Were you taught about the Great Depression in middle school or high school? If you were (sadly, it’s not a sure bet), you probably got this series of events as your teacher picked up the pace to get to the good stuff (World War II):
1. Speculation crashed the stock market
2. Herbert Hoover did nothing – he believed in a hands-off approach
4. FDR took office, dramatically altered course with the New Deal, and fixed most things
5. World War II fixed the rest
Of those, 1 and 3 are true in some regard (speculation played a role in the crash, and Hoovervilles did exist). The other three points are completely false. Hoover was incredibly hands-on, involving the government quickly and directly in schemes like job-sharing and wage-fixing. Many of his approaches were repeated by FDR, who nevertheless saw the value in painting himself as the polar opposite of Hoover, a Republican (although hardly an ideologue – he was a free agent who worked in the Wilson Administration), even though they weren’t that different at all (wait, this all sounds familiar!).
In fact, the Depression re-ignited in the late ‘30s and Democrats were getting sledgehammered in mid-term elections. Not quite the symptoms you would expect to accompany the economic magic of the New Deal wand. And the notion that government war spending was the culminating moment of Keynesianism is equally ill-founded. High employment numbers are a lot easier with a draft. Further, there’s no “multiplier” for a howitzer. It gets built in a factory that at one time built consumer goods and goes directly to the army. Life in 1940s America was pretty crappy, despite the massive amount of government dollars flowing into the marketplace.
But I digress – the larger point is that perhaps the biggest economic lie since “Hoover did nothing, so I have to do something” is starting to take shape: the fact that our current economic situation was brought on by some kind of deregulated Wild West of a market that was absent any government oversight or involvement. Here’s Joe Stiglitz, waiting precisely zero words to get this new, made-up narrative:
Just a few years ago, a powerful ideology—the belief in free and unfettered markets—brought the world to the brink of ruin. Even in its heyday, from the early 1980s until 2007, American-style deregulated capitalism brought greater material well-being only to the very richest of the richest country of the world. Indeed, over the course of this ideology’s 30-year ascendance, most Americans saw their incomes decline or stagnate.
Look, you can have complaints about the rules we were operating under before 2008, or even the ones we’ve got now – but let’s not pretend that there were not rules (i.e., “free and unfettered”). Let’s also not pretend the government was not playing a role. There was a concerted effort to manipulate risks and incentives, and to encourage lenders to make loans they would not otherwise make. Not surprisingly, this led to a bubble, which did what bubbles do – burst. Here’s a great piece by Don Boudreaux that shows how completely absurd this approach was by using pianos instead of houses:
Suppose that several years ago Uncle Sam — pressured by the powerful lobbies of piano producers and piano teachers — adopted policies to encourage the manufacture and purchase of pianos. Tax deductibility for piano purchases, along with special government-created agencies designed to make credit artificially inexpensive for piano buyers and manufacturers, were used to ensure that no American household was denied the dream of easy access to a grand or upright piano.
Pianos, being beautiful to behold with eyes and ears, were indeed produced and purchased in record numbers. Families that otherwise would not have purchased pianos actually did so because of these government efforts to promote these exquisite musical instruments.
Politicians and the punditry were well-pleased. The rate of piano ownership soared to an all-time high. Citizens took pride in owning their very own pianos, as well as in knowing that their country was so prosperous and humane that piano ownership was spreading across the land.
And piano teachers and piano tuners were hired in record numbers. Wages for these occupations rose. Many young men and women who might have trained to become nurses or carpenters or clarinetists became, instead, piano teachers and tuners.
Piano production, retailing, delivery, maintenance, repair and instruction all boomed. “The piano industry is a mainstay of our economy,” many all-knowing talking heads explained.
But a few discordant notes eventually were heard. Because consumers’ demand for pianos was never really as strong as government policy made it appear to be, some creditors who lent money to piano buyers or piano producers started growing anxious. “Will the demand for pianos remain artificially high long enough for me to be repaid?” many of these creditors wondered — at first to themselves, but then more vocally.
These (reasonable) concerns gripped increasing numbers of creditors. Concern became panic. Even with government subsidies, creditors no longer wished to lend money to anything or anyone associated with the piano industry.
Demand for pianos collapsed — and along with that came the collapse of demand for the services of piano makers, retailers, tuners and teachers.
“Greedy business people seeking a quick buck nearly destroyed this vital industry, thus threatening the entire economy,” politicians all said in unison. “We must legislate to ensure that such a financial fiasco never happens again.
Read the whole thing. Then remember it the next time someone says “the free market was the reason we got into this mess.” And especially remember it far into the future when your grandkids come home and say it.