Skip to comments.FDR Responsible for Prolonging - Not Ending - Great Depression, Say UCLA Researchers
Posted on 03/17/2005 8:05:25 AM PST by ken21
FDR Responsible for Prolonging - Not Ending - Great Depression, Say UCLA Researchers
1933 recovery package delayed upturn by 7 years
Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.
After scrutinizing Roosevelts record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.
Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump, said Ohanian, vice chair of UCLAs Department of Economics. We found that a relapse isnt likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.
In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.
President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services, said Cole, also a UCLA professor of economics. So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies.
Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelts policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.
In the three years following the implementation of Roosevelts policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.
Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.
High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns, Ohanian said. As weve seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the markets self-correcting forces.
The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.
Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.
Roosevelts role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th centurys second-most influential figure.
This is exciting and valuable research, said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. The prevention and cure of depressions is a central mission of macroeconomics, and if we cant understand what happened in the 1930s, how can we be sure it wont happen again?
NIRAs role in prolonging the Depression has not been more closely scrutinized because the Supreme Court declared the act unconstitutional within two years of its passage.
Historians have assumed that the policies didnt have an impact because they were too short-lived, but the proof is in the pudding, Ohanian said. We show that they really did artificially inflate wages and prices.
Even after being deemed unconstitutional, Roosevelts anti-competition policies persisted - albeit under a different guise, the scholars found. Ohanian and Cole painstakingly documented the extent to which the Roosevelt administration looked the other way as industries once protected by NIRA continued to engage in price-fixing practices for four more years.
The number of antitrust cases brought by the Department of Justice fell from an average of 12.5 cases per year during the 1920s to an average of 6.5 cases per year from 1935 to 1938, the scholars found. Collusion had become so widespread that one Department of Interior official complained of receiving identical bids from a protected industry (steel) on 257 different occasions between mid-1935 and mid-1936. The bids were not only identical but also 50 percent higher than foreign steel prices. Without competition, wholesale prices remained inflated, averaging 14 percent higher than they would have been without the troublesome practices, the UCLA economists calculate.
NIRAs labor provisions, meanwhile, were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labors bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still remarkably high. By comparison, in May 2003, the unemployment rate of 6.1 percent was the highest in nine years.
Recovery came only after the Department of Justice dramatically stepped enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.
The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes, Cole said. Ironically, our work shows that the recovery would have been very rapid had the government not intervened.
UCLA admits this???
Who has that pic of the "Hell" sign covered in ice???
The DIMS are now going to claim revisionist history...Sucks being them...
This has been known for years. He did nothing to end the Depression. He tried, but all his policies and programs were socialistic and unsuccessful.
here's a good source of one faculty member's ideas;
you and i know that.
but many people do not.
so, posting and talking about this is educational.
education be a prime directive of free republic!
Learn all about the best minds (and they acutally were smart) and alphabet soup of laws that FDR enlisted for the new deal.
Fascinating (like a train wreck) stuff.
Robert Higgs' work is the benchmark text of this school of thought.
It's a PDF file.
My Grandfather switched parties and became a staunch Republican farmer because of FDR. If he were alive today, he would be smiling from ear to ear and saying "I Told You So!" after reading this article. He abhored the Farmer's Union, FDR, and any Democrat on the ballot from the day he switched parties after FDR's first 90 days.
My Dad was the same way when it came to FDR and Democrats -- he blamed FDR for Pearl Harbor but he immediately enlisted in the Army to go fight after December 7th.
Grew up in an anti-FDR family on both sides -- never thought I would be seeing the day an article like this came out of UCLA -- never ever!
A very significant piece of research, if it holds up.
The fact that it confirms Friedman's work shows that it is not just a flash in the pan, so to speak, but part of a growing body of work.
European economists have been saying this for decades.
So add FDR to Jackson and Lincoln as the Presidents who ignored the US Supreme Court.
i put it on my wish list at amazon so i don't forget it, but i'll get it at the library.
(i had to print off my amazon wish list! it got too long--about $12,000 of books.)
That would explain why we had a stock market crash a few years ago that was as bad as 1929, but didn't plunge into a depression.
Rate_Determining_Step beat you to it!
That 3rd dip in '37 should have been a clue.
Another hero of the liberals bites the dust.
Well, they still have Castro.
And that fake India with the Jack Nicholson complex.
I've been saying this for years.
Add to that FDR's public stance as a pacifist while doing all he could th get us into WWII and we begin to see why we never want another one like him
In fact - get FDR's smug mug off the dime and put Reagan on!
Should be. It'll be buried and ignored though. Too many people on both sides of the political isle are making big bank and grabbing lots of power with the way things are though.
The hell with us, the consumer. The producer. We "little" people. We don't COUNT anymore in their grand scheme of things.
I pity these guys.
Can you imagine the reception they'll receive at the UCLA Faculty Club after publishing heresy like this?
I'm glad to see this point of view is becoming more accepted.
every once in a while, after people get tenure, they do and say what they want.
Well he was safely reelected at that point, and then he gave us that "don't change horses" crap when the war arrived. In the meantime, his administration was breeding communists.
Better not say this kind of thing around elderly yellow-dog democrats unless you want to lose your head! I have older relatives who think FDR could (and did) walk on water.
that's a good book. fast pace, bird's eye view.
I agree. By prolonging the purging of bad debt, his actions prolonged the slow down. Witness, more recently, the case of Japan.
my best friend's mo-in-law is one of them!
wow! she has me pegged as evil.
for bad-mouthing fdr.
another liberal who believes her oppressor is her liberator!
And here all this time, I thought it was Bush's 'er Hoover's fault! (sarcasm)
Good post/thread bump
Only by left-wing socialist nutcakes. What finally ended the Great Depression was World War II and its attendant production boom, in spite of rather than in concert with FDR's idiotic New Deal programs.
Socialists are so stupid.
Look, they're talking about your favorite president (not).
We've got a supposedly conservative Republican administration, and they've got their lawyers in front of the USSC defending Wickard v Filburn now.
Indeed, he completely blasted the Keynesian tactics used (badly) in that book.
John Flynn spelled this out in detail in 1948, so it isn't revisionist history, and you can read his book for free:
The Roosevelt Myth
Right. World War II was optional, the US could have sat it out. I bet you believe in the Easter Bunny too.
Worst president ever.