Monday, February 14, 2011

The Lessons of 1935

Hazy memories of the Great Depression are often in the forefront of consideration during this seemingly endless and profoundly destructive Great Recession. What would Roosevelt have done, and why isn't Obama doing that now? Why is he making things worse?

I've fallen into that pattern of thought myself from time to time, pointing out with malicious glee that Obama's economic policies are essentially the same as Hoover's -- which I know is not entirely accurate, but the point is to emphasize the contrast between how Hoover dealt with the Great Depression and how Roosevelt would deal with it, and then to note that Obama's economic policies are more aligned with Hoover's than with Roosevelt's.

It's time to revise and extend my remarks.

Things were not quite the way we think they were during the Great Depression. While Roosevelt's administration came up with all kinds of innovative programs and efforts to deal with the suffering of the People, these efforts were quite anemic considering the need.

Republicans and Conservodems fought even modest provisions for the poor and unemployed, and to a great extent, they won the day.

David Cushman Coyle is my source for much of what follows. He is described in the Virginia Quarterly Review as:

An esteemed engineer and economist, Cushman designed the Washington State Capital and sold over a million pamphlets espousing persuasive economic theories. He is best known for his books "The United States Political System and How it Works," "The United Nations and How It Works," and "Uncommon Sense."

He's also considered to be quite an eccentric, even a crank. Yet his insights into what was going on during the Depression, and his considerations about why conditions really weren't improving for the poor and working classes of the day resonate strongly today. Some of the very same factors were aligned against the poor and the working class during the '30s as we see today, and with very similar results.

The takeaway is that Roosevelt was more like Hoover than we know, and Congress was always loathe to tax the rich to pay for programs that would benefit the lower orders.


This is from Coyle in 1938; the essay is "Inefficient Efficiency":

Somewhere in the national picture there should be an understanding of the overhead efficiency or inefficiency of the whole system in which the engineers build their machines. Someone besides a simple mountaineer needs to observe that while industries improve their methods, industry as a whole flourishes only for a few years and then withers away, leaving the fine new machines idle and the personnel management with no one to manage. Why should Americans who are thrifty and have saved up a little money so often find themselves destitute? Why should factories stand unused? Why should a great oil field have twenty times as many expensive wells as are necessary for getting out the oil? Why should ten million workers go on for years without producing any valuable thing whatever?

The United States as a producing organization is about as efficient as a factory that has half its machines broken down and half its workers playing pinochle. How does it happen that a poor farmer, whose father made a bare living with a mule, can buy a tractor from Mr. Ford and raise his efficiency to the point where the sheriff takes the farm? There is an island on the Maine coast that supported a fine stone house in the old primitive days when lobster fishermen tended their traps in a dory, standing up and rowing patiently from one trap to the next. But now, in an age of motor boats and ten traps to a buoy, the house is falling to ruin, the farm has grown up to weeds, and the fisherman grows poorer year by year. It doesn't make sense.


In a certain sense, that same sort of thing is happening all over again.

We are right back where we started from; for some of the country, it's been like this for decade upon weary decade, but for most Americans, this sense of being trapped in an ongoing economic decline and debacle is something new. As workers are "shed" and manufacturing declines nationwide or is off-shored, as the public sector withers, as the safety net is shredded, the more the upper 1% flourishes -- as much of it did back in the day.

According to Coyle in 1935 [Harper's Magazine, January, 1935, subscription needed], the great public works programs of the Roosevelt Administration weren't actually doing what they were supposed to do -- jumpstart the economy from its stall and depression and most especially get the unemployment rate down. They weren't doing it because the way they were designed they couldn't do more than provide temporary, stop-gap employment for a declining percentage of workers. That deficiency was built in to the programs due to the concept of "self-liquidation." The programs had to be "self-liquidating." In other words they had to pay for themselves through fees and assessments on their "customers", ie: the poor and the working classes themselves, and on the municipalities and localities that benefited from infrastructure and other improvements provided by public works programs.

And they had to be "self-liquidating" because it was an article of faith that income taxes on the rich could not be raised to pay for what was necessary. Income taxes on the rich could not be raised at all.

Where have we heard that before?

This is not to say that the programs were useless. They just couldn't kill the Depression.

