The 1920s Depression: Glenn Beck, Thomas Woods, and "Benefits" of Cutting Taxes to Combat a Recession, Part 2

by cactus

Last week I wrote a post about some nonsense Glen Beck was peddling, with said nonsense originating with Thomas Woods.  Woods claimed a smorgasbord of things, the dollar meal version being:

1.  lefties talk up how the New Deal (big gubmint, tax hikes) saved the economy from the Great Depression but it didn’t

2.  there is a conspiracy of silence about the recovery from the 1920s Depression because it shows that if the government does nothing (with the possible exception of cutting taxes), the economy will roar, as it did throughout the 1920s

Last week I put up a graph showing the marginal tax rates and the recessions from 1920 to 1940.  The graph of the data doesn’t quite mesh with the words that Woods chooses to use.  What we see is that while Republican administrations were happily cutting marginal tax rates in the 1920s, the economy kept going into recession after recession culminating with Great Depression.  In fact, between the end of the 1920s Depression and the start of the Great Depression (not including either one), the economy was in recession 30% of the time.  Conversely, once the New Deal started and the Big One ended in ’33, there was only a single recession before WW2 started.

Today we’re gonna do something different.  We’re going to look at economic growth and see how well that meshes with Woods’ storyline.  Now, the problem is… where do we find data?  After all, the Naitonal Income and Product Accounts tables were not being calculated back in the ’20s.  But…  Woods quotes a number or two on GNP, which he gets from Smiley on GNP.  Smiley, in turn, pulls his GNP data from the Historical Statistics of the United States.  I’m always leery of using pre-1929 national accounts data from the HSUS since its made up of interpolations, but I guess its as good a source for that data as one is likely to find.  Either way, they’re clearly good enough for Woods, so I cannot imagine he would object to us poking around.

Anyway, I had to enter the data by hand, and I’m using a mini-mini laptop right now, so hopefully I didn’t screw up anything, but here’s what real GNP per capita in 1958 dollars (I’m not changing the HSUS data at all…. I want to make sure Woods would approve) looks like:

Figure 1 - Woods & Beck Part 2

Sorry about the step figure look, but I wanted to get the recessions (the gray bars) as accurate as possible… and while that data is monthly, real GNP per capita from the HSUS is yearly.  Now, Woods’ focus is on the recoveries…  but the the graph doesn’t exactly scream at you that the Mucho Tax Cuts and Deregulation Roaring ’20s massacred the Drab Socialist New Deal period.  As a result, he adds a lot of verbage which I do encourage you to read.  I prefer to take a different approach, though.   I created the graph below, which I think is pretty self-explanatory.

Figure 2 - Woods & Beck Part 2

So there it is.  All of Woods’ verbiage boils down to this…  relative to the New Deal policy he excoriates, his example of success is a time of slower growth, more time spent in recession, and it all culminates in what may be the worst economic situation this country has ever faced. 

Now, you may be thinking…  Woods doesn’t realize that the policy he is promoting produced worse results than the one he is attacking.  But I disagree.  I believe he knows what the data shows.  I provided a few examples last week where Woods seemed to me, at least, to be very misleading.  One technique for doing that which I pointed out last week was to cite someone else when passing off incorrect data, but not to point out that the data was wrong.  That allows Woods not to outright lie, but it does lead readers to believe something which is not true.  Here’s another example…   Woods states:

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.”

Now, Woods is very carefully not stating himself that the Fed did nothing. He himself states that the Fed’s actions were hardly noticeable.  That may be…  I have no way to measure that with the poor data that is available to us now.  But Woods goes farther.  He tells us that an economic historian has stated that “the Fed did not move to use its powers to turn the money supply around and fight the contraction.”  Which is stronger than hardly noticeable.  Does Woods agree with this statement?  Well, he doesn’t quite say so.  But what he never writes is this – “well, this dude says the Fed did nothing, but he is wrong.”  And by not doing that, by telling us what some historian said but not indicating we should not believe that historian, Woods is, in effect, endorsing that economic historian’s statement.  And by now, after two posts, you should realize that I’m only bringing this up because the Fed actually did something. 

As we can see on page 440 of this document from the FRASER collection at the Federal Reserve of St Louis, back in that era, there could be different rates at different Federal Reserve Banks.  And just about all the big ones had rate cuts in 1921 before the end of the recession.  Take the New York branch, the most important one.  The rate was 7% at the start of the year, was cut to 6.5% in May, cut again to 6% in June, and cut again to 5.5% in July, the month the recession ended.  One can argue that the Fed moved a little late – which would make “hardly noticeable” potentially true, but it certainly makes “the Fed did not move” BS.  This is just one of several examples where, in my opinion, Woods is careful not to lie by commission.  But readers will read it and conclude something that is untrue. 

So there it is.  After two posts, I conclude:

1,  the Roaring 20s prior to the start of the Great Depression were a period of deregulation, many tax cuts, and many recessions with very short lived recoveries.  The culmination of the Roaring 20s was a great economic disaster, perhaps the worst in American history.   None of this applies to the New Deal Era prior to the start of World War 2. 

2.  Over the length of the Roaring 20s “recovery” and the New Deal recovery, growth was quite a bit faster during the New Deal years. 

3.  Woods writes carefully and precisely enough that it is hard to conclude that he does not realize 1 and 2.

4.  Knowing what Woods appears to know, and knowing that economic policy has tremendous consequences on people’s lives, Woods is nevertheless willing to promote policies that did much more poorly than he implies and to attack policies that did much better than those he promotes

5.  Glen Beck is either in on the con or he’s being had.