The first problem I found in reading Thomas Sowell's "A Mind-Changing Page" is his citation of employment figures:
Although the big stock-market crash occurred in October 1929, unemployment never reached double digits in any of the 12 months after that crash. Unemployment peaked at 9 percent, two months after the stock market crashed — and then began drifting generally downward over the next six months, falling to 6.3 percent by June 1930.
I agree with Sowell's assertion that the stock market crash of 1929 was merely the single dramatic event that people focus on. It was not, by itself, the event that really changed the course of history. But I was very interested to see how agreed-upon facts are treated very differently. Here is the picture of the 1930s in the statistics provided by Steve Kangas in "The Great Depression: Its Causes and Cure."
1930
The GNP falls 9.4 percent from the year before. The unemployment rate climbs from 3.2 to 8.7 percent.
1931
The GNP falls another 8.5 percent; unemployment rises to 15.9 percent.
So...wow! Unemployment was 6.3% in June 1930 but was at 8.7% by December! If 1929 unemployment was at 9%, the year began with 3.2% unemployment, hit 6.3% by June and 8.7% by December, that doesn't sound like a stable economy that was "gradually drifting downward," that sounds like an economy that was wildly jumping about!
A look at US Government statistics
Nonfarm Employment, Hours, and Earnings by Industry
| Year | Employees (1,000s) |
| 1929 | 31,324 |
| 1930 | 29,409 |
| 1931 | 26,635 |
| 1932 | 23,615 |
| 1933 | 23,699 |
| 1934 | 25,940 |
| 1935 | 27,039 |
| 1936 | 29,068 |
| 1937 | 31,011 |
| 1938 | 29,194 |
| 1939 | 30,603 |
| 1940 | 32,361 |
This chart shows around two million people losing their jobs in 1930. By the way, this chart, with the years 1938 to 1940, backs up the frequent liberal Keynesian charge that by taking the government's "foot off the gas," i.e., by not spending lots of government money, thereby engaging in good Keynesian stimulative economics, the US fell back into recession. Employment made gains from 1932 to 1937, then fell sharply and didn't regain their former height until 1940.
What I find very interesting though, is that Sowell never mentions GNP, which is something Kangas takes very seriously as a way to measure the US's economic health. Kangas notes a few things about the US economy in 1929 that Sowell doesn't pay attention to:
- Backlog of business inventories grows three times larger than the year before. Public consumption markedly down.
- Freight carloads and manufacturing fall.
- Automobile sales decline by a third in the nine months before the crash.
- Construction down $2 billion since 1926.
- Recession begins in August, two months before the stock market crash. During this two month period, production will decline at an annual rate of 20 percent, wholesale prices at 7.5 percent, and personal income at 5 percent.
This is a picture showing that the US economy was in very serious trouble well before the stock market crash. Kangas ends off 1929 by noting:
- Stock market crash begins October 24. Investors call October 29 "Black Tuesday." Losses for the month will total $16 billion, an astronomical sum in those days.
Kangas' picture of 1932 is one of cascading disaster. The picture that Sowell paints of the remainder of the 30s is:
Within six months after this government intervention, unemployment shot up into double digits — and stayed in double digits in every month throughout the entire remainder of the 1930s, as the Roosevelt administration expanded federal intervention far beyond what Hoover had started.
If more government regulation of business is the magic answer that so many seem to think it is, the whole history of the 1930s should have been different. An economic study in Out of Work.
Problem: The chart that Kangas shows us at the bottom of his piece:
| Tax | Federal | GNP | Unemp. | ||
| Year | Receipts | Spending | Growth | Rate | |
| 1929 | 3.2% | ||||
| 1930 | 4.2% | 3.4% | -9.4% | 8.7 | |
| 1931 | 3.7 | 4.3 | -8.5 | 15.9 | |
| 1932 | 2.9 | 7.0 | -13.4 | 23.6 | |
| 1933 | 3.5 | 8.1 | -2.1 | 24.9 | |
| 1934 | 4.9 | 10.8 | +7.7 | 21.7 | |
| 1935 | 5.3 | 9.3 | +8.1 | 20.1 | |
| 1936 | 5.1 | 10.6 | +14.1 | 16.9 | |
| 1937 | 6.2 | 8.7 | +5.0 | 14.3 |
shows steady improvement from the depth of the Depression when Franklin D. Roosevelt took over (1933) until 1936. Sowell appears to agree with the basic facts presented here, but I don't believe Sowell agrees with the general picture at all.
Was the crisis properly handled by keeping labor's bargaining power limited and by essentially waiting it out and not undertaking vigorous government action? I don't think so. Sowell states:
The very fact that we still remember the stock market crash of 1929 is remarkable, since there was a similar stock-market crash in 1987 that most people have long since forgotten.
What was the difference between these two stock-market crashes? The 1929 stock-market crash was followed by the most catastrophic depression in American history, with as many as one-fourth of all American workers being unemployed. The 1987 stock-market crash was followed by two decades of economic growth with low unemployment.
But the two stock market crashes make for an apples & oranges comparison. As Kangas points out, the American economy was undergoing very real and very serious crises. The 1929 stock market crash was just one of many events that indicated America's economy was suffering a general systems failure. I was in my late 20s in 1987 and decided to change jobs. I made an appointment with an employment company and was to show up, but then the '87 crash occurred and they told me "Well, er, you can show up, but..." (I didn't bother). In other words, there was no general economic crisis in 1987 as there was in 1929 as the employment company was looking forward to having me come in right up until that date. Reagan's hands-off policy worked because '87 was a regular old downturn.
The hands-off policy that was being advocated by "literally a thousand economists" in 1929 was a political non-starter and very poor economic advice because 1929 was fundamentally different from 1987 and from economic downturns that had come before. Yes, under some circumstances, a hands-off policy is a sensible course of action, but in 1929, the problem was a loss of consumer demand caused by money being concentrated into far too few hands. America is approaching a similar point of concentration today, meaning that the next economic crisis should probably be handled in a Hooverian/Rooseveltian manner.
In a UCLA study, one of the authors of the cited study declares:
"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."
"Self-correcting forces" are all very fine and well when a country faces a standard, normal economic downturn, but when the problem is that of the society's economy is collapsing, it's not a very good policy at all. Getting high wages to workers in the midst of a critical lack of consumer demand was an eminently sensible policy. Ohanian is correct for when times are normal and for when the economic downturn is a regular one. For the Depression, the UCLA study is useless.
Update: One of the people I was discussing this issue with referred me to a piece that defends the concept of keeping government out of the economy to the maximum extent possible. When the piece referred to Ludwig von Mises and stated:
Total bank deposits more than doubled between January 1914, when the Fed opened its doors, and January 1920. Such artificial credit creation sets the boom–bust cycle in motion.
I recognized the theory I was arguing against. I wrote a piece in April 2009 that tore apart the libertarian theory that Federal Reserve interest rates had anything to do with economic booms & busts.
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