[StBernard] FDR's policies prolonged Depression by 7 years, UCLA economists calculate

[Westley Annis]

FDR's policies prolonged Depression by 7 years, UCLA economists calculate
By Meg Sullivan| 8/10/2004 12:23:12 PM
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-