A certain Wall Street Journal opinion piece set of a mini-blog storm about the roll of policy in the cause and length of the Great Depression. The piece presented five myths. Here’s my take on them:
Herbert Hoover, elected president in 1928, was a doctrinaire, laissez-faire, look-the-other way Republican who clung to the idea that markets were basically self-correcting.
UNQUALIFIED MYTH – Rauchway tells us so.
The stock market crash in October 1929 precipitated the Great Depression.
MYTH – There have been many stock market crashes that didn’t result in a depression. In fact, there appears to be no relationship between stock returns and GDP growth. But don’t take my word for it, here’s Ben Bernake:
[T]he market crash, rather than being the cause of the Depression, as popular legend has it, was in fact largely the result of an economic slowdown and the inappropriate monetary policies that preceded it. Of course, the stock market crash only worsened the economic situation, hurting consumer and business confidence and contributing to a still deeper downturn in 1930.
“Ah,” you say, “Ben says the crash precipitated the depression by hurting consumer confidence.” True, but that’s a bit like saying the noose precipitated the hanging.
Where the market had failed, the government stepped in to protect ordinary people.
QUALIFIED MYTH – It depends on what you mean by help. If you mean policy was efficient, then certainly much government policy was inefficient. Inefficiency comes in the form of unemployment and low GDP. Those things hurt. If, on the other hand, you mean policy prevented people from starving, you have a case. There’s a trade-off between efficient policy and policy aimed at reducing economic depravity; this is a trade-off between short-term pain and long-term gain. I haven’t seen a case that said the short term pain was so great it was worth the hit in the long-run. And for the above statement to not be a myth, you’d have to show the extreme short-term pain was caused by market failure.
Greed caused the stock market to overshoot and then crash.
Enlightened government pulled the nation out of the worst downturn in its history and came to the rescue of capitalism through rigorous regulation and government oversight.
QUALIFIED MYTH – Certainly market forces got us into a mess in the late 1920s. The interesting question is how much was Hoover’s bad policies responsible for the depression that followed and how much did various New Deal policies work to prolong the depression. That’s a big knot to untangle. Would have policies meant to alleviate economic deprivation been necessary if Hoover hadn’t have screwed up so bad?