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.