• The Heritage Network
    • Resize:
    • A
    • A
    • A
  • Donate
  • Hoover's Big Labor Policies Caused Great Depression

    The University of California at Los Angeles reports:

    Pro-labor policies pushed by President Herbert Hoover after the stock market crash of 1929 accounted for close to two-thirds of the drop in the nation’s gross domestic product over the two years that followed, causing what might otherwise have been a bad recession to slip into the Great Depression, a UCLA economist concludes in a new study.

    “These findings suggest that the recession was three times worse — at a minimum — than it would otherwise have been, because of Hoover,” said Lee E. Ohanian, a UCLA professor of economics.

    The policies, which included both propping up wages and encouraging job-sharing, also accounted for more than two-thirds of the precipitous decline in hours worked in the manufacturing sector, which was much harder hit initially than the agricultural sector, according to Ohanian.

    “By keeping industrial wages too high, Hoover sharply depressed employment beyond where it otherwise would have been, and that act drove down the overall gross national product,” Ohanian said. “His policy was the single most important event in precipitating the Great Depression.”

    Unfortunately big labor has only increased their power in Washington since Hoover’s time. Heritage fellow James Sherk recently detailed How Labor Unions Affect Jobs and the Economy:

    Unions Compress Worker’s Wages: Unions want employees to view the union–not their individual achievements–as the source of their economic gains (without the union, workers wouldn’t get “fair share”). As a result, union contracts typically base pay and promotions on seniority or detailed union job classifications. Unions rarely allow employers to base pay on individual performance or promote workers on the basis of individual ability. Consequently, union contracts suppress the wages of more productive workers and raise the wages of the less competent. They may raise the overall wages of workers as a whole, but mostly unions just redistribute wealth between workers.

    Unions Kill Jobs: By eating up 10 to 15 percent of a firms profit, unions both make undertaking new investments less worthwhile and reduce the money that firms have available for new investments. Over time, this makes unionized firms less competitive. Consider the manufacturing industry. Most Americans take it as fact that manufacturing jobs have decreased over the past 30 years. However, that is not fully accurate. Unionized manufacturing jobs fell by 75 percent between 1977 and 2008. Non-union manufacturing employment increased by 6 percent over that time. In the aggregate, only unionized manufacturing jobs have disappeared from the economy. This pattern holds across many industries. Union jobs have disappeared especially quickly in industries where unions win the highest relative wages.

    Unions Slow Economic Recovery By raising their member’s overall compensation, unions reduce business investment and the overall number of jobs in an industry. Economists have found that states with more union members took considerably longer than those with fewer union members to recover from the 1982 and 1991 recessions.

    Sherk concludes:

    Unions are labor cartels. Cartels work by restricting the supply of what they produce so that consumers will have to pay higher prices for it. OPEC, the best-known cartel, attempts to raise the price of oil by cutting oil production. As labor cartels, unions attempt to monopolize the labor supplied to a company or an industry in order to force employers to pay higher wages. In this respect, they function like any other cartel and have the same effects on the economy. Cartels benefit their members in the short run and harm the overall economy.

    Posted in Economics [slideshow_deploy]

    17 Responses to Hoover's Big Labor Policies Caused Great Depression

    1. john newquist, chica says:

      This article lack merit due to lack of research. Perhaps addressing the effect of a 85% drop in grain prices and a banking collapse might clue the author to the factors of the great depression. I

    2. Roger D says:

      Having been in a construction union for over 30 years. And working on many different projects for many different contractors from sea to shining sea and four foreign countries.

      That is not way the construction union’s work. If you do not perform to your boss's expectations he can and will fire you are lay you off at mid shift if he wants.

      Most promotions are on performance, not years of service.

      Because of the skills of the Union construction worker the contractors are very happy with our performance.

      Construction Unions spend many millions of dollars every year training their members so that we are some of the best and most skilled workers in the world.

      That being said, I do not like their politics. But then I do not like the presidents either.

      Thank you.

    3. Pingback: » Financial News Update - 09/02/09 NoisyRoom.net: Where liberty dwells, there is my country…

    4. Roger S., Ma. says:

      There's a great little book on the history of the Great Depression, by Amity Shlaes: The Forgotten Man.

      It details the roles of Hoover, FDR, and a host of lesser characters, committing their "economic sins" of the time. Labor unions also played their part, although numerous others share in the blame.

      Ms. Shlaes does not dwell on it, but one point is that practically any governmental meddling is detrimental, mostly due to the "cartel privileges" which that necessarily conferred on a variety of economic actors whom "freer" markets might, otherwise, not have favored.

