Posted on 07/24/2010 8:48:22 AM PDT by CommieCutter
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."
-UCLA-
LSMS368
While we are reposting old articles. There was one that came out in 1999 in NYTimes I believe about how the fiscal policy we were following with FANNYMAY and FREDDIEMACK would cause a bubble burst...because it points to DODD and FRANKS as culprits.Way before the bubble actually blew.
“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.”
Milton Friedman explained the same thing in Capitalism and Freedom.
Thank you! Ya gotta laugh and cry at the same time! “We’ll be fine unless somebody’s stupid enough to....” Somebody needs to tell Stupid....
Let’s not forget this one too. http://newsroom.ucla.edu/portal/ucla/pandering-to-labor-caused-great-91447.aspx
I would be the first to trash FDRs policies, but since he was in office only about 8 years before the Depression ended, I’d say this is stretching it.
Thanks for the post...old but timely !!
the formula for average wages is:
average wage rate = demand for labor/supply of labor
By reducing the average of wages, the supply of labor that can be employed can begin to increase, and unemployment rate begins to fall.
George Reisman pointed this out in his book Capitalism
...and after 7 years UE was still 14.6%.
Before we award any (backhanded) trophies for length of depression, let’s see how long Obama’s lasts.
One thing's for sure: Obama isn't going to get 3+ terms to extend the damage.
At the rate he’s going, he won’t NEED three terms.
Well, there is that.
Archie Bunker: [Maude refuses to get out of Archie’s chair] Well, I got the secret weapon that can lay this little lady right away. Here we go. This country was ruined by Franklin Delano Roosevelt!
Cousin Maude: You’re fat.
Archie Bunker: Sticks and stones may break my bones, but Franklin Delano Roosevelt...
Edith Bunker: Archie, you promised never to say that name again in front of Maude.
Archie Bunker: Franklin Delano Roosevelt!
Edith Bunker: [to Maude] He don’t mean nothing. His whole family was for Roosevelt.
Archie Bunker: That was for two terms. But that was it. We didn’t know the guy was going to hold on to the job like a pope!
Reading the article it appears that the reason was the government did not regulate the private sector enough. LOL.
“President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages.”
There was a rather bizarre economic theory back then that high worker wages were needed to stimulate demand. People like Henry Ford and the rino Hoover believed that high wages were needed so that those people could afford to purchase the goods that they were actually producing. In fact, it was improvements in efficiency and technology that brought prices down so that the masses could afford them.
Besides FDR’s support for cartels and unionization, the continuation of Smoot-Hawley tariffs and the 80-90% top marginal tax rate were other major reasons for the needless prolongation of the depression.
Roosevelt was a brazen Marxist and I do think that 0bama indeed ranks with him at the bottom. On April 27, 1942 Roosevelt stated in a message to congress “No American citizen ought to have a net income after he has paid his taxes, of no more than $25,000 a year.” (FDR’s Folly, Jim Powell, 2004 p245)
Using an inflation calculator $25k in 1942 is worth $313k today. Just think how much less innovative, productive and prosperous our nation would be today if FDR actually succeeded in this permanent salary cap. In fact it wasn’t until JFK that top marginal rates came down into the 60% range.
Only by left wing moon bats.
Must be the very same idiot UCLA economists who want us to believe that the Stimulus worked and that spending trillions more is a good thing. =.=
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