Big Government and Economic Recovery

Via UCLA comes an analysis of the Great Depression and the failures of Big Government policies in alleviating what began as a sharp recession.  Harold L. Cole and Lee E. Ohanian, after studying Franklin Roosevelt’s performance, have reached a conclusion about the New Deal.

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.  We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.

These two lay the responsibility for the failure, in particular, on the anti-competition and pro-labor measures FDR signed into law in 1933.  Even though much of that first New Deal round was found unconstitutional, that outcome took a couple of years to reach, during which the damage was being done, and it was replaced by similar New Deal laws that a later, more submissive Supreme Court upheld.

Cole added

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.  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.

The Cole and Ohanian study went on:

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.

And with those carefully elevated prices—deliberately elevated through mandated price floors and, with agriculture, government-controlled production rates—food was so expensive that FDR forced food stamps—and the taxes to support them—through the Congress.

Ohanian added this, too:

High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns.  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.

Does any of this sound familiar?  Under the present administration, with its Patient Protection and Affordable Care Act, its Dodd-Frank Act, its wholly unaccountable Consumer Financial Protection Bureau, it’s really not so unimaginable.  Under the present administration, that singles out private citizens and publicly castigates them for political donations to the wrong candidates, with its picking and choosing individual business—and whole industry—winners and losers, it’s entirely understandable.

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.  Ironically, our work shows that the recovery would have been very rapid had the government not intervened.



With a h/t to GayPatriot, who actually were writing about a different matter.

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