President Barack Obama is betting he learned enough lessons from Herbert Hoover to revive an economy still slowed in the wake of financial crisis.
Hoover, president from 1929 to 1933, raised taxes, signed the Smoot-Hawley import tariffs that hurt global trade and failed to stem a run on banks -- all of which contributed to the Great Depression. Obama, who seeks a second term in today’s election, helped to recapitalize the U.S. banking system, rescued automakers and approved $831 billion in fiscal stimulus.
Obama’s activism reflects a much larger federal-government role 80 years later, as well as the development of macroeconomics, giving officials more tools now to combat a slump, said Mark Gertler, a professor of economics at New York University.
“The policy response in this crisis was the mirror image of what happened during the Depression,” said Gertler, who has researched that period with Federal Reserve Chairman Ben S. Bernanke. “In contrast to Hoover, Obama pursued an activist policy intervention. Hoover operated largely in the dark: Economics at the time had nothing to say about what was happening.”
His term was marked by the October 1929 stock-market crash, which was followed by 9,700 banks suspending operations as of 1933, a contraction in U.S. economic output of close to one-third and unemployment that soared near 25 percent, according to the Fed.
During Obama’s term, the Standard & Poor’s 500 Index has risen 76 percent, the economy began expanding again in July 2009 after an 18-month slump, and the jobless rate fell to 7.9 percent last month from a peak of 10 percent in October 2009.
Economic research since the 1920s by John Maynard Keynes has shown that government deficits can be “good medicine for depressions,” and economist Milton Friedman has highlighted the importance of central-bank liquidity, said Hugh Rockoff, an economic-history professor at Rutgers University in New Brunswick, New Jersey.
“Obama deserves credit for making use of the better economics and a larger federal role,” Robert McElvaine, a historian at Millsaps College in Jackson, Mississippi, and author of “The Great Depression: America, 1929-1941,” said in an interview.
“Obama has much more macroeconomic knowledge and many more tools available, but Hoover declined to use what was available at the time,” McElvaine said. He wrote an article published in the New York Times last week comparing the two men.
Obama and Hoover, a former business executive, “were in office during the early months and years of the two worst, and in some respects quite similar, economic collapses of the past 100-plus years,” McElvaine said. Obama became president “four months after the 2008 collapse,” while the 1929 stock-market crash came during Hoover’s first year, he said.
Both crises followed years of economic imbalances before they came to a head, McElvaine said. While Obama cited Franklin D. Roosevelt’s “bold, persistent experimentation” in his speech at the 2012 Democratic National Convention, Roosevelt came to office after “the situation had deteriorated to an extraordinary degree, and it was nearly four years after the collapse, so almost everyone knew that it could not have been his fault,” McElvaine said.
As voters go to the polls today, both Obama and Republican candidate Mitt Romney have drawn on the record of the 31st U.S. president in making contrasting arguments about the success of Obama’s policies.
Romney has repeatedly criticized what he calls too-big government and too-high taxes for leading to the “slowest, weakest recovery” since Hoover. The unemployment rate stalled above 8 percent for 43 consecutive months through August, the longest stretch on monthly records dating back to 1948.
“To me, it’s a tragedy,” Stanford University economist John B. Taylor, a Romney adviser, said in a Nov. 2 Bloomberg Television interview. “I’m so disappointed we have not done better.”
While Obama may have learned lessons from Hoover, he proposes raising taxes despite criticism from some economists, including Taylor, that this would stunt growth. He has said he wants to boost taxes on income that exceeds $200,000 a year for individuals and $250,000 for married couples. He also supports higher taxes on investment and for some multinational corporations.
Obama invoked Hoover’s name during a November 2011 campaign event in criticizing “trickle-down economics before the Depression.” Press secretary Jay Carney referred to Hoover as “hapless” in May as he defended Obama’s stimulus and “the absolute essential need for taking dramatic action.”
Historians disagree on the extent of Hoover’s responsibility for the Depression, given the understanding of economics in his time.
He “became the chief scapegoat,” even though “public works under Hoover were very greatly expanded,” said Glen Jeansonne, a University of Wisconsin-Milwaukee professor and author of the biography, “The Life of Herbert Hoover: Fighting Quaker, 1928-1933.” Hoover actually boosted federal spending from $2.9 billion in 1929 to $4.8 billion in 1932 in an effort to mitigate the crisis.
Hoover’s trade barriers and higher taxes were counterproductive, which wasn’t understood at the time, Jeansonne said.
Edward Prescott, a Nobel Prize-winning economist and professor at Arizona State University in Tempe, says these policies, along with “shutting off immigration” and pressuring industry to maintain nominal wages as prices dropped, “created the Great Depression.”
One important distinction between Hoover and Obama’s eras is that the U.S. central bank acted more forcefully to combat the recession that began in December 2007, said Michael Bordo, a professor of economics at Rutgers who has criticized the slow pace of recovery. The Fed’s “aggressive actions in late 2008-2009” should get more credit than Obama for ending the slump, he said.
The Fed has taken unprecedented measures to fight the financial crisis and try to boost growth in its aftermath. Bernanke gave out more than $2 trillion in emergency aid through six loan programs, currency swaps with other central banks and the rescues of Bear Stearns Cos. and American International Group Inc.
The U.S. central bank also has held its benchmark rate near zero since December 2008 and pursued three rounds of so-called quantitative easing that have swelled its balance sheet to a record of almost $3 trillion. On Sept. 13, the Fed said it would buy $40 billion of mortgage-backed securities a month, without setting a limit on the size or duration of the program.
What Obama’s “administration didn’t do was deal with the source of the crisis,” which was “the collapse of the housing sector and the effects that had on the financial system,” Bordo said.
Some of Obama’s policies continued those of his predecessor. Congress approved the $700 billion Troubled Asset Relief Program for the financial rescue and President George W. Bush signed the bill into law in October 2008, in the midst of the presidential-election campaign Obama won.
TARP, initially aimed at U.S. financial institutions, was broadened to housing and autos as the crisis unfolded, though less than two-thirds of the total Congress authorized has been used. Bush first gave General Motors Co. and Chrysler Group LLC federal money, and the companies received additional help through managed bankruptcies under Obama’s administration. The U.S. has spent about $418 billion of the TARP funds.
“We would have suffered a depression” without intervention, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. TARP and government “stress tests” of the largest U.S. banks helped “to end the recession and jump-start the economy.”
How much money the rescues end up costing taxpayers will depend largely on the government’s ability to sell its 32 percent stake in GM and 74 percent ownership of auto lender Ally Financial Inc. The portion of TARP used to bail out banks has been profitable.
Obama’s use of TARP funds to help homeowners, an effort that’s not designed to produce a return on investment, has generated the most criticism.
The Treasury spent $5.8 billion of the $45.6 billion set aside to combat the housing crisis as of Nov. 2. The administration said in February 2009 it wanted to help as many as 4 million homeowners through the Home Affordable Modification Program to avert foreclosures. The plan has assisted about 1 million.
“Obama and his administration deserve high praise for containing what might easily have become a global economic meltdown,” said David Hamilton, a University of Kentucky historian and author of “From New Day to New Deal: American Farm Policy from Hoover to Roosevelt, 1928-1933.”
“The stimulus package that he put in place achieved substantial benefits and avoided a 1930-1931 sort of situation, which has meant we are not facing the grim world of 1932-1933.”