Did the New Deal Prolong the Great Depression?

Over the decades most people have come to believe that the Great Depression contains a number of lessons. They believe that Franklin Roosevelt’s New Deal saved the nation and saved capitalism. They also believe that, absent government regulation, free enterprise cannot be trusted.

In many precincts these are articles of faith. FDR continues to enjoy a reputation as one of the greatest of American presidents, by Democrats and Republicans alike.

Over the years serious economic historians have disputed the conventional wisdom, but the last time America faced an economic crisis it chose, by electing Barack Obama, to follow New Deal policies.

Two UCLA economists have recently published a report showing not only that the New Deal did not get us out of the Depression. It made the Depression worse.

The UCLA Newsroom summarized the results:

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."

Cole concludes:

"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."