Oct. 25 (Bloomberg) — "When it comes to our foreign policy, you seem to want to import the foreign policies of the 1980s, just like the social policies of the 1950s and the economic policies of the 1920s," President Barack Obama told Mitt Romney in their final debate.
Obama got sloppy here. Presumably, the president was suggesting the 1920s represent economic failure. The decade represents just the opposite, as measured by the very goals on which the Democrats base their 2012 presidential campaign.
Growth: Obama has spoken often and forcefully about economic growth. In just one debate, the second one, the president used the term "grow" when discussing the economy 13 times, whereas Romney said "grow" or "growth" eight times. The 1920s had strong growth: Real gross domestic product increased an average of 4 percent per annum.
Higher wages for skilled workers: "I want high-wage, high-skill jobs," Obama has said. Weekly wages increased in the 1920s, especially in the president's preferred area — higher-skilled jobs. Overcoming joblessness, Obama has said, matters hugely to our future.
"We've seen 30 consecutive, 31 consecutive months of job growth, 5.2 million new jobs created," the president said in the second debate. The actual unemployment rate currently sits at 7.8 percent, and the Obama case remains that more stimulus and support are necessary. Contrast that with the 1920s. Confronting a jobless rate of 11.7 percent in 1921, policy makers acted by cutting the federal budget. Unemployment slipped to 6.7 percent and then to 2.4 percent by 1923, according to the Historical Statistics of the United States.
Innovation is important to Obama. As he said earlier this year: "We are inventors, we are builders, we're the makers of things. We're Thomas Edison and the Wright brothers and Steve Jobs." In the 1920s, patent applications for inventions, the barometer for innovation, averaged more than 80,000 a year, a level they didn't reach again until the 1960s. Such newer inventions made Edison's light bulb and the Wright brothers' airplanes common in our society. The 1920s roar was loud and real.
The 1920s did suffer several problems. Unit banking (meaning no branches) and poor management of savings and loans made small financial institutions weak. Many failed. So did many farms, as a result, some argue, of excessively tight monetary policy.
The stock market rose too high too fast, hitting 381 when it stood at only 100 less than a decade before. Some scholars believe the market leap resulted from interest rates that were too loose.
In any case, overall, the 1920s data are estimable. Americans got telephones, fans and Model T's and A's. Even income distribution relative to taxes, a favored Democratic metric, became more favorable: The rich paid a greater share of the income tax by the end of the decade.
One can hazard two guesses as to why Obama slams the 1920s. The first is that the 1920s were followed by the 1930s, a decade of high unemployment when policies of federal intervention were closer to his own. The easiest way to protect the 1930s programs from criticism is to argue that the 1930s Depression was caused by 1920s policies.
This argument is a stretch; to hang a whole decade of trouble on, say, President Calvin Coolidge, or the 1929 crash, is hard to do. Economists themselves have long since concluded that the troubles of the 1930s had many causes. The stock-market crash of 1929 could have been like those of 1987 or 2000 — rough but quick. Other factors, including foreign monetary policy, did damage.
Additional domestic programs, mostly the responsibility of Herbert Hoover and Franklin Roosevelt, the presidents from the 1930s, made the Depression deeper, as well. Especially damaging, as the scholar Lee Ohanian has shown, was a then-new policy of placing upward pressures on wages through either presidential exhortation (Herbert Hoover) or law: the Davis-Bacon Act (Hoover), the Wagner Act, the Fair Labor Standards Act (Franklin D. Roosevelt).
The second reason the president might want to slam the 1920s is that the policies responsible for such strong performance in that decade are ones of which Obama, Fed Chairman Ben S. Bernanke and perhaps Romney disapprove. Today, all politicians avoid recession at all cost. The Fed and Treasury raised interest rates sharply after World War I, even though everyone knew a recession would result.
Combating inflation and stabilizing the dollar seemed more important than avoiding a recession. Today, politicians like stimulus. Back then, over a matter of just a few years, the federal government cut its size in half. In the 1920s, presidents and Congress cut tax rates often. The top rate on the income tax, which Obama would like to raise, was cut to 25 percent from more than 50 percent.
Why not allow the president his cheap conceit? For the same reason we want to call Romney on his lazy argument that Chinese currency manipulation, rather than our own lack of relative competitiveness, causes U.S. troubles.
The 1920s are crucial. If we don't know what really happened then, then we can't know what is possible now. Recently Romney produced a commercial announcing that he and Obama saw "two very different paths for the country." In the coming days, Americans must choose between those paths. That's especially hard to do when the country's past — the paths behind — are kept in the dark.
(Amity Shlaes is a Bloomberg View columnist and the director of the Four Percent Growth Project at the Bush Institute. Her biography, "Coolidge," will be published in February 2013. The opinions expressed are her own.)
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