Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Sunday, February 22, 2009

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 . . .

4 comments:

Ironman said...

Some clarifications are needed for your observations:

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.

Changes in stock prices are most often driven by changes in people's expectations - once something becomes believed to be likely to happen, people begin making decisions to adjust for the changes they expect to happen and will begin doing so almost immediately.

We're most familiar with a rather large amount of data demonstrating that happening in real time with today's stock market - there's no reason to believe that the market of 1929 was any different in that regard.

And for that matter, the effect we described above is not limited to the stock market. We can see the same thing with a variety of other economic statistics, such as employment data, with employers reacting to legislation well before it either passed either the House or Senate or into law or when it finally took effect.


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 stays in the range of the "dead zone" values all the way out through 1949. Wow!


"Sustained recovery" in this case means that stock dividends per share did not see any extended periods of decline or reversals from positive growth as they did in the depression era.

The key word here is "sustained". There is no other description of the rate of growth of stock dividends per share nor comparison to the period we identified as having anemic growth in the post. A false presumption on your part is required to arrive at your conclusions as they are not supported by the actual text or graphs contained within our own post. I'm afraid that you're fighting a straw man of your own creation here.

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 graph clearly identifies the period between October 1929 and June 1943 as one in which deflation was either flat or dominant (indicated by the green line being consistently on or above the blue line). That visual outcome definitively demonstrates our point and in no way "refutes [our] wrap-up sentence." Instead, it's fully consistent with it. I'm afraid you've lost your battle with your straw man.

Jazzbumpa said...

Ironman -

Thanks for stopping by. How did you find me? I thought I was the most obscure blogger in the galaxy.

It's late and I'm tired, so I'll have to digest your comments another time, probably tomorrow, and then make a more intelligent response.

For now, I don't think I set up any straw men. That was certainly not my intention. We do seem to have some basic disagreement about either concepts or the meanings of words, and we're certainly seeing different things in the graphs.

In graph 1, The slope after '42 is less than the slope in the anemic period of '39 to '42.

If you're setting up dividend payout as your criterion for recovery, and real dividend payout in the recovery period is essentially flat for several years, and very close to equal to dead zone values, I don't see that as recovery.

More later. I appreciate the dialog.

Jazzbumpa said...

That should say "slope after '43" not 42.

Jazzbumpa said...

For a response, see the next post.