Some Lessons From the Great Depression
UCLA Newsroom (2004) -- 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 2004 issue of the Journal of Political Economy (working paper version here), 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."
"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."
HT: "1"
20 Comments:
Interesting, so do they mean that Keynes was wrong? And our government should do nothing:)
--Chinese reader
Roosevelt certainly contributed to the economic "dead zone" that ran from 1933 through mid-1935, although it should be clarified that the NIRA unintentionally ensured that the economy would not recover during this period. It was very much not a deliberate act intended to make the economy worse, even though FDR essentially created a poverty trap with the policy.
This is the 700 billion dollar question right now.
There seem to be 3 schools of thought on this.
The Bush, supply-side school of thought that the economic policy over the last 8 years was dead on perfect. That view is obviously wrong.
The other view is that the Federal Reserve kept rates too low for too long after the internet bubble crashed. This fueled the housing bubble, the consequences of which we are living with right now. Their belief is that what the government is doing now is just making things worse. And could very well be leading us to a Depression. This view is held by people like Peter Schiff and Ron Paul.
The final view is the Keynesian view. Its held by people like Krugman and Roubini and the incoming administration. They too believe that rates were kept too low for too long. But their solution to the problem involves lots and lots of spending to make up for the lost private demand.
Who is right? I honestly don't know. But I think we'll find out soon. If the economy recovers soon after Obama's coming massive, Keynesian stimulus package then I will be in the Keynesian school forever. If we sink into a second Depression, then I'm a Friedman guy all the way.
The other view is that
machiavelli,
I believe you have a bad case of post hoc ergo propter hoc
Another cheap shot at FDR?
The federal government agreed Sunday to take unprecedented steps to stabilize Citigroup Inc. by moving to guarantee close to $300 billion in troubled assets weighing on the bank's books, according to people familiar with details of the plan.
Treasury has agreed to inject an additional $20 billion in capital into Citigroup under terms of the deal hashed out between the bank, the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corp. Treasury officials will charge a higher interest rate for the capital injection -- 8% for the first few years -- than it has charged to dozens of other banks now borrowing money under the government's the $700 billion rescue package approved by Congress last month.
The US is little more then a banana republic mow frat boy.
Roosevelt certainly contributed to the economic "dead zone" that ran from 1933 through mid-1935.
Why the conflation of S&P500 dividends with GDP? The economy contracted (NBER data) for 43 months from August 1929 to March 1933 (coincidentally FDR's inauguration) and expanded for the next 50 months ending May 1937, followed by a recession for 13 months ending June 1938.
Incidentally, the economy was in recession for 50 months in the 1920s and 51 months in the 1930s. The roaring twenties were not so roaring after all.
Of the 145 months FDR was in office, the economy was in recession for 16 months.
Truly, some of the conclusions being drawn in recent days about what did and did not help fix the Great Depression make me wonder about the adequacy of training in economic history and also history of economic thought.
I am finding it very useful going back to what Keynes himself actually thought and said - as interpreted, of course, by those who try to understand him in his context, not turn him into a set of equations. The best of these books on Keynes are by Moggridge, Skidelsky, and Markwell.
"I believe you have a bad case of post hoc ergo propter hoc'...
I'm curious anon @ 11:33 PM, what is that logical fallacy you see in machhiavelli's comment?
NOT a rhetorical question...
Consider Ralph Raico's Was Keynes a Liberal? (24 page pdf)
"Another cheap shot at FDR?"...
Hardly a 'cheap' shot sethstorm: a continued deterioration in the finances of Social Security and government retirement programs for civil servants and military personnel. The loss — equal to $11,434 per household — is more than Americans paid in income taxes in 2006...
I'm just thinking that FDR's SS program started the problem of unfunded federal mandates...
Wow, you should be ashamed of yourself for this post. FDR is an American hero. This is a disgusting post.
"FDR is an American hero"...
Hero?!?!
Only to the uniformed or fellow commie symps...
"Wow, you should be ashamed of yourself for this post. FDR is an American hero."
Thanks, anon 9:53, for reminding me why we continue to suffer under the same broken government that we always seem to end up with. We can't look too closely at FDR's policy without being a treasonous smasher of American icons. We couldn't question Obama's policy platform during the election campaign without being a racist.
On behalf of all critical thinkers, thank you anon, and the majority of American voters who think exactly as you do for once again showing up to the polls and keeping the wheels of hypocrisy, er democracy, grinding forward.
Those who fail to learn history are fated to repeat it.
db
DB, wow. If you think you could have done a better job than our coutries greatest president I think you need to check your ego, sir. Just because you have bold predictions about the economy and how you think your theories may or may not work doesn't mean you wouldn't have crawled under your desk and cried if given the same pressures as FDR faced. He led this great country in the absolute worst of times and we ended up for the better. You could learn a few things about doing rather than saying.
Regardless of what anyone thinks about FDR did economically, he tried to increase the size of the Supreme Court so all of his New Deal Programs would be constitutional. That is the supreme power hungry move.
-UA
A little less power hungry than the Patriot Act, and FDR's move, you know, actually worked.
The federal government agreed Sunday to take unprecedented steps to stabilize Citigroup Inc. by moving to guarantee close to $300 billion in troubled assets weighing on the bank's books, according to people familiar with details of the plan.
Ok, so they get money at the drop of a hat, yet GM/Ford/Chrysler are the only ones that gets scrutiny? I'd bet that if all three became banks, they'd receive the same scrutiny.
(back to the main topic)
...a continued deterioration in the finances of Social Security and government retirement programs for civil servants and military personnel. The loss — equal to $11,434 per household — is more than Americans paid in income taxes in 2006...
If you want people to convert to a privatized Social Security program, figure out how to sell it to the population.
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I'll let the professional and armchair economists argue this, but I sure as hell hope that the Obama economic team reviews the paper and applies some solid thinking to our current set of economic affairs.
Every government economic action has significant unintended consequences, usually negative.
Our country does not need a prolonged depression. Raising taxes (as FDR did) should be avoided. Relying solely on government spending on infrastructure jobs like the WPA is also not a good idea. God forbid the starting of another economic Ponzi scheme like social security. And last, we don't need the government to take over private industry.
"If you think you could have done a better job than our coutries greatest president I think you need to check your ego, sir"...
Hmmm, maybe you should get a better grip on reality... 'greatest President' indeed...
Go to your local library and check out the following 25 year old book: The American Communist Party; A Critical History (Franklin D. Roosevelt and the Era of the New Deal)
….Projections and predictions conjured by those who took the shotgun seat in the vehicle which drove us to the precipice.
We have created monsters in the form of omnipotent economists. They are not what they seem.
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http://pacificgatepost.blogspot.com/2008/11/economists-our-new-philosopher-kings.html
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Perhaps society has simply overplayed them. It would be much more productive to listen to entrepreneurs.
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