April 16, 2004 | WebMemo on Economy
The Economic Lessons of President Hoover
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
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
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.
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
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
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
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
What are distinguishing features of the
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
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
For one example of this charge, of
the many extant, see the article "
Sen. Kerry kicks off tour at UNH
" from the April 13, 2004,