Coyle in Harpers, January, 1935:

By a partial relief of unemployment,
by creating an organization capable of
administering a public works program
of a more adequate type at some future
date, and by initiating two important
agencies for an intelligent treatment of
our national resources, the three billion
dollar fund has more than justified
itself. But it did not kill the depression.
The reasons for its failure to
accomplish its main objective were to
be found not in the administration of
the Act, but in a whole series of economic
misconceptions that were written
into the Act itself. The program
was foredoomed because the elements
of a successful attack on the depression
along this line were not well understood
at the time when the Act was under

The most vital error in the public
works program was the idea that self liquidating
public works are a "sound"
instrument of recovery.

In fact, they're not, as Coyle would show.

The theory of self-liquidation springs
from the general assumption on which
the policies of the previous Administration
were based-that expenses must
be chiefly borne by the people with
small incomes, so as to avoidthe necessity
of taxing further the people with
large incomes. A "sound self-liquidating"
project is one that is so arranged
that charges can be laid directly
upon the consumer, so that no expense
will fall on the Federal treasury (and
the income tax). The logic is quite
simple, except for the joker. Major
premise: the Government cannot spend
money indefinitely without getting any
back. (Silent axiom: the income tax
is unthinkable.) Minor premise: the
most direct way to get the money
back, without rousing any dangerous
thoughts about taxation, is by charging
fees to the consumer. Conclusion:
self-liquidating projects are the soundest
projects. The name "self-liquidating,"
like so many other relics of
the New Era, has that fine nutty flavor
that characterized the period. The
idea was that such projects paid for
themselves, because the people who
paid for them were not visible, to the
conservative eye. The consumer, however,
though microscopic in size, is all the business man has to live on.

A bit dense, to be sure, but strikingly familiar, no?

But not all public works can be
made self-liquidating. Schoolhouses
and streets can hardly be made "selfsupporting"
by stationing a policeman
to collect one cent from everybody who
passes a given point. However, there
is more than one way to levy upon the
consumer. Local projects can be paid
for by local taxes or assessments on real
estate, mainly borne directly by the
people with small incomes, or indirectly
by the same people through
higher rents and prices. Under the
late Administration this principle was
called "local self-help," and meant simply
that those taxing bodies that cannot
effectively levy income taxes ought
to be the ones to carry the costs of work
relief, rather than the Federal Government
which might possibly tax the
higher brackets.

There is a piquancy and sadness in these paragraphs, especially so given the current economic situation, and the apparent fact that policy-makers were stuck in the same or a similar frame of mind back then.

Coyle was well aware that the economic policies and the thinking behind those policies were doomed to fail because they could not do what was necessary to break or kill the Depression. In many ways, they would prolong it.

Coyle again:

But not all public works can be
either self-liquidating or local. About
ten per cent of the public works in the
past have been done directly by the
Federal Government. Here the problem
can be quite easily solved by the use
of special Federal sales taxes. Roads
can be financed by gasoline taxes.
Someone has suggested that grade crossings
can be financed by a combination
of taxes on railroad tickets and on automobiles.
Thus the consumer can be
made to take up the forgotten man's
burden, and any risk of having to think
the unthinkable can be avoided. This
was called, under the late Administration,
"broadening the base of taxation,"
and was considered a highly
satisfactory solution not only by conservative
Republicans but also by such
distinguished Democrats as Mr. Hearst.

Note the Hooverite concept of "broadening the base of taxation." And we are right back to that today. Don't raise taxes on the rich, broaden the base of taxation instead. This is practically a universal article of faith among the high and the mighty who rule us.

Broaden the base of taxation instead.

That was a prime objective of the Catfood Commission. Lowering tax rates at the upper end of the income scale has long been a core principle of our rulers. The way to do it, without further reducing revenues, is to decree that more people pay the income tax, and that other taxes (such as a value added tax) be assessed on all, on top of "broadened" income tax assessments. And we will soon see how it works in practice.

Lucky us.

These two concepts, that public works and other Depression fighting projects had to be self-liquidating, and that income taxes on the rich could not be raised to pay for programs and projects to fight the Depression stalled recovery in the 1930's and they're among the factors stalling recovery now.

Yes but, Social Security passed, and Unemployment Insurance was instituted. So there was that.

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