Was Hoover's No-Wage-Cuts Pledge a Banana Subsidy?
Like almost everyone else, libertarians typically argue that Herbert Hoover’s policies exacerbated the Great Depression. But there’s a key difference: Normal people blame Hoover’s commitment to laissez-faire, but libertarians blame Hoover’s proto-New Deal policies. Libertarian economists are particularly likely to highlight Hoover’s fervent effort to maintain nominal wages in the face of sharp deflation. See here, here, here, and here for background.
When you look into the details of Hoover’s “high-wage” policies, however, you learn that it remained legal to cut wages. Hoover talked, and many firms listened. But this doesn’t sound like a classic case of government failure. Instead, Hoover’s sermons against wage-cutting seem more like what we at GMU call a “banana subsidy” – a government policy that encourages people to take actions that are imprudent – even taking the subsidy into account. As Tyler originally explained:
Let’s say that the government subsidized the price of bananas, you
bought so many bananas, put them on your roof, and then the roof
collapsed. Is that government failure or market failure? The price was distorted, but I still say this is mostly market failure. No one made you put so many bananas on your roof.
After reading Lee Ohanian’s, “What – or Who – Started the Great Depression,” though, I’ve decided that Hoover’s efforts to discourage wage cuts were no mere “banana subsidy.” Hoover wasn’t simply preaching. He had a two-pronged approach: (1) Threaten and pass laws to encourage unionization, and (2) Urge firms to maintain wages in order to avoid the rising threat of labor militancy. Hoover didn’t just preach; he made compliance with his preaching the lesser evil from firms’ point of view. As Ohanian explains:
In November, 1929, Hoover met with the leaders of the major industrial firms in manufacturing, utilities, and transportation at the White House. Hoover presented his program for raising wages and work-sharing to avoid firm-labor conflict that he anticipated would arise. Hoover informed industry that they were to bear the cost of a recession by securing from them an agreement to maintain or raise nominal wage rates, and to engage in work-sharing. In return, he secured an agreement from labor to not strike and to not demand further wage increases. This program is clearly consistent with Hoover’s preferences for fostering high real wages, supporting unions, and reducing the workweek…President Hoover asked industry to maintain or increase current wages, as this would help keep the industrial peace: “…to maintain social order and industrial peace…a fundamental view (is) that wages should be maintained for the present…that the available work should be spread by shortening the work week…the industrial representatives expressed major agreement…the same afternoon I conferred with the outstanding labor leaders and secured their adherence to the program…this required the patriotic withdrawal of some wage demands…” (Hoover , pp.43-44).
Ohanian goes beyond earlier accounts by presenting detailed evidence that (1) the Great Depression was the first recession where wage cuts were rare and work sharing was common; (2) leaders of labor and industry, leading academics, and major media all gave Hoover personal credit for this new-found wage rigidity; (3) the union premium at the time was unusually large, making it prudent for firms to make major concessions to avoid unionization; and finally, (4) Hoover’s policies actually delivered the promised benefit of industrial peace:
In return for industry following Hoover’s program, labor largely kept their pledge to Hoover to not strike, as man-days lost to work stoppages was at its all time low in 1930 (U.S. Bureau of Census, ). Moreover, there was little labor organization during this period. Freeman reports that union membership as a fraction of non-agricultural employment fell between 1929 and 1931.
I suspect that most macroeconomists will see Ohanian’s history as window-dressing, and his subsequent calibrations as his “real” contribution. I’d exactly reverse that judgment. As a rule, calibrations are a question-begging leap of faith that the world resembles a tractable homework problem, and Ohanian’s is no exception. But his history genuinely advances our knowledge of the Hoover phase of the Great Depression. Hoover’s wage stabilization policy wasn’t a banana subsidy. It was more like a “voluntary” export quota, where firms consent to one bad thing in order to escape an even worse fate that government has waiting in the wings.