, but it would have been much worse without the RFC.
There was no deposit insurance, so when a bank failed, you lost your money. The social safety net wasn't there, and savings disappeared.
The Federal Reserve, meanwhile, worried about loss of gold reserves to Europeans who were demanding gold for their dollars, jacked up interest rates to stem the gold tide. This was terrible timing, as though right now the Fed were to decide that what the current recession needed was high interest rates to curb inflation. Higher interest rates raise borrowing costs, further curbing spending and investment.
What Hoover didn't do was balance the budget. The federal budget showed a surplus in 1929 and 1930, but a deficit in 1931 and 1932. In fact, the deficit got smaller in 1933 under Roosevelt. As Roosevelt emerged as a Democrat front-runner, he began to campaign against "irresponsible Republican budget deficits." Hoover, hoping to get re-elected, pulled back on his spending plans.
The conventional wisdom was that a balanced budget was the right thing to do. Budget deficits were to be run only in times of emergency. War was an emergency; millions of people out of work and starving apparently was not. For the wealthy, poverty has always been a character flaw.
On the conservative side of the equation, it has become chic to blame Roosevelt for prolonging the Depression. The argument of Amity Shlaes in The Forgotten Man and Jim Powell in FDR's Folly is that government intervention is what caused 10 years of economic famine.
The underlying argument here is that if workers had simply been allowed to reduce their wage demands, rehiring would have occurred, and the economy would have recovered. The government just needed to get out of the way. The fact that executive salaries rose throughout the Depression is of no consequence. Some of this is a breath of fresh air. The typical portrait of FDR as saintly genius, unfailingly pushed by such devout partisans as the late Arthur Schlesinger, Jr., isn't terribly accurate. Schlesinger, as another historian put it, tended to "confuse profundity with mere vagueness."
But some of the conservative revisionism is ideological wishful thinking. Roosevelt was no savior, but his errors were of timidity, not of commission.
It's probably correct to blame FDR for prolonging the Depression. When he took office, he promised "bold and persistent experimentation" to solve the Depression. Demonstrably, this did not happen.
About the only bold experiment was the National Recovery Administration (NRA), which promised to fix capitalism by ending it. It created codes of business conduct that effectively barred competition.
The Brain Trust's answer to low consumer demand was to raise prices. It didn't work, and the Supreme Court threw out the NRA in a 9-0 decision. Roosevelt was abandoned even by his allies on the court.
The court also threw out Roosevelt's very similar farm policy. This was replaced by farm subsidies, which ultimately helped hammer the family farms that the administration hoped to save. Do the math: The biggest farms get the biggest subsidies. Smaller farms are immediately at a disadvantage.
Other programs — public works, Social Security — did put people to work and help alleviate poverty, but none of them was big enough to make much of a dent in the Depression.
Furthermore, Roosevelt was loathe to run up deficits of any size. When he launched his first public works program, he paid for it by cutting federal employee salaries.
Roosevelt got Congress to rein in spending in 1936, as the economy seemed about to recover, and instead it went into a greater tailspin in 1937-38 than it had in 1930-31.
The economy did not recover until World War II forced massive fiscal intervention. Budget deficits ballooned, but people went back to work. And even then, the War Labor Board fought workers across the country to keep defense industry wages pathetically low.
President-elect Obama could run up very large deficits in trying to jump-start the U.S. economy, which will give the conservatives and Fox News something to carp about. What he shouldn't do is a) worry about that or b) go Hoover and not stick to his guns.
Budget deficits can't be sustained forever, but nobody's suggesting that.
John Maynard Keynes popularized the idea of deficit spending, and told Roosevelt he should do as much to solve the Depression. Roosevelt had no inclination to listen to such a suggestion. Keynesianism nonetheless became part of the vernacular. What's usually missed is the second half of the Keynesian prescription: When things are good, use the surplus to pay down the deficit. Eventually that needs to happen, too.
It makes a difference what you spend on. Budget deficits aren't all created equal. Spending on infrastructure and education should produce more economic bounce than will spending on defense, if only because tanks and bullets are effectively removed from the economy once built.
Critics have complained that the kind of spending Obama is talking about won't give the economy an immediate boost. But spending on infrastructure, research and development, and education will produce greater long-term gains. Obama should say what Hoover didn't: the critics be damned.