A Page From the Hoover Playbook
As the nation navigates through the most perilous straits it has seen since the 1930s, policymakers are looking back to the '30s to see which of the paths that Depression-era America embarked upon actually led toward recovery. Well, some of our policymakers. Others, it seems, have seized upon the very policies that deepened the Depression and are repackaging them as solutions for our time.
In Monday's meeting between President-elect Barack Obama and congressional leaders, Senate Republican leader Mitch McConnell suggested that instead of providing aid to the states to help them meet their Medicaid and education obligations, the federal government offer them loans. The idea is ridiculous on its face: With revenue drying up, states are already slashing services and reducing their workforces, which only deepens the downturn. The last thing they'd be inclined to do would be to take on more debt at the very moment they're struggling to balance their budgets.
But back to my original point: This idea was tried once before, in the depths of the Depression. In 1932, Congress appropriated $300 million to the Reconstruction Finance Corporation to send to the states for unemployment relief. (Unemployment insurance did not exist until the Social Security Act of 1935 was passed). Unfortunately, Herbert Hoover's RFC didn't offer the funds to the states as grants but as loans. Already all-but-insolvent, many states didn't take the offer. And the economy continued its plunge into the abyss.
This is Mitch McConnell's idea of a policy worth reviving.
Such historical illiteracy can result not only in cures that kill the patient but is also a cause of our current crisis. In Sunday's New York Times magazine, economics columnist Joe Nocera reported on the intricate mathematical models that Wall Street banks and brokerages used to assess their exposure to risk -- models, it's now painfully clear, that failed to alert our financial titans that they were parading off a cliff. Devised by the quants (Wall Street's name for the gifted mathematicians it employed), the models factored in an immense number of variables, including market behavior going back a quarter-century, in coming up with daily quantifications of risk.
But in addition to all their quants, Wall Street should have hired a handful of hists (my version of Wall Streetese for economic historians). Those hists might have insisted that the risk models include data from the late 1920s, the last time that America's financial institutions were as highly leveraged and as lightly regulated as they were last year. Those hists might have noted that even as U.S. households bought more and more on credit, their median annual income had flat-lined ($50,557 in 2000, $50,233 in 2007) and that this was a story that could only end badly -- much as it did at the end of the '20s, when the purchasing power of American farmers and workers tanked.
Unfortunately for us all, it's on the question of how to restore broadly based prosperity that the historical illiteracy of the American elite is at its most acute. Our opinion leaders have one thing right: We need to increase Americans' education levels. From 1875 to 1975, schooling for the average American rose by seven years. It has not increased since.
But education is hardly the only factor in boosting Americans' incomes. The one great period of broadly shared prosperity in U.S. history remains the three decades following World War II, which, anything but coincidentally, is the one period in which America had high levels of unionization. The business lobby is throwing big money into ads opposing the Employee Free Choice Act (EFCA), which would make it easier for workers to join unions, but one concern it has neglected to address is how the United States can again become a land of broad-based affluence with private-sector unionization at its current 7 percent level. There is no historic precedent for mass prosperity absent mass collective bargaining. The model cannot be constructed.
Happily, Barack Obama seems to have learned the right lessons from America's economic history. He knows that the stimulus package needs to be big enough to compensate for the collapse of bank lending. He knows that unemployment insurance and food stamps cannot be allowed to run out. He supports the EFCA as a way to boost Americans' incomes.
The problem is that a number of powerful members of Congress aren't much more historically literate than McConnell. Some Republicans advocate time-honored business tax breaks that have never done anything to jump-start the economy; some Democrats fail to see how EFCA can renew their party's historical role as the expander of the middle class (or they fear a diminution of business campaign contributions in 2010). From the world's best bully pulpit, Obama needs to preach, and teach, some history.