Raising trade barriers as a response to an economic downturn isn’t a very smart idea. That said, I’ve rarely if ever seen a serious economic historian attribute the Great Depression primarily to the Smoot-Hawley tariff. The timing doesn’t add up right, and the United States just isn’t a particular trade-dependent country. Milton Friedman, for example, is a pretty hard-core right-winger but that’s not what he thinks. Naturally, since this explanation lacks intellectually respectability it’s commonly heard from conservative pundits and politicians. Michelle Bachman, however, gives it a special partisan twist arguing that “FDR applied just the opposite formula, the Hoot-Smalley Act which was a tremendous burden on tariff barriers” and that this is what caused the Great Depression.

TPM’s Eric Kleefeld has a feeble effort at a rebuttal:

Here’s what really happened: When Franklin Roosevelt took office, unemployment was already about 25%. And the tariff referred to here was actually the Smoot-Hawley bill, co-authored by Republicans Sen. Reed Smoot of Utah and Rep. Willis Hawley of Oregon, and signed into law by President Herbert Hoover.

Kleefeld needs to read Michael Dummett on reverse causation. It’s true that Bachmann is making an unfortunate error about the names of Messrs. Smoot and Hawley. But her contention is simply that Roosevelt, though he took office in March 1933, was actually able to cause events in the past precipitating the very years-long Depression that led to his election. It’s a bit confusing, yes. And somewhat metaphysically controversial. But not at all something she deserves to be mocked for.

[no, not really—she should be mocked]

If you have a real job, you probably don’t have time for this, but yesterday I watched the webcast of a subcommittee hearing on the lessons of the New Deal for today’s crisis featuring Christina Romer, Brad DeLong, Lee Ohanian, James Galbraith, and Allan Winkler and found it very interesting.

Eric Rauchway offers some some slices of New Deal history that seem relevant to the current debate over AIG. First, Jesse Jones, head of the Reconstruction Finance Corporation, from his memoir Fifty Billion Dollars (which was a ton in the thirties!):

The RFC acquired voting control of Maryland Casualty in April, 1934, when we first bought preferred stock in the Company. At that time we sent Silliman Evans to Baltimore to take the presidency of the company and Edward G. Lowry, Jr., of our legal department, to be its vice president and special counsel, each being elected as director. Mr. Evans later became chairman of the board…. When we got into the company, the situation was so much worse than had been represented that we felt it necessary to replace the management.

And this from James Olson’s book Saving Capitalism:

For political reasons, Jesse Jones often toyed with the salaries of corporate management, especially if they were, in his mind, “over-paid” Wall Streeters. Jones and Roosevelt knew that RFC loans always had the potential of political trouble—stirring up liberal Democrats and progressive Republicans who were blaming businessmen for getting the country into such an economic mess. Salary reductions were one way of showing that RFC, even while it was pouring billions into private business, was not enriching corporate management. Amendments to the RFC Act in 1933 required Jones to certify the appropriateness of the salaries paid by every corporation accepting loans and investment money. Jones devised a declining scale of salary reductions. Corporate management receiving annual salaries of $150,000 or more would be cut to $60,000, $100,000 or more to $50,000, and other reductions accordingly.

The RFC doesn’t get a ton of discussion today, but I think there’s plenty of evidence that its activities were more important to the 1933-36 growth spurt than was that era’s rather modest fiscal expansion. Basically the idea was to set up a public agency that could make the loans that the banking system couldn’t or wouldn’t do. Today’s TALF, run as a Fed/Treasury partnership, is designed to serve a similar function but works quite differently and has mechanisms in place designed to make it less political—and, not coincidentally, more business-friendly.

Populists on the left and opportunists on the right have taken to condemning the series of “bailouts” the government has undertaken since the fall of Lehman Brothers. And certainly I think these situations have been mishandled in a number of respects. And beyond that, I think these situations are inherently problematic in a variety of ways. But there’s a strong case to be made that the policy response to the recession has made things better than they might otherwise have been. When I say something like that, people tend to pester me in response for specifics: What, exactly, would have happened if we’d just let AIG and Citi and Bank of America and others collapse? The problem is that it’s impossible to say, in detail, what would have happened.

Kevin Drum, however, makes the excellent point that we can illustrate this in part with reference to Justin Fox’s chart of today’s job losses versus the Great Depression:

Consider, after all, that our response to the Depression appears to have been 180 degrees wrong. We literally did almost everything possible to make it worse: we tightened the money supply, balanced the budget, raised interest rates, passed protectionist legislation, and allowed banks to fail by the hundreds. It escalated a panic into a Depression. And this time around? Just the opposite: interest rates are close to zero, we’re running an enormous budget deficit, protectionism has largely been kept at bay, money is being pumped into the economy prodigiously, and with the notable exception of Lehman Brothers banks are being saved right and left. These actions have reduced a panic to a severe recession. If we had taken the same policy actions that Hoover and Mellon took in the 30s, does anyone doubt that the results would have been another Great Depression? I don’t. We may still be doing a lot of dumb things, but we’re an awful lot smarter than we were 80 years ago.

Kevin’s right. The right-wing advocates of no bailout and “spending freeze” are, in essence, calling for a return to the Hoover-Mellon policies that had disastrous results in the past. The nature of those results is spelled out in the chart. What people are living through today is no walk in the park, but it’s vastly better than the alternative. Meanwhile, the left-populist alternative of no bailouts and massive stimulus wouldn’t have been quite as bad because some proportion of the masses of the unemployed could have been employed in public sector jobs. To get stimulus on that scale, however, would have required an extremely high percentage of pure makework and essentially wasted funds.

