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.

Thursday, November 17, 2011

U.S. Still Believes We Control Our Personal Destinies

Today, the Pew Research Center released the following:
The American-Western European Values Gap

It should be no surprise that Americans value personal freedom more than they value a social safety net. The United States is a nation built by explorers who managed to survive frontiers. Even immigrants celebrate the rugged individualism of our national heros. A table of the survey findings:


Notice that the data are mirror images. Europe has a different history, one shaped by two world wars and various upheavals. Neither approach is "right" or "wrong" — but I definitely fall in the personal freedom camp. I do not trust governments to solve problems and would rather be left alone to succeed or fail, as much as possible.

Most Americans support a minimal safety net, but nothing comparable to the European welfare state.

Individualism and the Role of the State

In the U.S., Britain, France and Germany, views of the role of the state divide significantly across ideological lines. For example, three-quarters of American conservatives say individuals should be free to pursue their goals without interference from the state, while 21% say it is more important for the state to guarantee that nobody is in need; among liberals in the U.S., half would like the state to play an active role to help the needy, while 42% prefer a more limited role for the state. 
Those on the political right in Britain, France and Germany are also more likely than those on the left in these countries to prioritize freedom to pursue one’s goals without state interference. Unlike in the U.S., however, majorities of those on the right in France (57%) and Germany (56%) favor an active role for the state, as do more than four-in-ten (45%) conservatives in Britain.
Even the "conservative" position in Europe holds on to the dream of a benevolent state. I am a cynic: centralized power seldom produces the results desired. Again, different experiences, but I also don't see much historical evidence that strong governments have ended well for European citizens. Too often, these strong governments have mismanaged resources and hindered creative solutions to problems.
American opinions about the role of the state also vary considerably across age groups. About half (47%) of those younger than 30 prioritize the freedom to pursue life’s goals without interference from the state and a similar percentage (46%) say it is more important for the state to ensure that nobody is in need; among older Americans, however, about six-in-ten consider being free a higher priority, with just about three-in-ten saying the state should play an active role so that nobody is in need. No such age difference is evident in the four Western European countries surveyed.
I am among those shifting farther and farther away from trusting government with each year. Owning a business, working in management, paying taxes, dealing with city regulations, and fighting to improve our education system have all worked against my trust in government. Too often, government is simply crony capitalism (corporatism) or idealistic "wise men" trying to tell us what is best for our lives. Large companies love strong central governments with mandates and regulations that (magically) favor behemoths over small business.

The European model favors being "good enough." I want to be the greatest. I want to be better than my competition. I want to be in control of my business success or failure. However, Europeans don't believe that we are in charge of our fates. Ironic, for a highly secularized culture. For a region that is rejecting faith, it seems to hold to a concept of predestination.
Asked if they agree that “success in life is pretty much determined by forces outside our control,” Americans again offer more individualistic views than those expressed by Western Europeans. Only 36% of Americans believe they have little control over their fate, compared with 50% in Spain, 57% in France and 72% in Germany; Britain is the only Western European country surveyed where fewer than half (41%) share this view.
There is a reason for Europeans to believe your birth decides your fate: they don't share the American tradition of socio-economic mobility. Most Americans don't realize it, but nearly half of the people in the top quintile of earners are not in the top quintile after a decade. Likewise, half of the bottom quintile of earners are no longer in the bottom after a decade. The U.S. economy is dizzyingly dynamic. That can be disorienting.

In the U.S., if you have a college degree and are married, the odds are you will be in the top 40 percent of wage earners. Research suggests the surest way to reach the middle class is to be married and a high school graduate, which I've written about on this blog in the past. Education is the path to economic freedom. Government cannot make you finish high school or prepare for college, though.
In the U.S. and in Western Europe, those without a college degree are less individualistic than those who have graduated from college; this is especially the case in the U.S. and Germany. About three-quarters (74%) of Germans in the less educated group believe that success in life is largely determined by forces beyond one’s control, compared with 55% of college graduates. Among Americans, 41% of those without a college degree say they have little control over their fate, while just 22% of college graduates share this view.