More Depressing Thoughts

Did anybody ever tell you the Smoot-Hawley Tariff Act was a cause of the Great Depression? It wasn't. It probably didn't help things, but as a cause - well, let's just say it showed up far too little, and a little too late.

This post at Political Calculations goes into it. It has some interesting graphs, along with some stunningly wrong-headed reasoning. First off, they posit that Smoot-Hawley was responsible for the stock market crash of October, 1929. This is pretty extraordinary, since Smoot-Hawley was passed by Congress on March 24th, 1930, and signed into law by President Hoover on June 17th, only a few days short of eight full months later. In fairness to the good people at Poly Calc, they blame the crash on the breakdown of an anti-tariff coalition in the Senate in Sept-Oct of '29. If you're willing to believe that an impending incremental increase in trade restrictions has a close tie to the vagaries of domestic corporate finance - OK, go for it. But still - the idea that the mere potential of a bill, with yet-to-be-determined-effects, passing at some time in the future could be the root cause of a devastating stock market decline is rather fantastic.

It gets better. Have a look at their graphs, Thing 1 and Thing 2.

First off, these are graphs of trailing 12 month stock dividend payouts. As a measure of economic activity, this will be a very late indicator, and it's not at all clear that it will be an indicator of any validity. In Thing 1, for example, they define a "dead zone" from late '32 through late '35, when dividend pay-outs were almost flat, following the big decline from the 1930 high. We already know that business investment hit rock-bottom in '32, and was rebounding quite vigorously by '35. In the absence of any specific knowledge, I'll guess that those investments were beginning to pay off, hence the desire (and the ability) to eventually increase dividends. A lag time of about two to three years from the bottom does not seem unreasonable, especially since it is trailing pay-out data.

Now look at 1939 through 42, the pre-WWII period they call "anemic growth." Compare it to the period beginning in 1943, when "Sustained recovery begins, and Great Depression ends." Notice anything odd about the next 5 or so years after 1943? Like, for example, that the growth rate is about half of what they called anemic! It has me scratching my head, for sure.

Thing 2 is absolutely stunning! Inflation adjusted dividend pay-out, after their Depression end date of 1943, stays in the range of the "dead zone" values all the way out through 1949. Wow!

I have no idea what point they are trying to make. Even a casual glance at Thing 2 refutes their wrap-up sentence. "The beginning and end of the Great Depression can be identified as the period from October 1929 through June 1943 as the period in which the real (inflation-adjusted) values of the S&P 500's dividends per share consistently exceeded their nominal (historic) values."

The graphs sure are pretty, but -- scratching continues . . .