Wednesday, December 18, 2013

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."


Terry Lohrenz said...

I think it is worthwhile to point out Amity Shlaes' excellent book, The Forgotten Man, which lays out some of these same arguments.

Dennis said...

Shale's book is hard to read because it almost seems like one is reading the present and the future as it will happen. Same ideas played over and over again with the same results.
FDR's policies were so bad it drove the economy back into depression. Sans WWII it would not have improved though FDR's attempt at "court packing" and actions finally even woke up Democrats.
There was so much enmity against business through laws friendly to labor, the threat of government taking over as in the TVA, the threat of "excess profit taxes," et al that money did not get reinvested in the economy. Why reinvest when the government is threatening to ignore private property laws and just take the firm?
Capitalism and free markets just did not exist because of FDR's actions. The only capitalism we have today is "crony capitalism." We still do not have free markets. That economists can blame capitalism and free markets is an indication of how much the education system has degraded the ability to understand systems outside the politics and progressive ideology involved.

The Dark Lord said...

Economists are barely better than witch doctors ... they start with "theories" and try to fit the real world into said theories ... and when a government policy fails its NEVER because their theory was wrong ... it always some evil hidden forces that caused the failure ... usually someone with a profit motive ...

The Dark Lord said...

Darwin had and has the best theory of economics ... life is a big feedback loop ... people will always work towards increasing their own survival ... in nature that takes a long time to work thru the feedback loop of failed physical characteristics ... but with economics the feedback loop is fast and continuous and humans are able to quickly adjust behaviors to maximize survival ...

Sam L. said...

How come we only hear "Great Depression" in the US? Not called that in Europe, as best I know.

Unknown said...

Thank you for sharing this. I believe that competition is anywhere is really very eminent and that we should know how to deal competition. President Roosevelt did find a great way to regain back their economy.

Memphis said...

The more government interfered with the economy, the harder it had to struggle to recover. Roosevelt and his policies stood in its way in the name of "doing something."

Anonymous said...

Amity Shlaes' book so outstanding, she's been destroyed by the progressives for it. Hardly a better endorsement.

And for those hard for time and wanting a cribbed version, the first chapter will suffice. The rest is detail.

FDR recklessly interfered with the economy to the point where two of his own Secretaries of the Treasury rebuked him, amidst FDR acting as a ruthless predator of the Treasury Secretary before him (Mellon).

It is nothing short of preposterous how he has been lionized. For all those who claim modern political who-and-whos are "moralizing lunatics," I give you Franklin Delano Roosevelt. The man was a pretentious, moralizing WASP creep of the highest order. All by the fireside to make one feel cozy about it. Gack.


Dennis said...

I can remember as a young sailor stationed in DC spending many hours in the National Gallery of Art and the Smithsonian. The National Gallery of Art was the "house" that Mellon built. Roosevelt and jackson did almost everything possible to destroy Mellon who was far better for this country than either FDR of jackson.
One of the things that one finds is how enamored people like Tugwell, Douglas, et al were of Stalinist's policies.
It is amazing how much those with wealth created most of the foundations, museums, galleries and places where everyone could go to see the greatness of America. Here I was earning $68.00 a month and enjoying some of the finest art ever to be exhibited. Learning about America through the Smithsonian and what the city represented to the country.
These so called "robber barons" did more to aid most Americans than the government ever did and help to maintain freedom. Wilson, FDR and Obama are three of the most dangerous presidents this country has ever elected.