What we’re seeing today is policy that’s basically on the right track, with errors on the margin. What we saw in the past was policy that was pointed in the complete wrong direction, married to good ideas like public relief on the margin. Unfortunately, as you can see on the chart there’s a ton of room between “not as bad as the Great Depression” and “worse than all the other post-war recessions.” And if we stay stuck in that territory for a long time, as I fear we might, there’s a real chance that voters will conclude in 2010 and 2012 that “bailouts and stimulus don’t work” and we’ll respond to continuing economic weakness with Hooverite policies that push us off the cliff.

The current recession is “the worst since the Great Depression” but it’s still a good deal better than the Great Depression. Justin Fox has a chart that makes the point:

The data’s not directly comparable because farm employment was a bigger deal back then, but this is about as close to an apples-to-apples comparison as you can find and the apples of the 1930s were much, much, much worse than our apples.

Via Tyler Cowen, economic historian Alexander Field makes the case that the 1930s was the decade in which we saw the most technological progress:

Because of the Depression’s place in both the popular and academic imagination, and the repeated and justifiable emphasis on output that was not produced, income that was not earned, and expenditure that did not take place, it will seem startling to propose the following hypothesis: the years 1929–1941 were, in the aggregate, the most technologically progressive of any comparable period in U.S. economic history. The hypothesis entails two primary claims: that during this period businesses and government contractors implemented or adopted on a more widespread basis a wide range of new technologies and practices, resulting in the highest rate of measured peacetime peak-to-peak multifactor productivity growth in the century, and secondly, that the Depression years produced advances that replenished and expanded the larder of unexploited or only partially exploited techniques, thus providing the basis for much of the labor and multifactor productivity improvement of the 1950’s and 1960’s.

I think a phrase like “the most technologically progressive” period is hard to define properly. But there’s no disputing the fact that there was substantial technological innovation during the Depression (refrigerated trucking as we know it, to cite just one example, arose during this period) and a ton of productivity growth. You can tell about the productivity increased by the fact that GDP had fully recovered to its 1929 peak by 1936, was clearly higher in 1937, remained above ’29 levels throughout the 1938 trough, and then was higher still in 1939 and 1940 even though the unemployment situation remained bad for much of this period, and absolutely terrible during the ’37-’38 recession-within-a-depression:

I assume that part of the story here is that the Roosevelt administration implemented labor market policies that had the effect of pushing real wages up in what they thought was an anti-deflation measure, rather than letting them fall in a way that would have encouraged more employment. This should have given employers and workers incentives to try very hard to make labor-hours as productive as possible.

Mitch McConnell studies history and reaches the conclusion that we should hope for a German campaign of world conquest:

“But one of the good things about reading history is you learn a good deal. And, we know for sure that the big spending programs of the New Deal did not work. In 1940, unemployment was still 15%. And, it’s widely agreed among economists, that what got us out of the doldrums that we were in during the Depression was the beginning of World War II.”

To be precise, the historical record shows that throughout FDR’s first term, the country was on a path to recovery—albeit from a very low point. Then there was a recession-within-a-depression associated with efforts to return to McConnell-style policies of fiscal restraint. By 1940, things were much better than they had been in 1932. But still, as he says, not very good. Thus far we don’t have a very solid case against stimulus spending. And now things get worse. The conclusion McConnell wants is that “big spending programs” couldn’t help fight the Depression. But World War II was, among other things, a huge spending program. At the moment, however, we’re fortunate not to be in a position where there’s a powerful wehrmacht that needs fighting. So we can try to direct our recovery-oriented spending at useful civilian projects that will improve the country’s infrastructure or health or education rather than on tanks and bombs.

Apropos of Paul Krugman’s demolition of George Will’s argument about the Great Depression, Brad DeLong offers a chart:

There you have it. This is far from saying that every detail of the New Deal regulatory agenda was the right thing to do then or would be the right thing to do now. But the monetary expansion associated with the New Deal helped the economy, and the attempted return to orthodoxy hurt.

Eric Rauchway reflects on Herbert Hoover’s October 25, 1929 proclamation that “The fundamental business of the country, that is the production and distribution of commodities, is on a sound and prosperous basis.”

Hoover worked to get businessmen to respond to the crisis by herding them into conferences and urging them to cooperate. He backed immigration restriction and a cut in the capital-gains tax. He quarreled with the unemployment figures from the Bureau of Labor Statistics. None of it worked, and yet Hoover insisted on the soundness of fundamentals, blaming the continuing crisis on whiners: “The income of a large part of our people is not reduced by the depression,” he said, “but is affected by unnecessary fears and pessimism.” He urged his fellow countrymen to count on “the magnificent working of the Federal Reserve system and the inherently sound condition of the banks.”

But the banks were not inherently sound; they depended on the unsound foundation of 1920s lending. After the crash, the president said the fundamentals were strong, but American consumers said, in effect, well, we’ll see, and their credit-driven buying slowed. Purchases of consumer durables in 1930 were about 20 percent lower than they were in 1929. Less purchasing meant less selling and more layoffs, which meant still less purchasing and soon more defaulting. The banks began to fail. Meanwhile, the “magnificent working of the Federal Reserve” did not stop the bank failures, which increased to sickening levels as Hoover’s term ground on and the reality of the Depression became undeniable.

Now of course to actually get down to the depths of the Depression required some policy blunders that I think it’s extremely unlikely anyone in the contemporary United States will undertake. But there is an undeniable commonality to the off-the-shelf conservative policy prescriptions here.