This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: Political Arithmetic: Simon Kuznets and the Empirical Tradition in Economics Volume Author/Editor: Robert William Fogel, Enid M. Fogel, Mark Guglielmo, and Nathaniel Grotte Volume Publisher: University of Chicago Press Volume ISBN: 0-226-25661-8, 978-0-226-25661-0 (cloth) Volume URL: http://www.nber.org/books/foge12-1 Conference Date: n/a Publication Date: March 2013 Chapter Title: The Emergence of National Income Accounting as a Tool of Economic Policy Chapter Author(s): Robert William Fogel, Enid M. Fogel, Mark Guglielmo, Nathaniel Grotte Chapter URL: http://www.nber.org/chapters/c12915 Chapter pages in book: (p. 49 - 64) 3 :: The Emergence of National Income Accounting as a Tool of Economic Policy Herbert Hoover was sworn in as president at the end of a decade of generally vigorous economic growth, marred by the deep but short recession of 1920–21. By March 1929, the economy was near the top of a vigorous boom. In his inaugural address, Hoover was lyrical in his vision of American prosperity: “Ours is a land rich in resources; stimulating in its glorious beauty; fi lled with millions of happy homes; blessed with comforts and opportunity. In no nation are the institu- tions of progress more advanced. In no nation are the fruits of accom- plishment more secure. In no nation is the government more worthy of respect. No country is more loved by its people. I have an abiding faith in their capacity, integrity, and high purpose. I have no fears for the future of our country. It is bright with hope” (“Inaugural Ad- dress” 1929). However, that bright hope received a terrible jolt just seven months later with the stock market crash of October. In 1930, the unemployment rate jumped to nearly 9 percent, triple the rate of the previous year. During 1932, Hoover’s last full year in offi ce, nearly a quarter of the labor force was out of work (Smiley 1983). Hoover did not fi ddle while Rome burned. He had been an ac- tivist secretary of commerce for eight years, and he moved far more forcefully to infl uence the course of the economy than any previous president. Because the agricultural sector was depressed when he assumed of- fi ce, Hoover supported the establishment of the Federal Farm Board with authority to lend money to farmers and promote farm coopera- 50 Chapter Three tives. Concern with the speculative stock market boom of 1927–28, fueled by the low interest rates of the New York Federal Reserve Bank, led him to pressure the bank to desist in lowering rates and also to seek new regulations to limit margin buying and insider trading. Be- cause of the stock market crashes of October 24 and November 29, Hoover feared that a major cyclic downturn was impending, and he sought to counter it with a reduction in taxes and expanded public works. He also held a series of conferences, organized with the help of the NBER, that involved representatives of business, labor, and gov- ernment to address the impending recession (“American President: Herbert Hoover,” n.d.). Because he expected the economic downturn of 1930–31 to be simi- lar to that of 1920–21 (sharp but brief), Hoover initially opposed ma- jor federal intervention. However, the large rise in bank failures and a huge jump in unemployment led him to support legislation establish- ing a vigorous public works program and temporary emergency relief. He also supported prolabor legislation curtailing injunctions against strikes and confi rming the right of workers to organize in unions (“American President: Herbert Hoover,” n.d.). In addition to legislation and executive orders, Hoover engaged in extensive jawboning, organizing conferences of business, labor, and academics aimed at persuading large corporations not to cut wages and unions not to strike. These eff orts, in which the NBER played a major role, were surprisingly eff ective. Nevertheless, the rate of bank failures rose to unprecedented lev- els, and, by 1932, unemployment was eight times the level of 1929 (one of every four industrial workers was unemployed). Hoover sought to stem the decline in the economy by defi cit spending, doubling the national debt, which reached 40 percent of GNP in 1932 (Gay and Mitchell 1929, 1933; NBER 1931, 1932; “United States Unemployment Rate,” n.d.). The New Deal During the election of 1932, Roosevelt railed against the shocking es- calation of federal government spending by Hoover and his expan- National Income Accounting as a Tool of Economic Policy 51 sion of the federal bureaucracy. Roosevelt’s running mate, John Nance Garner (the speaker of the U.S. House of Representatives), accused Hoover of “leading the country down the path of socialism” (Otto, Gorey, and Galvin 1982, 26). The recurrent themes of Roosevelt’s cam- paign were a return to laissez- faire and fi scal solvency at all levels of government. Aft er