Thursday, February 05, 2009

New Deal Policies and the Persistence of the Great Depression

Earlier I posted an excellent editorial by professors Harold Cole and Lee Ohanian in which they argue that the New Deal made the Great Depression worse, or at least last longer. In it they discuss their academic research, which I fortunately was able to find. I haven't managed to read the whole thing, and it is quite technical at times, but rather interesting. From the conclusion:

The recovery from the Great Depression was weak despite rapid productivity growth, and was accompanied by significant increases in real wages and prices in several sectors of the economy. A successful theory of the recovery from the Depression should account for persistent low levels of consumption, investment, and employment, the high real wage, and the apparent lack of competition in the labor market. We developed a model with New Deal labor and industrial policies that can account for sectoral high wages, a distorted labor market, and depressed employment, consumption, and investment despite normal productivity.

Our results suggest that New Deal policies are an important contributing factor to the persistence of the Great Depression. The key depressing element behind these policies was not monopoly per se, but rather linking the ability of firms to collude with paying high wages. Our model indicates that these policies reduced consumption, and investment about 14 percent relative to their competitive balanced growth path levels. Thus, the model accounts for about half of the continuation of the Great Depression between 1934 and 1939.

New Deal labor and industrial policies did not lift the economy out of the Depression 51 as President Roosevelt and his economic planners had hoped. Instead, the joint policies of increasing labor’s bargaining power, and linking collusion with paying high wages, impeded the recovery by creating an inefficient insider-outsider friction that raised wages significantly and restricted employment. The recovery would have been stronger if wages in key sectors had been lower. 52

11 comments:

Lonnie Bruner said...

Man, these guys have done their homework. 76 pages! I'm not sure I can read it all.

For me, the idea that an increase in government spending alleviated the G.D. seems more logical. I mean, everyone's broke and those with money don't want to spend it. So one of the biggest spenders on the block -- gov't -- starts spending and things get moving again. Like a ripple effect. Then, after the recovery of the 40s, government kept spending at just less than the same levels, keeping safeguards/regulations in place, etc, and another depression didn't occur for 60+ years because of it.

I'm open to other interpretations -- I am -- but that simple analysis has been good enough for most historians and economists for six decades.

Just think of the government as a massive, often inefficient, corporation -- the biggest one -- and it's pretty solid. It takes a PhD thesis to suggest otherwise. (Not saying it's wrong. I didn't read it).

James B. said...

That was the whole point of the article I posted earlier "Faith Based Economics". This has never been proven, or even persuasively argued, it is just a matter of faith because people think it makes sense.

I am just amused at all the Democrats who would demand Cheney be impeached if Halliburton overcharged the government $10,000 for something, but now insist that it doesn't matter if a signficant percentage of $800 billion goes down the drain never to be seen again. Hell, that idiot at Newsweek practically argued that it would be beneficial if it would be wasted. And the One is arguing that we shouldn't even be trying to decide if the spending is appropriate, that would be to dangerous for the nation.

Lonnie Bruner said...

It's not faith-based at all. It's logic-based. Plus, you still haven't given a response to this: "Then, after the recovery of the 40s, government kept spending at just less than the same levels, keeping safeguards/regulations in place, etc, and another depression didn't occur for 60+ years because of it."

Man, you guys still can't get over the fact that you LOST big time last Nov. Face it: America prefers Democrats to make the decisions right now. Republicans are gonna look pretty stupid if the stimulus doesn't pass because they didn't like 1% of it.

James B. said...

Well there wasn't a Depression for the 60+ years before the Great Depression either, that does not prove anything.

I am not saying that no good reforms came out of this. I certainly don't call for the SEC to go away anytime soon. Milton Friedman may actually be responsible for this more than anyone else. His work lead to an understanding of the importance of monetary policy which has helped stabilize economies all over the world.

This has nothing to do with being sore losers. I have been hearing for the last 8 years how "dissent is patriotic", well I am being a patriot. Democrats have a huge majority, why would the Republicans look stupid if a Democratic president can't get a bill through a Democratic congress?

And I would not get too enamored with the popularity of this plan:

http://uk.reuters.com/article/usTopNews/idUKTRE5147L820090205

ATLANTA (Reuters) - Americans voice growing concern over the cost of President Barack Obama's economic stimulus plans and assail as a weakness the disagreement in Washington over how to spend the money.

Two opinion polls show support dwindling. In a Rasmussen Reports survey, 37 percent of Americans backed the legislation in Congress, down from 45 percent two weeks ago, while 43 percent opposed it.

Lonnie Bruner said...

Uhhh ... no depression in the 60 years previous to the GD? Dude, are you insane? What about the depression of 1873–1896 -- a 23-year downturn which saw such pleasantries as the Haymarket Riot in Chicago. Panic of 1907–1908? Post WWI recession of 3 years? HULLO?? Bueller??

To be perfectly honest, James, I am worried about what will happen -- stimulus or not. We're screwed either way.

James B. said...

Well that depends on the definition of depression vs recession. Most economists refer to 1873 as more of a bank panic. And that was virtually 60 years before, so the point remains.

Most economists (the end the fed crowd aside) would actually place the difference in economic stability on the Federal Reserve. Before 1913 there used to be constant bank panics, which often devolved into more widespread problems.

James B. said...

BTW:

http://www.cbsnews.com/stories/2009/02/05/opinion/polls/main4778192.shtml?source=RSSattr=HOME_4778192

There are signs that Americans are receptive to Republicans' push to increase the proportion of tax cuts in the stimulus bill: Asked whether higher government spending or tax cuts for business would be more effective in ending the recession, 59 percent choose the tax cuts. Just 22 percent prefer more government spending.

Lonnie Bruner said...

I hope the Republicans DO get rid of some the most ridiculous spending in the bill. 100 million for Nat Endowment for the Arts? WTF? CUT IT. And tax cuts are a decent idea too, however, they're not going to work if people don't spend that money. That's what happened to Bush's latest check he wrote everyone. Didn't do shit.

There's got to be a balance of stimulus spending and tax cuts. I have a feeling Reid et al will come up with something that passes. Maybe even today.

I remember this old saying: "How do you end a recession? Tell people there isn't one."

Lonnie Bruner said...

Also, do you really think a president should just do whatever the polls say rather than what he thinks is best for the country?

Clinton did. I hated Clinton.

James B. said...

I remember this old saying: "How do you end a recession? Tell people there isn't one."


That would be much easier if Obama weren't running around using words like "catastrophe" and "we may never recover". That is a long way from "You have nothing to fear but fear itself."

Also, do you really think a president should just do whatever the polls say rather than what he thinks is best for the country?


No, I was just responding to your "argumentum ad populum"

Lonnie Bruner said...

"""That would be much easier if Obama weren't running around using words like "catastrophe" and "we may never recover". That is a long way from "You have nothing to fear but fear itself.""""

Agreed.