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economic justice

FDR prolonged -- not ended -- great depression

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.''

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Dismal science, indeed 17.Aug.2004 09:04

Hal E. Burton


They take a few narrow facts to prove thier political bent. Economists tend to be whores for the right. A few tend to practice the study as a science.

Consider, if you will...

The dustbowl and outmigrations. . .
NRA, CCC, WPA and so many others. . .
Why healthcare is tied to employment in the U.S.?
This study needs to work on a larger historical context to "prove" what it purports to.

Pure bunk 17.Aug.2004 09:21


Gen-u-wine, 100% bullshit.

Poor research 17.Aug.2004 11:35


One dimensional research. There was not enough information given in this article to make it credible. Please give an example or compare and contrast to another country's economic system. Throw us a bone I would love to understand.

I followed the link... 17.Aug.2004 12:02


...and nowhere is there any scientific data or processes to examine. All we have is someone's statements about the supposed conclusions that some economists came to.

How very convenient. Science can be used (if manipulated correctly) to claim that pro-labor legislation is "unnatural" and goes against the market's supernatural urge to right all wrongs. Such BS! This article proves nothing whatsoever.

Still Attacking the New Deal 17.Aug.2004 12:12

Lawrence Maushard

Revionist GOP history, pure and simple. They cannot stand the fact that FDR saved Americans at home from their forefather evil greedheads and then went on to make us the world power we still are today. They hate Social Security, minimum wage laws, union guarantees, work place safety, and government capital improvements -- the New Deal -- that FDR helped to install.

May those evil murderous GOP bastards burn in conservative capitalist hell.

Great rebuttal comment from blog where article originally posted 17.Aug.2004 12:50

Andrew Wiederhorn is behind bars!

enjoy reading these analyses, especially given the conclusion that lo and behold we have "discovered" the prolongation of the Great Depression, and it was FDR!

One is never convinced that the American economic system had not changed in ways that precluded speedy recovery through private-sector adjustments or that the vicious cycle at work in early 1933 might not have continued downward and become even more socially destructive in the absence of a New Deal. In other words, the entire model using 1929 as a starting point is in itself a folly. More recent experience with the austerity and laissez-faire policies imposed upon sick economies abroad also makes one wonder about their curative powers.

One thing is certain: the American system as reformed, partly by the New Deal and partly by a carry-over of wartime measures, did perform wonderfully well in the two decades after World
War II, a fact that has seemed to go missing from the UCLA analysis. In that period the business community finally adjusted to institutional reforms, an enlarged public sector, and altered "social
contracts" that much of America believed to be necessary steps toward a more humane and equitable order. Therefore, this analysis is not persuasive, and FDR perhaps deserves the ranking that TIME Magazine bestowed upon him a few years ago.

Dr. Joe Plaud

Conclusions followed by chosen supporting data 17.Aug.2004 20:50


It is easy to draw the wrong conclusions and then pick and choose supporting data to "prove" those conclusions, and of course one would totally ignore refuting data that would prove otherwise. The Great Depression lasted ten years, not fifteen. Then starting off with a wrong conclusion, the article goes downhill from there to the end.