The economy today is strong, but perceptions remain gloomy thanks to unrelenting negative rhetoric from some politicians in Washington. Despite the widely held view, on Wall Street and elsewhere, that the economy may be overheating, Senator John Kerry and the Democratic Party maintain that President George Bush has "the worst economic record since the Hoover Administration." But is this really an apt comparison?
Herbert Hoover, of course, was President from 1929 to 1933. Given today's rhetoric, it may be instructive to review his record-both the economic facts and the misguided policy responses that converted the 1930 recession into the decade-long Great Depression.
Jobs. Hoover's economy lost 6.4 million jobs in four years, almost half during his last year. Unemployment rose to 24.9 percent. Since Bush took office, payroll jobs are down, but overall employment is up by 400,000. Since the recent recession ended in late 2001, 1.9 million more Americans have found jobs. Most importantly, the rate of unemployment is 5.7 percent today, which is low by almost any standard.
GDP. Real output collapsed during the Hoover administration, declining by more than 25 percent after the 1929 peak. Today's real GDP is over $700 billion dollars greater than it was when Bush was sworn in. Growth has accelerated sharply and reached a 6.1 percent annualized average rate over the most recent two quarters.
Quality of life. By almost any measure of health, income, education, or goods consumption, Americans enjoy a vastly better standard of living today than 72 years ago. For perspective, consider a few of the innovations during that span: air conditioning in 1932, microwaves in 1947, a polio vaccine in 1952, lasers in 1960, bar codes in 1974, the personal computer in 1981. Innovation continues today at a rapid pace, thanks to expanded incentives for businesses to invest that were implemented in the 2003 Bush tax bill.
Policies of the Hoover era
Monetary policy, controlled entirely by the Federal Reserve, was unforgivably tight in 1930, raising interest rates. In contrast, Alan Greenspan's Fed has aggressively lowered the federal funds rate from 6.5 percent in 2000 to a steady 1 percent today, driving up investment and asset values.
The President and Congress control fiscal and institutional policy-things like national security, trade, and economic laws. These policies take time to change and even longer to have an effect. Under Hoover, "[t]he top income-tax rate went from 25 percent to 63 percent, and 40-percent tariffs were imposed on imports," Rich Lowry reminds us. The real Hooverite today seems to be John Kerry, who proposes higher taxes on the rich and trade protectionism.
Questions and Answers
Were Hoover's policies responsible for the Great Depression?
The policy response of President Hoover, a Republican, to economic crisis was mixed, especially after a Democratic majority was elected to Congress in 1930. Economic polices of the time included, from during and after Hoover's term, the Smoot-Hawley Tariff in 1930, tax increases in 1932, 1935, and 1937, and a new Social Security tax in 1937.
Economists are universally critical of the contractionary monetary policy of the Federal Reserve during the first phase of the Depression, which had a greater impact than fiscal policy.
What are distinguishing features of the current recovery?
Both modern recessions of 1991 and 2001 have been shallower in terms of GDP declines than the historical norm. The recent peak of the unemployment rate was only 6.3 percent in June of 2003, far below earlier norms, even in good times. However, the last three years seem to be marked more by a permanent restructuring than by a recovery of old. Manufacturing in America is in a profound productivity boom, and modern factories simply do not require as many workers, even though industrial output is higher than ever.
What is the misery index?
Economists starting in the Carter administration have used a misery index that equals the sum of the rate of inflation plus the rate of unemployment. Both measures are broad, reflecting all price increases that affect all American incomes and the strength of national labor market. The definition of economic misery has not changed, despite the Kerry campaign's new version that it invented by selecting a handful of narrow measures of the economy, to the bemusement of academic economists everywhere.
Is this a jobless recovery?
No. Payroll jobs have increased for seven months consecutively, and the broadest measure of employment, from the Census survey of households, indicates that 1.9 million more workers and 2.0 million more people have entered the labor force since the recovery began after November 2001. Mark Zandi of economy.com calls this the "recovery formerly known as jobless."