Obama as Roosevelt: Is the Great Recession Being Needlessly Prolonged?

Two economists from UCLA, Harold L. Cole and Lee E. Ohanian, have argued that the Great Depression lasted seven years longer than it had to because of the misguided, experimental and anti-market policies of Franklin Delano Roosevelt.

The article, "FDR's policies prolonged Depression by 7 years, UCLA economists calculate" presents this conclusion as a great surprise. They seem to think that no one has ever suggested before that it might have been FDR's fault. I suspect that it might come as an even bigger surprise to the article's author that this conclusion comes as no surprise whatsoever to conservatives. Progressivism can be such a narrow cocoon in some ways.

Here is a bit from the article:

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 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.

"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."

He thought that "excessive competition was responsible for the Depression by reducing prices and wages." What an unbelievable thing to believe. If Roosevelt actually believed that, he was utterly incapable of thinking clearly about the situation. This smacks of a know-nothing, blame the rich, class-warfare approach.

The article discusses the National Recovery Administration's role in preventing the market's natural functioning:

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.

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."

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.

The parallels to today are stunning and frightening. Obama's artificial, ad hoc, arbitrary pattern of government intervention into various sectors of the economy are based on political calculations rather than economic theory (eg. the need to save the auto workers' pensions and preserve an important voting block and source of campaign contributions as the motivation for "saving" GM and Chrysler at the expense of bondholders).

If Cole and Ohanian are right, we can expect the recession to end right after the 2012 presidential election on one condition: that a Republican is elected to replace Obama.

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PS - It ought to be borne in mind that the longer the Great Recession goes on, the more the poorest people in North America will be hurt. Anyone concerned about the poor should be extremely concerned to determine for themselves if in fact Obama's progressive policies are actually extending the economic downturn, causing high unemployment and ultimately leading to government spending cuts in welfare programs.

The Forgotten Man

Amity Shlaes has written a book that everyone in the Age of Obama needs to read, The Forgotten Man: A New History of the Great Depression (Harper Perennial, 2007). I found the similarities between FDR and Obama to be almost creepy. Both were/are meglomaniacs, both were/are anti-business, both had/have an unwavering faith in the ability of government to solve problems, and both were/are responsible for untold economic damage to the country.

In the afterword to the paperback edition, Shlaes sums up her conclusion as follows:

But what really stands out when you step back from the 1930s picture is not how much the New Deal public works achieved. It is how little. Notwithstanding the largest peacetime appropriation in the history of the world, the New Deal recovery remained incomplete right through the 1930s. From 1934 on - the period when the spending ramped up - monetary troubles remained. But they could not take all the blame for the Depression. The story of the mid-1930s is the story of a heroic economy struggling to recuperate but failing to do so because of perverse federal policy. the worst factor was Roosevelt's war on business. But one can also make the argument that lawmakers' preoccupation with public works got in the way of allowing productive businesses to expand and pull the rest forward.

Blaming business and fanning the flames of class warfare are the strategies of the Obama administration, as we saw in the past week in their unbelievable cynical attacks on the Chamber of Congress. When business understandably becomes nervous about investing, the economy gets worse and the attacks are stepped up. A vicious cycle is created. This recession will not end until the Democrats are out of power and confidence in a stable regulatory and tax environment is restored.

Shlaes' book contains so many parallels between the 30s and the past few years that it is almost depressing. Obama does not have a single new idea; everything he proposes comes out of the failed playbook of Hoover, who made the Depression possible, and Roosevelt, who unnecessarily prolonged it. How he can accuse his political opponents of wanting to go back to the past with a straight face is impossible to understand.

Progressive Fantasies in 1927

I'm now reading Amity Shlaes' The Forgotten Man: A New History of the Great Depression (Harper Perennial, 2007). I've decided that my education was lamentably deficient in economics and it is time to do something about it. (Up next is Thomas Sowell's Basic Economics.)

This book is readable, insightful and interesting. I'm always impressed when academic experts produce works that are helpful to the non-expert who is willing to do a little work. Shlaes is senior fellow in economic history at the Council on Foreign Relations and a syndicated columnist at Bloomberg.

In July of 1927, a group of American progressives - labor leaders, academics, journalists - boarded a steamship aptly named The President Roosevelt after America's first progressive president for a trip to Europe that would ultimately take them to the promised land: the Soviet Union. The group would eventually meet for six and a half hours with Joseph Stalin himself, which was the highlight of their trip. During the trip, one of the members of the group, Stuart Chase, was deeply impressed with the Russian method of state planning of the economy. Shlaes quotes him and writes:

The official goals of the Russian state planning commission impressed him deeply. This was "the attempt to do away with wastes and frictions that do such dreadful damage in Western countries." The scale of management took his breath away: "Sixteen men in Moscow today are attempting one of the most audacious economic experiments in history . . . they are laying down the industrial future of 146 million people and of one-sixth of the land area of the world for fifteen years." Chase continued, "These sixteen men salt down the whole economic life of 146 million people for a year in advance as calmly as a Gloucester man salts down his fish." And, Chase noted with enormous admiration, "the actual performance for the year 1928 will not be so very far from the prophecies and commandments so calmly made . . . One suspects that even Henry Ford would quail before the order." Perhaps the United States could organize its economy in similar fashion. Chase, like Steffens, believed he saw something that worked.

Several thoughts occurred to me when I first read this passage.

1. These were the kind of people who were led by Roosevelt to implement the New Deal in the 1930s and their degree of openness to collectivism is amazing. There can be no doubt that many of them would have gladly turned America into a socialist state if they had had the power to do so. For them, sixteen men in Moscow making economic decisions for 146 million others was not totalitarianism, but efficiency.

2. About this time, Aldous Huxley was writing his dystopian novel, Brave New World, which would be published in Great Britain in 1932. What aroused Chase's breathless admiration represented a nightmare of soft totalitarianism to Huxley.

3. The common factor between the New Dealers and the Soviet Communists was not government ownership of the means of production, but something more fundamental though it is not usually considered to be the difference between socialism and capitalism. What united them was a faith in the ability of bureaucratic experts under the control and direction of a highly centralized and powerful head to do what the market and individuals could not do. They were, above all, modern in their worship of bigness, technocracy and centralization. The fact that after 75 years the USSR collapsed under its own weight as a massive economic failure is an damning indictment of this modernist faith, not just Communism.

The application of these lessons to the current political situation in the United States is obvious.