      Her thesis concerning the Depression amounts to this: Although such favor (or disfavor) would be troublesome at any time, it becomes especially detrimental during times of crisis when –for whichever reasons unbalanced– markets are struggling to adapt and find a new equilibrium. The further distortions due to governmental "inputs" during such times will only serve to further delay the adaptive response. As few, if any, markets exist in isolation, such delays affect more or less all. Thus they become detrimental to the entire economy in its move toward a recovery which becomes unduly delayed. In short, the "law of unintended consequences" will invariably second-guess any government trying to second-guess a market!

      Recent events, I believe, have supplied enough fresh evidence to prove Ms. Shlae right beyond a reasonable doubt. The recent "sales successes" of GM and Chrysler products during the "clunkercrash" program are more than a hint, much more than coincidental. Moreover, we may expect some, so far, delayed effects.

      Has the UAW helped or hurt in this context? When the principal actor is government, it becomes hard to tell. Either way, union leadership should remember that it's real "service" is as agent between employer and employee. Harming either to favor the other would normally cause the "losing" party to look elsewhere — unless, of course, the government "prevented" it. In the latter event, all three are harmed. The construction union mentioned by Roger D. seems to have understood this. At least it is acting in conformity with the idea of providing a genuine and tangible service to both sides, something markets tend to honor. In its case, that appears to be the enabling and enforcing of performance standards on the one side while securing appropriate compensation on the other. Since lots of our tax-dollars have been forcibly invested in Chrysler and GM, let us pry that the UAW is, or becomes, just as smart!

    5. Sandwichman says:

      I'm still waiting for the revelation that Ohanian's article is a hoax, just like Alan Sokal's 1996 punking of Social Text.

      Ohanian's "macro-economic model" doesn't support what he says and his sources don't support the assumptions in his model. Either the referees at JET were cronies with no scruples or they were total incompetents who passed the article on ideological wishful thinking. Shameful. See my detailed critique of Ohanian's bunk at:

      http://econospeak.blogspot.com/2009/08/and-it-ain
      and http://econospeak.blogspot.com/2009/08/and-it-ain

    6. Robert , Mississippi says:

      The unions killed the steel industry in this country to the point where virtually no steel is manufactured in America.

      The 1973 strike by the UAW against GM was the straw that broke the camel's back for the car industry and killed the golden goose.

      I would say that Wal Mart will be interesting to watch. If the unions ever gain entry, the decline of that businees will be well chronicled.

    7. Whicket Williams Kin says:

      Yes, same thing happening now We, the people, must reduce the government back to where it belongs, or India will look like paradise. impeach, prosecute as aplicable

    8. Whicket Williams Kin says:

      My Daddy told me about the government man coming by and shooting every other cow. Did not try for old, young, good, bad, just shot every other one, and went on down the road, killing. It made an already difficult situation worse. They lived hand to mouth for many years. Now, there are many more people, and the kind of sustenance farming/hunting they did is no longer feasible. We MUST put this monster back into the box before we have wholesale starvation Look at what they have done to food production in California, with more promised

    9. John Roane Sarasota says:

      What is important here in reviewing the past is that we can identify what we are doing here in the present.

      As a wise man once said "There you again"

    10. Tim Az says:

      One need only look at Michigan and Ohio to see the the wholsale destruction that unions have wrought. Another example would be the actual sales made during the cash for clunckers fiasco. You say Ford Sales were good during the cash for clunckers. Ford did not accept welfare for their union laborers. Ford is the only remaining American made car manufacturer left untainted by union labor welfare. I suspect the people will avoid buying products that are made with union labor as much as possible. Just as I have always done. How's that hope and change working out for you?

    11. Louis leon Cesar F L says:

      It is always wise to fallow Nature's laws which are the only ones that will work. All models, from all sciences that harmonize themselves with a thorough knowledge of these laws will be endowed with rare true explanation' and understanding power of how any system work.

      Pay based on performance, liberty of all entities (whether individuals or groups constituted along those principles of Nature's law) etc, are fundamental for growth and succes.

      All concentrations of power lead to tyranny, all authoritarianism are re-actions against Nature laws and will harm their subjects and objects alike. Even though it's not bad to unite when some think of defending their Rights, the nature and structure of the System prevent individual eclosion. The result is always against the individual and People and serve the few self-proclaimed leaders who unconsciously reconstitute what one psychologist calls the social ACTOR. Few Ohania'points are but structure of truth.

