The 1920s Depression: Glenn Beck, Thomas Woods, and "Benefits" of Cutting Taxes to Combat a Recession, Part 1
The 1920s Depression: Glenn Beck, Thomas Woods, and “Benefits” of Cutting Taxes to Combat a Recession, Part 1
So I get an e-mail from reader Dean Moriarty, stating:
Yesterday, I found myself in the sad position of inadvertantly listening to the Glenn Beck show. He was talking to some caller about how American history classes never want to talk about the 1920 Depression, because it is a matter that somehow completely undermines everything we are taught about how “the New Deal was a miracle and totally saved America from the Great Depression.” Aside from the straw man he made about the New Deal, I was still curious why he felt that the government response to the 1920 Depression was such a trenchant rebuttal of any kind of left-leaning economic philosophy.
Basically, the claim is made that it was a cut in government spending, tax cuts, laissez-faire ecomomic policy, and inaction on the Federal Reserve that solved the problem.
Dean goes on to point out that Beck claims to get many of these ideas from a dude called Thomas Woods, who is a senior fellow with the very libertarian Mises Institute. The guy has written a few books and gotten a few awards from assorted libertarian organizations, so he’s something of a prominent chap int those circles.
Woods’ position on the 1920s can be found here. Its even got footnotes so you just know its authoritative. Anyway, read the whole thing if you’d like, but what Woods is arguing is this:
According to the endlessly repeated conventional wisdom, the Great Depression of the 1930s was the result of capitalism run riot, and only the wise interventions of progressive politicians restored prosperity. Many of those who concede that the New Deal programs alone did not succeed in lifting the country out of depression nevertheless go on to suggest that the massive government spending during World War II is what did it.1 (Even some nominal free-marketeers make the latter claim, which hands the entire theoretical argument to supporters of fiscal stimulus.)
The connection between this version of history and the events of today is obvious enough: once again, it is claimed, wildcat capitalism has created a terrific mess, and once again, only a combination of fiscal and monetary stimulus can save us.
In order to make sure that this version of events sticks, little, if any, public mention is ever made of the depression of 1920–21. And no wonder: that historical experience deflates the ambitions of those who promise us political solutions to the real imbalances at the heart of economic busts. The conventional wisdom holds that in the absence of government countercyclical policy, whether fiscal or monetary (or both), we cannot expect economic recovery—at least, not without an intolerably long delay. Yet the very opposite policies were followed during the depression of 1920–21, and recovery was in fact not long in coming.
The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. No wonder, then, that Secretary of Commerce Herbert Hoover—falsely characterized as a supporter of laissez-faire economics—urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored.
Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.” 2 By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and was only 2.4 percent by 1923.
The article goes on providing support for the idea that a) the gubmint stayed the heck out of the economy and b) the economy recovered swimmingly. It ends with this:
The experience of 1920–21 reinforces the contention of genuine free-market economists that government intervention is a hindrance to economic recovery. It is not in spite of the absence of fiscal and monetary stimulus that the economy recovered from the 1920–21 depression. It is because those things were avoided that recovery came. The next time we are solemnly warned to recall the lessons of history lest our economy deteriorate still further, we ought to refer to this episode—and observe how hastily our interrogators try to change the subject.
I read this, and to me its poison – it sounds reasonable, but is off just enough to be completely misleading. And it seems to me to be more than just purposely deceitful. See, influential people, whether they also think its deceitful or not, use these arguments. And that makes them dangerous. To me, dealing with this sort of thing is unpleasant. And I’m wasting my Sunday on something unpleasant only because I think its important. So before I lay into this let me explain the result of this post. I am going to lay out some arguments. They will state that Woods is wrong. My statements will contradict his in such a way that the difference between us will not be one of opinion. It will be one of facts and the use of facts. And I believe that at the end, there will be only four options. These are:
1. I am making up substantially all of my facts in a willfully deceitful way… and one would have to be crazy to take me seriously on anything
2. I am mistaken to the point of being delusional… and one would have to be crazy to take me seriously on anything
3. Woods is making up substantially all of his facts in a willfully deceitful way… and one would have to be crazy to take him seriously on anything
4. Woods is mistaken to the point of being delusional… and one would have to be crazy to take him seriously on anything
So with that, I’m going to start with what what normally might be a big deal, but in this case amounts to a minor quibble. And that quibble is that Woods uses made up data and doesn’t let on that the data he’s using is not the real thing. This may not be data he made up, mind you, and it may go by but its made up nevertheless.
For example, when Woods tells you that “unemployment had jumped from 4 percent to nearly 12 percent” in 1920 (presumably he means the unemployment rate) or that the ” unemployment was back down to 6.7 percent and was only 2.4 percent by 1923″ Woods is using somebody’s estimate of the unemployment rate. But if you head on over the Bureau of Labor Statistics’ website, and look around for historical figures, they’ll give you data going back to 1940 and no further. Spend a bit more time on the BLS site poking around and you might find an FAQ entitled “How the Government Measures Unemployment” which states:
Because unemployment insurance records relate only to persons who have applied for such benefits, and since it is impractical to actually count every unemployed person each month, the Government conducts a monthly sample survey called the Current Population Survey (CPS) to measure the extent of unemployment in the country. The CPS has been conducted in the United States every month since 1940, when it began as a Work Projects Administration project.
We can get into a quibble about the establishment survey and its precursors, but suffice it to say, whatever data Woods is using is an estimate someone probably produced long, long after the fact. Similarly, Woods tells us in 1920 “GNP declined 17 percent.” And once again, the question is, where is this data supposed to come from? Because when someone says “GNP” the natural assumption by someone with some familiarity with the data is that it originates with the Bureau of Economic Analysis’ National Income and Product Account Tables. And those tables only go back to 1929. Simon Kuznets wasn’t producing estimates before that.
