In the wake of the coronavirus shutdowns unemployment numbers have reached levels not seen since the Great Depression: 30 million people have filed unemployment claims, and movie theaters, car dealerships, and amusement parks are sitting idle. Even as political leaders face pressure to revoke closure orders, polling shows that most Americans are reluctant to venture out before they feel safe, which will almost certainly mean that economic recovery will be slow. But it could be worse—much worse, as the generation of the 1930s learned the hard way. Now, as state and federal lawmakers face pressure to “do something” about the economy, it’s crucial that they remember the hard lessons of the Depression and avoid repeating mistakes made then, which transformed the market crash of 1929 into a generation-defining catastrophe.
The 1929 collapse was hardly the first economic panic in American history. Periodic “hard times” have always been a fact of life, and there had even been a sharp depression in the 1890s, one clearly remembered by many of those who experienced the crash in 1929. There had also been horrific natural disasters, such as the San Francisco earthquake of 1906, which caused drastic economic shifts and spikes in unemployment. What was different about 1929 was the decision by political leaders, particularly President Herbert Hoover and his successor, Franklin Roosevelt, not to face the hard times with the market-based solutions that had worked before, but with government-controlled “recovery” schemes instead—schemes that actually wasted resources, delayed recovery, and weakened the market’s ability to bounce back.
Hoover’s primary goal in response to the downturn was to keep wages high, prevent unemployment, and resist the fall in prices for crops. “If prices are high, they mean comfort and automobiles,” he told a reporter, “if prices are low, they mean increasing debt and privation.” This was economic quackery, because lower prices are caused by excess supply, and the resulting price drop is a signal that capital should be devoted to some other line of production instead. True, falling asset prices in the overextended state of the 1920s stock market were destined to cause severe ripple effects. But rather than allow investors and consumers to reallocate their resources as they needed, the Hoover administration focused instead on artificially propping up the prices for goods: subsidizing farmers not to grow things and adopting the now-infamous Smoot-Hawley tariff, which even John Maynard Keynes—hardly an advocate of laissez-faire—regarded as insane. That tariff made goods more expensive for consumers who were losing their jobs, just as artificially increased crop prices made it harder to put food on the table.
At the same time, Hoover sought to reduce unemployment with a massive public works program, building dams and bridges in order to hire people onto the government’s payroll. The result was to create an illusion of recovery, when in reality capital that the market needed to build a sustainable recovery was actually being diverted into channels controlled by politicians. What’s more, the workers hired on to such projects were typically those with more skills—which meant the program failed to help those who were suffering the most.
On the campaign trail, Franklin Roosevelt condemned Hoover for “spending altogether too much money” and for giving government “too many functions.” Yet within days of his inauguration, he doubled down on the federal government’s response, instituting a series of programs designed to subordinate the economy to allegedly expert planning. The National Industrial Recovery Act allowed industry leaders to promulgate “codes of fair competition”—basically cartels that raised prices and restricted production—and to punish anyone who engaged in unauthorized economic competition. When Sam Markowitz and his wife, Rose, advertised that they would clean suits for five cents below the level set by the Cleveland “code of fair competition” for dry cleaners, they were sent to jail. Jacob Maged of Jersey City was jailed and fined $100 for charging 35 cents to press a suit rather than 40 cents as dictated by the “code.” Meanwhile, the Agricultural Adjustment Act sought to reduce agricultural production by prohibiting farmers from growing food. One consequence was to destroy the livelihoods of sharecroppers, since they didn’t own the land they farmed and were therefore thrown out of their jobs when the landowners agreed not to allow planting.
Roosevelt’s schemes for reducing unemployment were no less destructive. Massive undertakings by bureaucracies such as the Works Projects Administration, the Civilian Conservation Corps, and the Federal Writers Project, diverted human talent away from where the market actually needed it and channeled it into projects approved by politicians. While Depression-era projects such as Hoover Dam are today viewed as triumphs of the age, less well-remembered are the countless thousands of workers assigned to such time-wasting tasks as studying ancient safety pins or stenciling fire-hydrants in Brooklyn (at a cost of more than $100,000). Socialist writer Norman Mcleod was so excited when he heard about the Federal Writers Project that he returned to the U.S. from the Soviet Union—only to find that his colleagues had nothing to do and sat around drinking beer all afternoon.
