Monday, November 28, 2011

FDR's policies prolonged Depression by 7 years, UCLA economists calculate / UCLA Newsroom

One of the arguments I've advanced in various forums, including my classrooms, is that much of the rise America experienced during and after the Second World War was "luck" — we were spared the direct destruction experienced by every other global economic leader. It's hard to lose the war of economic dominance when you're the only player in the game for two to three decades.

But what about the "end" of the Great Depression before the War? First, I'm not convinced we were truly out of the Depression; economists and historians debate this. (I've noticed historians are more inclined to embrace the "FDR saved us!" line, while economists are skeptical of simplified credit to a person or political party.)

FDR was not a purist; he was a political pragmatist. He spent, or cut, as he saw fit, without any grand plan. I believe it is far too simple to accuse FDR of adhering to Keynes or any other economist's views. FDR bounced from idea to idea, which is what you do in a crisis. Still, spending didn't work, and that is the point I want people to learn. (As I'll post later, if Keynesian economics were the answer, Japan wouldn't be starting a third lost decade. Japan has spent and spent, with little to show for it.)

From two of UCLA's leading economists: FDR's policies prolonged Depression by 7 years, UCLA economists calculate / UCLA Newsroom. This is a 2004 press release, but the information doesn't seem to have reached many economists or reporters covering the current economic downturn. So, allow me to repost what many of us opposed to neo-Keynesian economic policies have long believed to be the case:
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.
We're experiencing another slow recovery from an economic downturn, and once again we should probably blame the U.S. government's best intentions. Attempts to "help" the economy generally have unintended consequences. The U.S. economy is not simpler today than 75 years go, either.
"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.
Here is the key paragraph from the researchers' press release:

"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."
It is called crony capitalism today. It is Big Business + Big Government + Big Labor deciding to "work together" under the guise of "Patriotism" during a crisis. This never ends well, locally or nationally. The Big Industries (U.S. Steel) set the rules, crushing competition with the patriotic hand of Uncle Sam. Price controls, export and import controls, extra regulations, all served to help a small number of huge cartels.

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."
We are experiencing this same condition today, but Big Government is the Big Employer. There's a reason that counties around Washington, D.C., have the highest household incomes and rising home values even as wages and home values have stagnated elsewhere. Bargaining agreements with state and federal unions keep wages high while companies are unable to raise prises on some consumer goods.

The prices that are rising are in segments of the economy under the greatest amount of government control. That should be something we discuss more often, but it is under-reported in the media. From higher education to medical care, areas of the economy in which government is the largest "payer" (directly or indirectly) are somehow rising in cost despite a recession.

If you dare to try to adjust to the recessionary forces by moving or correcting wages, the government steps in to ensure you cannot be more efficient. This month, Boeing reached an agreement with machinists that ended a National Labor Relations Board complaint against the airline manufacturer. Things in 2011 parallel 1934, with labor and government manipulating market forces. Thankfully for Boeing, its only real competition is EADS/Airbus, a mess of European government politics.
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.
Raising wages, either through minimum wage laws or through coercive pro-union policies, does not improve the lives of most citizens. Companies slow hiring when they must pay more. We now see this same result in San Francisco, where a "living wage" law mandates hourly wages exceeding $10/hour. Local employers, even in the Bay Area, have reduced hiring and looked for ways to automate tasks once done by... people. (see: SF to top $10 minimum wage)

Historians, so quick to celebrate FDR and progressive policies, don't seem to understand the results of artificial wage inflation. Plus, WWII has a way of overshadowing everything FDR did to the American economy. (Also, people forget that Hoover was a "progressive" dedicated to "scientific" experts and administrators running the economy. We had one elitist after another until Truman.)

FDR, like Pres. Obama today, selected winner and loser within the economy. We can argue it is the Justice Department making these decisions, that still reduces down to politics. If a company is big enough, and supports the president, it can buy the right to join a cartel or to be a monopoly. Don't believe for a moment that FDR wanted to end monopolies: he simply vilified a handful while actually encouraging other monopolies.
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.
The real economic recovery began only when the government stopped choosing winners and losers in the economy. Once laws were applied equally, things started to improve.
Recovery came only after the Department of Justice dramatically stepped up enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.
Sadly, many of my students and at least three generations were taught to believe that FDR "saved us" from capitalism's excesses. And while I argue we were saved by the "luck" of WWII wiping out the competition, UCLA's researchers suggest that when the government stopped trying to do so much to "help" the economy we also saw rapid improvement in the economy.
"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."
The lessons haven't been learned, though. Too many of my university colleagues idolize FDR and have constructed a myth about the U.S. economic recovery under Franklin D. Roosevelt. I'm afraid we will continue to see government experts and administrators do their best to "help" for years to come.

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