Don’t Forget History

Posted on May 8, 2014 by

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Amity Shlaes has written a fine piece in National Review Online on one particular aspect of the Great Depression having to do with minimum wages (NROMay 7, 2014).  As she points out, recent research has changed the way we evaluate that event in economic history.  In case you don’t remember, the dominant narrative had been that the stock market crashed and Franklin Roosevelt’s New Deal programs rode to the rescue.  These programs began to bear fruit around 1938 or so, with only a few setbacks.  World War Two finished the job.  But a proper revisionist history, driven by newly “discovered” (actually facts people finally paid attention to), has debunked this story.  

The seeds of the Great Depression were sown before the Crash of 1929, during the administration of Herbert Hoover, himself actually a kind of central planner and protectionist, whose Congress was willing to acquiesce.  Several pieces of legislation were enacted.  One was a protectionist tariff, which slowed down trade with other nations considerably. Another was an income tax increase, which of course meant less money in peoples’ hands to spend or save to be invested.  Shlaes adds another important policy, one which has application today in the calls for an increase in the minimum wage.

She reports that the “upward pressure on wages in the 1930s can’t have made it easier to hire.”  But apparently scholars and journalists either didn’t think too hard about why this occurred or deliberately ignored the possible causes.  Things have changed. Historians of economics now recognize that this upward pressure made the Depression worse then it might have been.  Why did the trend arise and why should that matter today?  Shlaes reports that before the 1920s most people lowered wages during downturns in the economy–as she puts it, “that was better than laying people off.”  Politicians however came to think that perhaps keeping wages high in a recession/depression might help the economy.  Hoover “voluntarily coerced” major businesses to keep wages high or even raise them in the months after the 1929 Crash.  This was of course not an economically sound move, but Hoover may have believed it would pay some short-term political dividends.  Less than two years later Hoover had signed the Davis-Bacon Act mandating “prevailing wages” in a trade or a region be paid on Federal contracts. Unemployment continued and rose, Shlaes reports.  Frankln Roosevelt continued the political pressure and his National Industrial Recovery Act codified higher wages (until it was struck down by the Supreme Court).  The Wagner Act simply re-implemented the means to push wages higher, this time through labor union activities.  Then the Fair Labor Standards Act of 1938 re-codified wages.  

What happened as a result?  Predictably, businesses simply didn’t hire or they laid people off, because they couldn’t afford to keep or hire workers.  Unemployment rose and remained high until it dropped just a bit i (not much) n 1938.  The Depression didn’t end, but persisted.  Here we are in 2014 and the calls for higher wages have returned, from President Obama, Joe Biden, Harry Reid, and many Democrats and other liberals.  Yes, the economy is once again, shall we say, less than stellar.  But if it has now been shown that higher wages in the1930s prolonged the Great Depression, what possible sense does it make to raise the proposal again?  Don’t we want people to at least be employed as opposed to having no jobs because they might have received a higher wage but now would be foreclosed by the legal circumstances?  Of course, it may make political sense, as the wage issue resonates with many people who both lack economic literacy and are driven by short-run self-interest.  So politicians can exploit this issue to some extent with only weak or muted reaction.

Amity Shlaes was correct to say the Depression was caused by several factors and also prolonged by some.  Today, our economic woes are also multi-causal.  But do we want to make them worse just to score possible political points?  So for all those who can articulate the case against mandated wage increases, please tell your friends and family the damage they do.  This blog certainly is not very glamorous, but the cause is worth even the introduction of a relatively boring topic.  On top of that, we can learn from history, another good reason to pay attention to it.

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