Book Review: The Forgotten Man: A New History of The Great Depression



Amity Shlaes, author of The Forgotten Man, is a classically trained (capitalist as opposed to Marxist) economist, and so has great insight into the policies employed to address the economic crisis following the stock market crash of 1929. This insight, plus the lively detail she puts into her history of the 1920s to the early 1940s, makes this book required reading for students of history, government, and economics. It also needs to be read by the Obama administration as it struggles to cope with the current recession.
Shlaes begins her narrative by talking about a desperate time--one where businesses were failing and people were committing suicide in the face of desperate economic straits--that time was not 1930, but 1937, after the New Deal had already been in place for five years. During this introduction, the author states her thesis regarding the extended length of the Depression. Rather than focusing on the Smoot-Hawley Tariff or the Dust Bowl or Hoover's attempt to force wage increases or tax increases during a period of economic hardship, Shlaes emphasizes that "the intervention, the lack of faith in the marketplace," which in previous downturns had always recovered through minimal government interference, was hindered by intensive government manipulation of market mechanisms.
Going back to the 1920s, Shlaes then contrasts Hoover (who was Commerce Secretary) with his boss of the time, Calvin Coolidge. While Coolidge was a hands-off administrator and a believer in capitalism, Hoover, an engineer, believed that the economy could do even better when tinkered with or directed by the government. In times of crisis, Hoover further believed that government had the right and duty to set things right again.
Elected in 1928, in part due to his ability to marshal federal resources to help the Midwest recover from a flood of the Mississippi, Hoover set the tone that FDR was to take to greater extremes when he took office in 1932. In hopes of protecting American jobs, Hoover signed off on the Smoot-Hawley tariff, a tax on imported goods that caused other nations to raise their own import duties in retaliation. Next, to curb inflation (the primary concern of most 20th century economists), Hoover pushed the Federal Reserve to tighten up the money supply by raising interest rates. This "tight money" policy created a state of deflation, making money hard for businesses and individuals to obtain. Some cities even turned to creating non-dollar-based scrip or bartering to keep their local economies moving. Hoover also pushed for public works programs to increase employment, through such programs as the Boulder Dam, more commonly known today as Hoover Dam. All of these actions came together to ensure that Hoover remained a one-term president, and usually one of those that Democrats today hang around the necks of Republicans as a symbol of failure. However, Roosevelt would make his own interventions, and those, too, would interfere with recovery.
When FDR took office in 1933, an incredible 25 percent of the American workforce was unemployed (compare this, say, to the 10.3 percent unemployed during the early years of the Reagan administration or the paltry 7.2 percent unemployment we're experiencing today). FDR was a new political animal, an old-money aristocrat who dared to war on his fellow aristocrats, a liberal who emphasized group rights at a time when classical liberalism still emphasized individual rights. FDR's rhetoric also changed the context of previous economic theory. Consider these two conceptions of "the forgotten man," from which the book takes it title:
...as opposed to its original context...

"These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensible units of economic power, for plans like those of 1917 that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid."
--Governor Franklin Roosevelt of New York, 1932

"As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X, or in the better case, what A, B, and C shall do for X...What I want to do is look up C. I want to show you what manner of man he is. I call him the Forgotten Man. Perhaps the appellation is not strictly correct. He is the man who never is thought of...He works, he votes, generally, he prays--but he always pays.
--William Graham Sumner, 1893

Again, Shlaes wants the reader to understand the changes FDR made to the traditional relationship between government and business. Prior to the 1930s, Washington was a quiet city, with a budget much smaller than many or most businesses nationwide. Its power was limited, and the public expectations of the federal government likewise remained limited. FDR would change all that, and more.
Roosevelt was one of the first mainstream American politicians to engage in "class warfare," a method usually practiced by socialists, wherein labor was set against "capital" (management), and goverment was expected to make capital pay for its misdeeds toward labor. In providing direct aid to poor blacks, FDR also shifted that voting bloc, which from the time of the Civil War had been reliably Republican, to the Democratic Party.
FDR pushed for higher taxes on big business, government management of electrical power, and government regulations of everything from consumer choice to labor wages. He approached market capitalism with confident skepticism and moral disdain. Shlaes also highlights his willingness to tinker with the economy, sometimes because he didn't know what would work, and sometimes just to irritate political rivals. Inverting traditional American assumptions of the time, FDR did what he could to restrict the power of big business under the assumption that "bigness" or success were obvious signs of corruption or unfair dealings. When big businesses were profitable, FDR established higher corporate tax rates to punish "excess profits." When corporations refrained from investing--out of fear of having their businesses nationalized or made unprofitable through government intervention--he created an "undistributed profits" tax to ensure that the federal government got its share regardless.
The problem with all of these interventions, regardless of the rhetoric used to justify them, was that they scared private enterprise from performing its usual function, which was to invest in new businesses, develop new products and services, and thereby create jobs. The government's tinkering exascerbated the very uncertainty they were supposed to overcome. According to Shlaes, the New Deal created many disincentives to typical economic activity and many perverse incentives to prevent the very activity they were supposed to help create.
One item in this book that was eye-opening to me was that government spending on World War II was only half of the equation in getting America's economy out of the Depression. Roosevelt also ceased his war on big business, allowing the economy to grow sufficiently to build the "Arsenal of Democracy." While Shlaes doesn't say so specifically, this seems to be pretty conclusive proof that Roosevelt was well aware his interventionist prescriptions were harming the economy, and that he stopped them only as a tool of national survival. Unfortunately, it might take a similar crisis to keep the current government in Washington from interfering in the market further.
There are other smaller stories within the greater narrative of The Forgotten Man that deserve attention, like the community- and individual-level self-help groups formed by characters like "Father Divine," a black preacher in New York, and Bill Wilson, the famous "Bill W" who created Alcoholics Anonymous. Shlaes also gives the reader insight into the behaviors of the political and big business magnates of the time, whose names are still familiar to us today: J. P. Morgan, Henry Morgenthau, Felix Frankfurter, Harold Ickes, Andrew Mellon, and Alexander Forbes. All of these stories flow as unique side trips along the great current of history that was the Great Depression, and they help a new generation understand what can go right and wrong when government attempts to help a nation out of economic troubles.

