The Fake History of the Depression

Mises Daily ^ | 4/20/2009 | Robert P. Murphy

[Eagle Forgotten]

When FDR took office, unemployment was, as you note, at something like 28%. In the late 1930s, before American entry into World War II, unemployment had been reduced to something like 10%.

Therefore, I'd be inclined to agree with you that the war -- sometimes referred to as "military Keynesianism" -- was not the key or sole factor in ending the Depression. What you have to account for, though, is that something happened during FDR's first several years in office. Conditions were markedly better than they were at the time of his inauguration.

So, in your view, what caused the huge decline in unemployment under Roosevelt?

And if you answer "buy my book," you will be sentenced to jogging three laps around the FDR Memorial. :)

[Conservative Coulter Fan]

“During the war the government pulled the equivalent of 22 percent of the prewar labor force into the armed forces. Voila, the unemployment rate dropped to a very low level. No one needs a macroeconomic model to understand the event.” ==Robert Higgs

[Conservative Coulter Fan]

We no what the "something" was in FDR's first several years, I defer to Jim Powell, "The New Deal tripled federal taxes between 1933 and 1940 -- excise taxes, personal income taxes, inheritance taxes, corporate income taxes, dividend taxes, excess profits taxes all went up, and FDR introduced an undistributed profits tax. A number of New Deal laws, including some 700 industrial cartel codes, made it more expensive for employers to hire people, and this discouraged hiring.

Frequent changes in the tax laws plus FDR's anti-business rhetoric ("economic royalists") discouraged people from making investments essential for growth and jobs. New Deal securities laws made it harder for employers to raise capital. FDR issued antitrust lawsuits against some 150 employers and companies, making it harder for them to focus on business. FDR signed a law ordering the break-up of America's strongest banks, with the lowest failure rates. New Deal farm policies destroyed food -- 10 million acres of crops and 6 million farm animals -- thereby wiping out farm jobs and forcing food prices above market levels for 100 million American consumers."

[BfloGuy]

So, in your view, what caused the huge decline in unemployment under Roosevelt?

For God's sake, man, don't underestimate the ability of citizens to try and better their own lot. FDR threw every possible obstacle in the way of Americans who wished to work harder and profit from it. But despite his misguided efforts at government planning, individuals continued to strive and, amidst all the barriers to progress, managed to take America from Depression to mere recession.

To claim that reducing unemployment to a mere 10% is somehow an accomplishment is to remove all meaning from the word. If government had kept out of the people's economic affairs, the Depression would have disappeard by 1934 or 1935 and would be nothing but a footnote now.

[LS]

I'm no big fan of Robert Higgs. He completely denies the impact of WW II spending (and forced savings) in causing the recovery. But there is a terrific new book out there on the New Deal by Burton Folsom:

New Deal or Raw Deal?

[tacticalogic]

When FDR took office, unemployment was, as you note, at something like 28%. In the late 1930s, before American entry into World War II, unemployment had been reduced to something like 10%.

I'd suspect a fair amout of the reduction could very easily have come from the creative minds of the beltway bureaucrats.

[Conservative Coulter Fan]

The conscription of 12 million men into the military is the only reason for the drop in unemployment.

[Conservative Coulter Fan]

People piled up large amounts of unspendable income in the form of money and bonds. Don’t confuse paper assets with real wealth.

[Conservative Coulter Fan]

Liberal myths are becoming something akin to a bottomless pit.

[Conservative Coulter Fan]

40% of the labor force were not producing consumer or capital goods and the tax money of the other 60% were funding the production of goods they did not need...that’s a loss of wealth.

[investigateworld]

Your thoughts?

[1010RD]

Have you read Burton Folsom’s book on the Robber Baron’s?

BTW Higgs is right about WW2 spending.

[1010RD]

Was???

[Eagle Forgotten]

The conscription of 12 million men into the military is the only reason for the drop in unemployment.

Conscription began in 1940 (the first peacetime draft in U.S. history). By that time the unemployment rate had already been cut to less than half what it had been at its peak.

Furthermore, there's no reason this should be surprising. Standard macroeconomic theory holds that, other things being equal, government deficits will produce an increase in aggregate demand, which will tend to reduce unemployment (but promote inflation). It was my impression that even the Chicago School monetarists had come around to acknowledging some role for fiscal policy. Government spending, taxes, and deficits do matter.

BfloGuy attributes the improvement to citizens' own efforts. Obviously that was part of it. If that were the sole explanation, though, you'd have to ask why it didn't occur earlier (such as under Hoover). Conservative Coulter Fan criticizes Hoover for trying to keep wages propped up, but Roosevelt did the same thing through the National Recovery Administration and then through the Wagner Act.

I know that "post hoc ergo propter hoc" is considered a fallacy, but sometimes an earlier event does cause a later one. Roosevelt got into office, discarded his own campaign rhetoric, instituted policies that were denounced as "socialism" by Republicans, and saw unemployment plunge as a result. If the change in policies didn't cause the plunge, what did?

[1010RD]

I hope you are right. I used to ridicule the Birchers, but I was just a kid then.

[Conservative Coulter Fan]

You said, "Conscription began in 1940 (the first peacetime draft in U.S. history). By that time the unemployment rate had already been cut to less than half what it had been at its peak."

I'd quote Jim Powell, "From 1934 to 1940, the median annual unemployment rate was 17.2 percent.1 At no point during the 1930s did unemployment go below 14 percent. Even in 1941, amidst the military buildup for World War II, 9.9 percent of American workers were unemployed. Living standards remained depressed until after the war." Please don’t be duplicitous about the continuation of the depression by discounting that unemployment ran high throughout the 1930s and it was the conscription was the key event that accounted in the drop in the unemployment rate, and that the drop in the unemployment rate doesn’t negate the fact that the war didn’t end the depression.

You said, "Furthermore, there's no reason this should be surprising. Standard macroeconomic theory holds that, other things being equal, government deficits will produce an increase in aggregate demand, which will tend to reduce unemployment (but promote inflation)."

To quote on Jim Powell, "As a cure for the Great Depression, government spending didn't work. In 1933, federal government outlays were $4.5 billion; by 1940 they were $9.4 billion, so FDR more than doubled federal spending, and still unemployment remained stubbornly high. Changes in federal budget deficits didn't correspond with changes in gross domestic product, and in any case the federal budget deficit at its peak (1936) was only 4.4 percent of the gross domestic product, much too small for a likely cure."

[Conservative Coulter Fan]

As Pindyck notes, “[m]ost econometric models of aggregate economic
activity ignore the role of risk, or deal with it only implicitly. A more
explicit treatment of risk may help to better explain economic fluctuations,
and especially investment spending”