Measures such as the Wagner Act, which forced businesses to accept the expensive demands of labor unions, thanks to compulsory “collective bargaining,” and the Social Security Act that made it vastly more expensive to employ people than it had been before, helped precipitate the “depression within the depression” in 1937, which in some ways was actually worse than the 1929 crash. Roosevelt’s response to that collapse was to blame business owners for secretly conspiring against him and to demand an FBI investigation—which, of course, turned up nothing.
Had the government instead allowed investors and workers to seek solutions on their own, the result would have been to channel capital and resources toward areas where they were needed, resulting in sustainable economic recovery. Instead, Roosevelt and his supporters maximized political control over the economy, and shifted goods, services, and money to their own purposes—slowing the economy’s ability to regrow.
Of course, the Great Depression and today’s pandemic are very different; a downturn as severe as a depression could have been foreseen and avoided by sounder economic policies in the 1920s, and recovery from a depression is a matter of politics and economics, whereas recovery from the pandemic depends on scientific advances and prudent public health measures. But there is no reason the nation’s economy cannot rebuild once it’s safe to reopen—or even sooner, depending on the freedom of industry to find new solutions for the crisis. Unfortunately, with leading politicians already advertising their plans for “an FDR-size presidency,” there is every reason to fear that the government will instead hamper the economy it’s trying to save.
Normally, if an outbreak of a contagious disease causes consumers to avoid amusement parks or restaurants, the result will be a fall in prices for those services, which leads investors and business owners to invest in other things instead—say, in improved methods for delivering food to people’s houses or new entertainment products that can be enjoyed at home. The result will be a rapid rise in unemployment, and a period of severe hard times—followed by swift recovery when people find new jobs in industries that are experiencing greater demand.
But that process is hindered by government policies that artificially prop up businesses for which there is no longer a market demand. Car dealerships may be suffering today, but calls for bailouts will prevent recovery by slowing the pace at which dealers and their employees find new, more profitable work. Bailouts will also prevent dealers attracting laid-off staff back to their jobs with higher wages, if and when consumers go back to buying cars, because the bailouts will prevent dealers from responding to market signals at all.
Not only do bailouts deter people from transferring resources to areas of the economy where they’re needed, but bailouts must also be paid for (assuming they’re ever paid for) out of taxes that come from the capital of enterprises that are currently successful—that is, those businesses that are serving customers now, rather than sitting idle. Bailouts therefore hurt those industries that respond well to the crisis, and reward those that don’t.
Tariffs, which are a bad idea even in normal times, are especially foolhardy in hard times. They act as taxes, depleting the resources that businesses need if they are to transition to serve the new forms of demand—and they raise prices for things shoppers need, at just the time when people need to stretch every dollar. Forcing an unemployed father to spend more money on a T-shirt because it was made in China instead of New Jersey is deeply inhumane.
Unfortunately, just as in the 1930s, such counterproductive policies remain highly popular today, and they are all too easy for politicians to adopt during hard times, because they seem on the surface to be compassionate. Nobody wants people out of work, and losing a job can be a difficult, even traumatic experience. But just like a bad-tasting but lifesaving medicine, a rapid economic transition to meet a shift in consumer demand is absolutely necessary in order to cure the patient.
There are things that government can do to help Americans recover, while still keeping themselves and their families safe. One big thing is to get out of the way. Regulatory burdens on business innovation and job creation are luxuries few can afford now. Licensing laws, laws that set minimum prices for goods and services (that is, which require high prices) and barriers to workers who want to put their skills to work providing for themselves and their families should be reduced wherever possible. Rules that prevent home construction for aesthetic reasons; requirements that freelance workers be classified as employees; and prohibitions on home-based businesses that don’t bother neighbors anyway—these are just a few examples of needless barriers to recovery that legislators should sweep away as quickly as possible.
Today’s economic downturn is distressing, indeed. But there is no reason to doubt that the ingenuity and innovation that free markets help generate can meet this bizarre new world. The only thing that can prevent that from happening—and transform these hard times into a new Great Depression—is misguided government policy rooted in a romanticized and ignorant idea of the New Deal precedent. Economists have learned a lot of lessons in the century since the 1929 crash, and the most important is this: Free markets work—when they’re given the chance.
Photograph of a WPA project during the Great Depression by Fotosearch Getty Images.
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