Bowing to Obama

I'm supposed to be polite and "give Obama a chance" and show appropriate respect for the man and this historic moment. How dare I question the man before he's even sworn in? (I listened to his speeches and analyzed his policies, that's how I dare.) But nevertheless, fine. I will behave myself tomorrow. But I expect quid pro quo. I'll establish a moratorium on pounding the President-elect as long as the left stops blaming George W. Bush for everything wrong with the country, "crimes against humanity," and other foolishness. Oh, never mind...

I'm reading The Forgotten Man, a history of The Great Depression. The ideas and methods Hoover and Roosevelt tried to use to solve that problem are eerily familiar and, by the way, didn't work then, either.

The Current Financial Mess and What It Means for Space

As if space advocates don't have enough to worry about, now we've got a shaky economy as well as a federal government willing to spend five times NASA's budget at the stroke of a pen to rescue one company (AIG) and one and a half times NASA's budget to rescue Fannie Mae and Freddie Mac. And if my discussions with liberal friends are any indications, we can expect more nationalizing of large businesses if there's a perception that not doing so would crash the economy.

Where are those strident voices asking, "Where is the money going to come from?" or "Shouldn't we be spending our money on more important things?" But of course what could be more important than "saving" the economy from individual and corporate bad decision making?

Back in college I had a history teacher who insisted that the Great Depression lasted as long as it did because "the government wasn't doing enough." Another theory suggests that the government was doing too much, and that the nationalization of banks and other activities, combined with a lot of make-work government jobs in fact extended the Depression. It is safe to say that both Marxist and Austrian economists agree that World War II got the U.S. out of the Depression, though they would pick different reasons--Marxists would focus on government spending (which was already going on under the New Deal), while classical economists would focus on the need for American goods overseas. In both cases, it was the private sector creating the jobs and employing people, regardless of who was in charge.

The next major economic crisis of the 20th century was the extended period of "Stagflation" in the 1970s and early 1980s under Nixon-Ford-Carter. Ronald Reagan's economic advisers took the dramatic step of reducing the top marginal tax rates. Using the so-called Laffer Curve, Reagan simultaneously increased economic activity and, counterintuitively, increased federal taxes. The deficits of the 1980s can be attributed partly to Reagan's defense buildup, but economic and political historians tend to ignore the simultaneous increases domestic, non-defense spending that were made possible by the tax cuts. Congressional lawmakers saw all the money flowing in, and couldn't resist feeding their own pet projects. Nevertheless, the Reagan tax rates held for ten years, and the U.S. has continued to benefit from them, even though the Clinton Administration raised the top marginal tax rate to 39.5% in 1993.

Now we're in another potentially ugly economic crisis, worse than the "Dot-com" mess of 2000 if some folks have their way, and the big choices will be there for the next president to make: increase taxes and direct handouts to citizens to pump more government money into the economy or decrease taxes ("make the Bush tax cuts permanent") and allow the productive classes to use their increased incomes to invest in more economic activity.

The economic history above is rather high-level, but it provides some of the context for spending on space. In 1990, the Cold War was ending, and the savings and loan industry was undergoing its own bailout. At approximately the same time, the Bush 41 Administration was proposing its Space Exploration Initiative to go to the Moon, Mars, and beyond. We know the decisions of that time: citizens were rightly outraged at the amount of money being spent to rescue other people's bad decisions ($175 billion), but defenders of the action said it was necessary to stabilize the economy. Domestic spending was made a priority, and human space exploration was allowed to languish.

The lessons for the Constellation Program and for space advocates in general should be obvious. The S&L bailout did not stop people from making bad decisions, nor did it stop the government from bailing out businesses. However, it should be obvious which economic policies will allow the United States to continue spending money on space: only a rich nation can afford space travel. It is complex and expensive.

Taxing the rich even more will not increase or improve economic activity. The top 10% of income earners pay nearly 80% of the taxes. The bottom 50% of wage earners pay 3% of federal income taxes. And the odds are pretty good that folks in the bottom 50% are employed by folks in the upper 50%. So: the money that the top 10% pay for taxes does not go toward new investments, new businesses, or new jobs for others. Tax the rich, and you squeeze the poor, who find themselves unemployed and subjects of the welfare state, which only grows and grows, squeezing out all other forms of federal spending--including investments in science, technology, and space, which could actually create wealth.

We've got a big problem here, people: if the federal government's primary spending is on supporting individual consumption and medical care, that is money that will not be spent on basic infrastructure (bridges, roads, etc.), homeland defense and security, or critical investments in science and technology, never mind local pet projects and bridges to nowhere. And that is where we are heading. Therefore, it is not enough for space advocates to be single-issue voters and focus solely on which "space architecture" is going to best create a spacefaring civilization. We need to consider the economic and political environments in which those space architectures are being built. And lastly, we need to take a good, hard look--as citizens and taxpayers concerned about our common future--at what we can and cannot afford to do.