his inauguration, however, Roosevelt unleashed a fury of measures aimed at turning the economy around through “relief, re- covery, and reform.” Much of this program was formulated before he took offi ce by his “brain trust,” academic advisers trained in econom- ics and corporate law and connected to Columbia University.1 During his fi rst hundred days in offi ce, Roosevelt concentrated on overcoming the banking panic. The day aft er his inauguration, Con- gress passed legislation for a “bank holiday,” which stopped the run on the banks, and then established the Federal Deposit Insurance Corpo- ration, which provided federal insurance of deposits if banks failed. He also extended Hoover’s relief programs under the supervision of a new agency, the Federal Emergency Relief Organization. To remove single, young, unemployed men from the labor mar- ket, he established the Civilian Conservation Corps to work on con- struction projects in rural areas. Congress also broadened the anti- monopoly powers of the Federal Trade Commission, and the powers of Hoover’s Reconstruction Finance Commission were extended to permit government fi nancing of industry and railroads. The Agricul- tural Adjustment Administration was established to raise farm prices by paying farmers to take land out of production and reduce the size of herds. The National Industrial Recovery Act (NIRA), which became law on June 16, 1933, was the main instrument used by Roosevelt in his at- tempt to reorganize the economy. The act permitted the president to establish the Public Works Administration, which initiated construc- tion projects that included the Boulder Dam (now Hoover Dam) in 1. Roosevelt’s original brain trust included Adolf Berle (corporate law), Raymond Moley (political science), Rexford Tugwell (economics), and James Warburg (banking). Berle, Moley, and Tugwell all taught at Columbia University. 52 Chapter Three Colorado and the New York Triborough Bridge (now the Robert F. Kennedy Bridge). The main feature of NIRA was its Title I, which permitted the pres- ident to cartelize industry and require farmers to take land out of pro- duction. To implement NIRA, leaders of each industry were asked to design codes to control economic activity by maintaining prices and wages, production, and employment. The aim of the program was to raise prices by reducing production, and, initially, it had the de- sired eff ect. But, aft er the fall of 1933, implementation of the program became sporadic as fi rms stopped cooperating. The increase in eco- nomic activity stalled between the fall of 1933 and 1935, when the Su- preme Court declared NIRA unconstitutional (Smiley, n.d.; Romer 1993, 1999). The 1934 congressional elections gave Roosevelt large majorities in both houses of Congress. Among the legislation that emerged was the bill creating the Works Progress Administration (WPA), which employed 2 million workers, including many writers, artists, and ac- tors. The WPA put actors to work in roving theaters that performed in local neighborhoods, and the artists painted murals on the walls of public buildings. More important in its impact on labor was the Na- tional Labor Relations Act of 1935, which gave a powerful impetus to workers to engage in collective bargaining through trade unions. That act prohibited employers from blocking the activities of unions and required employers to bargain with representatives of unions. It estab- lished the National Labor Relations Board to enforce the act. It has become something of a legend that the high level of gov- ernment spending under Roosevelt pulled the economy forward. In- deed, between 1932 and 1936, real GNP increased at over 7.5 percent per year. It is also true that defi cit spending at the federal level re- mained high. The decline in unemployment from 25 percent of the labor force in 1933 to about 14 percent in 1937 has also been attributed to fi scal policy. Somewhat puzzling, then, is the 1938 rise to 19 percent of unemployment, which lingered above 14 percent through the end of 1940, when Roosevelt promised to make America “the Arsenal of Democracy.” Overall, fi scal policy had little eff ect on the recovery from the De- National Income Accounting as a Tool of Economic Policy 53 pression. During most years of Roosevelt’s fi rst two terms, there were substantial increases in local, state, and federal taxes. Although gov- ernment spending increased between 1933 and 1939, in all these years except 1936 taxes exceeded government expenditures. While the fed- eral government ran defi cits, state and local governments had off set- ting surpluses. As E. Cary Brown of the Massachusetts Institute of Technology (a specialist in public fi nance) put it, fi scal policy was un- successful in promoting recovery from the Depression, “not because it did not work, but because it was not tried” (Brown 1956, 863, 866).