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

More On the Great Depression

I discussed recently how I thought the government helped make the Great Depression even greater. Helpfully an editorial in the Wall Street Journal today by economists Harold Cole and Lee Ohanian assists me in making my case.

The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office. Total hours worked per adult, including government employees, were 18% below their 1929 level between 1930-32, but were 23% lower on average during the New Deal (1933-39). Private hours worked were even lower after FDR took office, averaging 27% below their 1929 level, compared to 18% lower between in 1930-32.

Even comparing hours worked at the end of 1930s to those at the beginning of FDR's presidency doesn't paint a picture of recovery. Total hours worked per adult in 1939 remained about 21% below their 1929 level, compared to a decline of 27% in 1933. And it wasn't just work that remained scarce during the New Deal. Per capita consumption did not recover at all, remaining 25% below its trend level throughout the New Deal, and per-capita nonresidential investment averaged about 60% below trend. The Great Depression clearly continued long after FDR took office.

Unfortunately not everyone reads history. And one of those people we just elected president.

The European Union warned the US yesterday against plunging the world into depression by adopting a planned “Buy American” policy, intensifying fears of a trade war.

The EU threatened to retaliate if the US Congress went ahead with sweeping measures in its $800 billion (£554 billion) stimulus plan to restrict spending to American goods and services.

Gordon Brown was caught in the crossfire as John Bruton, the EU Ambassador to Washington, said that “history has shown us” where the closing of markets leads — a clear reference to the Depression of the 1930s, triggered by US protectionist laws.

Krugman and the Depression

When Paul Krugman recently won the Nobel Prize, I was worried, not so much that he didn't deserve it for his earlier work, but that he would use the fame to legitimize his much less rigorous later work. My fears were proven correct when I saw his new book The Return of Depression Economics, or rather a rehash of his old book of the same name, staring at me from the shelves of the local Barnes & Noble, complete with a "Nobel Prize Winner" emblazoned on the front cover.

The Wall Street Journal, however, once again in defense of reality economics, has an interesting editorial on a topic in his book today:

This reality shows most clearly in the data -- everyone's data. During the Depression the federal government did not survey unemployment routinely as it does today. But a young economist named Stanley Lebergott helped the Bureau of Labor Statistics in Washington compile systematic unemployment data for that key period. He counted up what he called "regular work" such as a job as a school teacher or a job in the private sector. He intentionally did not include temporary jobs in emergency programs -- because to count a short-term, make-work project as a real job was to mask the anxiety of one who really didn't have regular work with long-term prospects.

The result is what we today call the Lebergott/Bureau of Labor Statistics series. They show one man in four was unemployed when Roosevelt took office. They show joblessness overall always above the 14% line from 1931 to 1940. Six years into the New Deal and its programs to create jobs or help organized labor, two in 10 men were unemployed. Mr. Lebergott went on to become one of America's premier economic historians at Wesleyan University. His data are what I cite. So do others, including our president-elect in the "60 Minutes" interview.