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"
This article is from the UCLA Newsroom for August 10th, 2004 and is located at
http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx
Stunning to think an article like this could come from UCLA and here we are 4 years later in the middle of carrying out the very policies that have proven to slow an economic recovery, well actually, our government carrying out these policies irrespective of our protest brought about by, as we can see here, well determined wisdom.