Roosevelt prolonged the depression in the US by seven years

Here’s a story that has only ever been unknown to Keynesian economists: FDR’s policies prolonged Depression by 7 years, UCLA economists calculate. Whether they have properly explained what exactly Roosevelt did wrong is another story, but at least there is finally some acknowledgement that his economic policies were directly at fault a mere eighty years after the fact. It is laughable to see that the authors argue that up until now we had not known the reason for the delayed recovery. But it is actually more than that. Now that they have found something that removes the blame from the Keynesian policies FDR adopted, they are finally willing to state in print that Roosevelt’s policies actually were the disaster everyone always knew they were.

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.”

You need to read the whole article but let me take you to the very last para which has major implications for today:

“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.”

It’s a strange business since the article points out what I thought was common knowledge, that Roosevelt’s policies delayed recovery. But what it doesn’t do is put the blame on public spending which is where the blame truly belongs. It can therefore, in its own convoluted way, be taken as a defence of Keynesian policies since these were not the problem. Instead the blame for the astonishingly slow recovery is placed on industry policies which no doubt played their part. Eighty years from now someone will write a paper to argue that the Obama administration had been responsible for the slow recovery of the present moment but it will be blamed on something else instead – Obamacare maybe – rather than the fiscal and monetary policies whose effects will continue to be ignored just as they are ignored today.

The interventionists within economics is down to the last 95% of the profession but at least there is progress being made. The aim now is to save Keynesian economics, and if it requires finally admitting that Roosevelt had prolonged the depression, well that is how it will have to be. Since their conclusions take Keynesian economics off the hook, these results may end up being embraced as at long last solving a “mystery” that no one should ever have actually been mystified about.

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20 Responses to Roosevelt prolonged the depression in the US by seven years

  1. More than an article, I heartily recommend Amity Schlaes’ outstanding The Forgotten Man on the real consequences of what FDR did in prolonging the Depression.

  2. Rob MW

    Steve – it is highly amusing how the wheel is constantly being reinvented by people who suddenly discovered that it was made round.

  3. Rob-but who still have no idea why round works better

  4. Oh come on

    It’s a strange business since the article points out what I thought was common knowledge, that Roosevelt’s policies delayed recovery.

    Unfortunately, what’s “common knowledge” is that Roosevelt’s New Deal ended the Great Depression. It’s acquired truism-status, even, and is preached in practically every high school American History textbook*. Furthermore, I’m confident a comfortable majority of Modern History undergrads – as well as the faculty that instructs them – would concur.

    *or at least the ‘variety of primary and secondary sources offering a range of perspectives’ provided therein (so that the learner can form their own interpretation of history, as opposed to the way it was taught in my day when we were simply told what happened) result in the overwhelming majority of students concluding that FDR saved America from the Depression. Which is what I was taught in high school, too.

    Aaah, pedagogy. The more things change, the more they stay the same.

  5. Blogstrop

    Sometimes the first draft of history sticks around for far too long. Like the H.V. Evatt stories, or more recently the E.G. Whitlam ones. Lionizing these while denigrating R.G. Menzies has been the default position of the left-leaning commentariat, and even further up the totem pole, the book churning variety.

    You can see it happening in real time as the “for and against” lines emerge regarding Gillard.

  6. entropy

    My grandfather sundowned his way through western Qld during the thirties ( a sort of well heeled swaggie with his brother, a horse and a sulky).
    Anyway, I got into an argument with his ninety year old version of himself, who reckoned the best way to solve debt was to do what FDR did, and make the unemployed work with pick axes building roads. I observed that even the famous road built through Zion NP has really been completely rebuilt as the original was totally unsuitable for modern vehicles, and the unemployed can’t drive modern road building equipment. Besides, we have too much debt. Then print money, the old farmer said. Anyway, I said, if it worked, why we’re so many people in America still unemployed or in make work schemes right up until WW11? Grandad said it worked because the people believed in it.

  7. feelthebern

    & this from UCLA.
    Not exactly the home of conservatism.

    I used to think UCLA has produced nothing since Aaron Rodgers, but these guys will probably make me change my mind.

  8. 2dogs

    The depression hit Australia very hard, but we recovered quite quickly, relative to other nations.

    It was a credit to the Lyons government, and their fiscal restraint. It was the only time the manufacturing sector ever seriously grew in this country.

    I disagree with the protectionism, but then every other country was doing it at the time.

    On pretty much everything else, the UAP got everything right.

  9. 2dogs

    we have too much debt. Then print money

    So many people simply do not understand how a central bank works. The above can not work. Printed money is debt. If people have too much cash in hand, they put it in their bank, the banks, put it in the central bank, and then the central bank owes the private banks.