Where does his data come from? No idea. Maybe he got it from Glenn Beck for all I know. But I have a hard time taking estimates produced decades after the fact seriously if I don’t know how it was done or by who. And when the person using those figures either doesn’t know or doesn’t tell you who made the data he’s using or how, it really gets suspect. But like I said earlier, for where we’re going, this is just a quibble.
So let’s quit the quibbles and get into his argument, namely that our Hero, Warren G. Harding, went all slash-and-burn on them vile tax rates starting in 1920, the Federal Reserve did nothing, and this led to a robust recovery, unlike, say, what tax hikes and gubmint meddling did to the Great Depression. Here’s how he puts it:
Not surprisingly, many modern economists who have studied the depression of 1920–21 have been unable to explain how the recovery could have been so swift and sweeping even though the federal government and the Federal Reserve refrained from employing any of the macroeconomic tools—public works spending, government deficits, inflationary monetary policy—that conventional wisdom now recommends as the solution to economic slowdowns. The Keynesian economist Robert A. Gordon admitted that “government policy to moderate the depression and speed recovery was minimal. The Federal Reserve authorities were largely passive. . . . Despite the absence of a stimulative government policy, however, recovery was not long delayed.”5 Another economic historian briskly conceded that “the economy rebounded quickly from the 1920–21 depression and entered a period of quite vigorous growth” but chose not to comment further on this development.6 “This was 1921,” writes the condescending Kenneth Weiher, “long before the concept of countercyclical policy was accepted or even understood.” 7 They may not have “understood” countercyclical policy, but recovery came anyway—and quickly.
So let’s look at a picture that both shows what happened to tax rates and illustrates the extent of the rapid recovery. Below, I’ve graphed the top marginal income tax rate (data from the IRS), and the gray shaded areas are the periods the economy was in recession information from the NBER) for the period from 1920 to 1940.
Let’s start with the timing of the recovery. Unless I’m missing something, the tax cuts came after the end of the recession. That is to say, the recovery preceded the tax cuts by half of a year. Now, Woods is very precise… he says tax rates were slashed between 1920 and 1922. I for one was left with the impression that tax rates were slashed in 1921 as well as 1922, but he never quite said that. So its right, but misleading. (Its the fact that he writes so precisely about timing that leads me to believe this is not a mistake on his part, but rather that he knows what he’s doing.) But then why are the tax cuts in 1922 being given credit for a recovery that had already begun half a year earlier? Woods quotes some dude called Anderson who in turn writes:
The rally in business production and employment that started in August 1921
Again… rapid recovery in 1921, tax cuts in 1922. Anyone see the problem with this? If Woods doesn’t, I have a bridge I’d be happy to sell him… in New York City in 1402. Unless, of course, we’re supposed to infer the classic libertarian view, which is that everyone knew a tax cut was coming and acted on the fact, Of course, anyone who was gonna act on tax cuts in August of ’21 ahead probably would have acted on them in November of ’20… when Harding was elected. As I understand it, Harding didn’t exactly make a secret about what he intended to do. Part of the The Return to Normalcy campaign he ran on included a rejection of Wilson’s active government.
But once more back to this quote:
Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups.
Again, one more thing slightly misleading (at least to me) but technically correct. Tax rates were slashed for all income groups, but not in 1920 or 1921 or 1922. Check the IRS link again… the folks at the bottom only got their tax cut later, in 1923. (One can see very clearly why Reagan admired Harding.) And Woods doesn’t quite say that all income groups had their tax rates slashed between 1920 and 1922, does he?
But we still haven’t even touched the bigger problem the graph shows. To most people, “rapid recovery” does not mean “a recovery that burns out quickly, leaving behind another recession less than 2 years later.” But that is, indeed, what happened. Call that recession “Recession # 2.” Interestingly enough, Recession #2 didn’t end until after a tax hike, which makes for a delicious detail given what Woods writes. Following the end of Recession #2, taxes are cut again. (I imagine that Woods must be thinking he can credit tax cuts for retroactively ending that recession too. Also, that buying a bridge in New York City in 1402 would allow him to charge Moses a hefty toll when he rides across on a dinosaur.)
OK… so there’s a tax cut, and that leads to another rapid(ly ending) recovery – Recession 3 comes around about 2 years later, in October of ’26. That recession ended in November of ’27. And we know what came next, right? Another rapid(ly ending) recovery (21 month long) with a tax cut!!! And this time what follows is a doozy – the Great Depression itself.
Note… for comparison with the policies Woods is happy about, I continued the graph through 1940. Take a gander at the period from 1933 to 1940, when that commie pinko Roosevelt was in office. I wonder if Woods would say the tax hikes Roosevelt instituted are the reason there were no rapid(ly ending) recoveries in the 1930s.
So let me recap, but using a bit different phrasing than Woods might use. Starting with Harding, Republican administrations repeatedly cut taxes in the 1920s. Recessions came fast and furious; in the 96 months between the end of the 1920 Depression and the start of Great Depression that followed this tax cutting bonanza, the economy was in recession 30% of the time.
To be honest, this doesn’t strike me as a good argument for cutting taxes, but then maybe that’s why no libertarian organization would ever contemplate giving me a prize.
Which leads me to my next graph… or maybe not. I haven’t even gotten to my best material, but this post is getting a bit long. Expect part 2 next week. I’ll be taking my gloves off.