Posted on 03/06/2010 6:02:55 AM PST by paltz
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 Roosevelt's 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 UCLA's Department of Economics. "We found that a relapse isn't 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 Roosevelt's 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 Roosevelt's 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 we've 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 market's 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.
Roosevelt's 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 century's 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 can't understand what happened in the 1930s, how can we be sure it won't happen again?"
NIRA's 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 didn't 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, Roosevelt's 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.
NIRA's labor provisions, meanwhile, were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor's 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."
Really good satire has a number of elements, and even logical conclusions, close enough to the truth, that in some light, it is indistinguishable from actuality.
Perhaps some of the conclusions were overdrawn, but considering that the US industrial base did not get moving again until we began ramping up for war production, first as major supplier to Great Britain, then as Lend-Lease to the Soviet Union (for which we were never reimbursed, by the way), the effects of the Great Depression would have continued for far longer than the 1940’s. Only when most of the “New Deal” was dismantled starting in 1946 through the 1950’s, did the nation blossom again. The strictures of the New Deal were highly suited for a managed economy in wartime, but they are useless in a nation at relative peace.
The big recession in 1937 caused by the newly formed Federal Open Market Committee (the Federal Reserve) didn’t help either.
Roosevelt was a Dictator in the making. The fact that Presidential term limits were enacted almost immediately after his death was proof that the American public was afraid of where he was taking this country....
It wasn't until Jimmy Carter that we found a bigger fool to sit in the White House.
Finally the truth comes out.
FDR’s policies turned what would of been a deep recession into the depression.
And if he isn’t stoppped Obama might just do the same.
After WWII, the US was a long way down the path of military commitments and acting as the arms supplier to the world, largely to counter the "Red Menace" - that "military-industrial complex" which Ike cautioned against persists.
Based on the FDR era recovery period was delayed 7 years because of his interference, the current recovery period under Obama’s interference may be delayed forever. What a mess!!!!!
I have always found Democrat support for labor cartels odd. Democrats now are strident against collusion among businesses except for government influence that forces higher prices. Democrats openly support labor cartels somehow justifying labor cartels as fair even when cartels increase taxes and reduce government services provided. One might conclude that Democrats would favor competitive bidding in government services to maximize the amount of services provided.
In my mind, disdain for property rights is the overriding mindset of Democrats. The more wealth and income, the greater the disrespect by Democrats for property rights. Democrats spend every waking moment concocking schemes to violate property rights and destroying incentives to produce. Democrat schemes are essentially transferring property rights from producers who bear risks to workers bearing no risks. Democrats feel the natural order is to force risk bearing producers to transfer property rights to favored worker groups. Thus we see incredible income by relatively low skilled workers (bus drivers, auto workers, dock workers, and government workers). Democrats then transfer immutable property rights through ridiculous claims to retirement compensation. These groups have strong contractual rights to force risk bearing producers and taxpayers to pay for their property rights acquired through legalized theft. Who needs the mob for enforcement when the Democrats enforce through the state?
Notice the passive voice. Thought by whom? Answer: Keynesians and other statists, which includes essentially all journalists, and govermnent-sycophant "economists."
Works Progress Administration (WPA)— AKA... “We Piddle Around”.
So said my grandma who raised seven kids during the Depression.
“Wet Pants Annie” is what I grew up with.
WPA was in the concrete at the end of all sidewalks in my home town.
***WPA was in the concrete at the end of all sidewalks in my home town.**
I remember when almost all sidewalks had that logo on them. There is still a WPA Road near here.
Not news to me. My parents (and grandparents) hated FDR. When I was growing up I remember hearing them talking about how FDR’s policies made things worse not better.
Cost a lot of money just to keep "voters" busy and content during bad times.
It's part of the reason for the longevity of the great depression.
Haven't read any of her books however she sure has impressed me via interviews that I have listened to and watched.
“We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”
“Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”
Looks like it’s going to be a long cold recovery.
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