    12. Lynn B. DeSpain says:

      Nothing is more of a lie than a partial truth! In addition to what the Author has said, Hoover also failed to provide our vast farmland in the 'Dust Bowl" area with well drilling, irrigation and seed! He kept expecting the "Market" to correct itself,a and while of J.P. Morgan bailed out the Federal Banking system twice, still it all failed. FDR continued with this failure by allowing the Federal Government to continue to creep into the affairs of 'Private Enterprise", and continued keeping the Federal Reserve Banking System.

      The only thing that save this United States from complete ruin and destruction was WW11.

      Both Lincoln and JFK tried to abolish the Federal Banking system. Both may have died for it. Teddy Roosevelt was against the Federal Banking System.

      It has always been said,"Follow the money." to solve a crime. Ask yourselves this question, where is the money now? Who has the money? Who has not made good on a single 'Promise" since election? Who gave the money away and to whom, and why?

      History does on occasion repeat itself if left unremembered.

      We now seem to have in Office the same type of fool and a tool as Hoover was while he was in Office. Both with magnificent charm, golden words and both on the lower end of the I.Q. Scale!

      It is up to us, fellow Americans, to get our Nation back, one politician at a time, to take our States back one politician at a time. And we must and shall demand of our various States to become Sovereign and answerable only to the United States Constitution and its Amendments, and not to Washington DC and its crowd of fools.

      Hozro

    13. Pingback: Grassroots in Nebraska: In the News, August 28-September 4, 2009 | Grassroots in Nebraska

    14. Louis L Cesar F Levy says:

      Speechless before Lynn B cleverness. Whatever prevent destruction (originating from without) and few smart guys to get their ways against general interest when it thretens the Homeland's existence(from within) must be carefuly studied and correctly applied.

    15. S Clark, Colorado Sp says:

      Unions suffer from human propensity for power! As a union member for over 20 years, I must say unions such as mine (American Federation of Teachers) or AFT, forgot its basic ideas: to support teachers, students and education. Power corrupts, thus leaders must be monitored carefully by their constituents. I am often appalled by the us vs. them mentality of union leaders. My educational institution was perking along just fine with a Faculty Senate that negotiated contracts until a despotic president landed with unacceptable objectives forcing a union membership as bargaining agent. For years good healthcare and other issues were cordially negotiated, often with faculty forgoing huge pay raises. New leadership became involved with political action committees (PACs)usually against the rare conservative faculty. More and more the National AFT became a force to be reckoned with, leaving behind the education agenda and financing politicians for favors. Corruption and conflict-of-interest must be investigated! Unions have done much good for their members, but power has corrupted their leaders by forcing those nonmembers to pay union dues (union shop) to foster the Liberal agenda! Biology Professor

    16. Pingback: News on the Economy « Pond’rings

    17. Jack NYC says:

      Unions, unions, unions, it's always the fault of the damn unions. The unions haven't got any say in research, development, management, planning or any other significant aspect of running a major business entity. But damn those unions, they're always causing things to go wrong. Sherk tells it to us clearly, "By eating up 10 to 15 percent of a firms profit, unions both make undertaking new investments less worthwhile and reduce the money that firms have available for new investments." Obviously if greedy workers would simply accept lower wages the firms they work for could be more profitable. If workers donated their time the employers could hire even more workers and then none of the workers would be over worked. A brilliant analysis by Mr. Sherk. Now how do we get those greedy workers to participate in the economic process now that their wages have been satisfactorily reduced? Just like the good old days of sweat shops and child labor. Hey Sherk, little kids might work for still less.

      Of course as Roger S. tells us we can always turn to Amity Schlaes for quality information about the economic process. That BA in English from Yale was all the training an individual needs to produce articles in the various venues of the business media that have published her fictionalized accounts of the world of economics. That's what a degree in English is good for, making up stories about interesting subject matter that will satisfy your bosses and the general general business community that they pander to. Good work Amity. And good luck to the Heritage Foundation, a bastion of fiction and fables in the real world of economics.

    Comments are subject to approval and moderation. We remind everyone that The Heritage Foundation promotes a civil society where ideas and debate flourish. Please be respectful of each other and the subjects of any criticism. While we may not always agree on policy, we should all agree that being appropriately informed is everyone's intention visiting this site. Profanity, lewdness, personal attacks, and other forms of incivility will not be tolerated. Please keep your thoughts brief and avoid ALL CAPS. While we respect your first amendment rights, we are obligated to our readers to maintain these standards. Thanks for joining the conversation.

    Big Government Is NOT the Answer

    Your tax dollars are being spent on programs that we really don't need.

    I Agree I Disagree ×

    Get Heritage In Your Inbox — FREE!

    Heritage Foundation e-mails keep you updated on the ongoing policy battles in Washington and around the country.

    ×