  10. Tel

    Why the Great Depression lasted so long has always been a great mystery,

    The mystery was solved long ago, but some people didn’t want to look. New Deal intervention started with Hoover. FDR simply lied in his 1932 election campaign (promising a return to smaller government), then picked up Hoover’s bad policies and cranked them up to 11.

    http://mises.org/document/694/Americas-Great-Depression

  11. Rabz

    Which is what I was taught in high school, too.

    Yes indeed. My modern history teacher, otherwise a fairly scholarly chap, was effusive in his praise of Roosevelt’s decision “to kick start the economy” and save Americans from penury through massively increased government spending and mighty capital works.

    Pity the reality was somewhat different. But hey – how about the war, eh? That was a massive boost for GDP as well.

  12. .

    What difference is there between the Great Leap Forward and The New Deal?

    Not much. FDR was elected on a laissez faire programme, then sold out to populism which ruined the economy.

    This is old news but it should be repeated over and over again.

    The usual suspects (Homer Paxton et. al., who have little to no econometric expertise) were quick to condemn Cole and Ohanian.

    What was the rate of return of the New Deal projects? I’d wager it was less than zero and so was the Keynesian consumption multiplier. It is almost certain it is less than one and close to zero at a maximum.

    That is the metric we need to drive a stake into the blood sucking corpse of Baron Keynes.

  13. Rococo Liberal

    I always thought that the left in the US basically used the Depression for their own ends. Firstly, they got to blame capitalism for the downturn. Then they made it worse with economic intervention, but conned the unwashed that such intervention was helping them.

    The result was that a lot of left-wingers got powerful, capitalism was somewhat discredited and a lot of other lefties got rich by sucking on the government teat.

    The most telling statistic is that now the portion of the national wealth owned by the wealthiest Americans hasn’t changed since 1920. Thus, although the Federal Government in the US,(and the STates) now dispose of vast sums of money that is supposed to be redistributed away from the wealthy, what really occurs is that a new class of lobbyists and consultant has become wealthy from government contracts and handouts.

  14. mundi

    Here are some highlights of FDR insanity:

    -Buying up crops and livestock, then burning them. They believed this would stop the depression as it would stop prices falling by making food more scarce.
    -dictated what farmers could produce. They believed if new farms kept opening and producing more crops, prices would keep falling, so deflation would happen, prolonging the depression.
    -He forced companies to pay higher wages, and sell goodes at higher prices. When they started to shrink in sales, he banned them from laying off workers. The companies literally had to collapse.
    -He blamed the collapse of companies on gold hoarders who wouldn’t spend, so he banned ownership of gold.

    No honesty economist (not even Krugman) actually believes any of these policies actually help the economy. The reason economists like them is because a government who runs economies like that gives occasional power (and wealth) to economists, compared to a free market government, which gives them almost no power.

    Most leaders of the US reserve bank wrote thesis on FDR and guss over how well the economy was centrally controlled. They care more about the control than the outcomes.

  15. Yohan

    Even without deficit spending, the interventions by Hoover and FDR Mundi just listed would have caused a severe economic downturn. They cartelized the economy and fixed wages above their natural level. They destroyed crops, reduced the supply of goods and tried to implement artificial scarcity (the opposite of Say’s law).

    But this is where I think Steve Kates is wrong. Yes on its own deficit spending would have caused a recession. But on its own the interventions would also have caused a recession. Combine them both and you have the Great Depression…

  16. Ant

    I was in the US last year and drove the entire length of the Blue Ridge Parkway, a road project initiated under FDR’s stimulus.

    It was quite glorious. Thanks FDR.

    No doubt in 80 years from now a descendent of mine will be stumbling into the roof of some clapped out Brisbane bungalow to clean the rats out and, observing the roof insulation, will be thanking Kevin Rudd for his brilliant foresight.

  17. Boambee John

    “feelthebern
    #1501874, posted on November 3, 2014 at 7:14 am
    & this from UCLA.
    Not exactly the home of conservatism.

    I used to think UCLA has produced nothing since Aaron Rodgers, but these guys will probably make me change my mind.”

    When Keynsianism is under threat, even “Saint” FDR must go under the bus.

  18. tomlx

    “President Roosevelt believed that excessive competition was responsible for the Depression….

    E.G Whitlam believed, Kevin Rudd believed, Gillard believed…etc., etc…

    Where’s the evidence that Roosevelt or any of the other wreckers ever believed in anything?

  19. Sid

    Amazing how ludicrous those FDR policies are. Although, they compare favourably to the NBN.

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