Rossputin.com Rational Thinking About Our World

Liberals have a strange desire for masochism when they argue that FDR’s economic policies were good medicine rather than snake oil or when they assert, as David Sirota did recently, that there is no evidence to support the “claim that the New Deal prolonged the Great Depression.”

By simply looking at the change in the unemployment rate during various presidential administrations as Sirota does, he misses the key question: Did the policies of that administration make the situation better or worse.

It’s like giving a patient a pill and saying that subsequent improvements in the patient were caused by the pill without actually knowing or testing whether the pill was medicine, a placebo, or poison, and therefore whether the pill made the patient better, had no effect, or actually made the patient worse.

Effectively, Sirota is saying that because the patient, i.e. the unemployment rate, improved after the pill, i.e. the New Deal, then the medicine must have been beneficial. However, despite his claims there is plenty of evidence that the medicine was poison and that the patient recovered in spite of and not because of FDR’s policies. (I also note that the unemployment rate is only one measure of economic prosperity and it doesn't capture standards of living because it ignores wage levels.)

A paper by two UCLA economists, published in 2004, concludes that “New Deal policies are an important contributing factor to the persistence of the Great Depression.” The paper, entitled “New Deal Policies and the Persistence of the Great Depression” argues that “New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.”

A comment by one of the study’s authors in the above-linked press release, Harold Cole, seems a propos to today’s bailout mania as well: "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."

A very technical paper titled “Accounting for the Great Depression” basically says that New Deal labor restrictions prolonged the Great Depression.

It is also noteworthy that most other major economies (countries which did not have a New Deal) recovered faster than the US did. By 1938, France was in a worse position than the US in terms of industrial production (as compared to a 1929 base line), in part because the Depression hit France later than most other nations. But Italy, the UK, Germany, Japan and Sweden, among others, were far better off. (Those countries were producing more in 1938 than in 1929, but the US and France weren’t.)

Bryan Caplan, an economist who focuses frequently on voter and politician psychology, offers a fascinating insight in a 2003 paper, “The Idea Trap”:

Thus, the early phase of the Great Depression can be seen, depending on the country, as either a negative policy shock that led to lower growth, or as a direct negative growth shock. Yet what is most interesting from the standpoint of the current paper's model is the endogenous response of ideas to the downturn.In the United States, Schlesinger explains that "[F]aith in a free system was plainly waning. Capitalism, it seemed to many, had spent its force... The only hope lay in governmental leadership of a power and will which representative institutions seemed impotent to produce. Some looked enviously on Moscow, others on Berlin and Rome..." (1959, p.3) Bernanke observes that throughout the world, the depression "increased pressure on governments to intervene in the economy in ways that inhibit adjustment." (1995, p.24) An array of counter-productive policies won new popularity: labor market regulations to keep nominal wages from falling, pro-union legislation to push real wages up, and industrial and agricultural policy to raise the price level by restricting production. Sensing political opportunities, politicians rapidly responded to the public's new ideas about effective economic policy. This began on a moderate scale during the Hoover administration, then rapidly expanded under Roosevelt. "The National Recovery Act, the cornerstone of Roosevelt's First New Deal, also contributed, perversely, to the slow recovery of American output and employment," explains Eichengreen. "By January 1934, 80 percent of American industry was covered. All of these codes established minimum wages of 40 cents an hour, and many revised upward the entire structure of industry wages." (1992, p.344) Thus, it appears that sharply negative growth reduced the quality of ideas, policies worsened because politicians competitively responded to voter demand, and bad policies in turn retarded the recovery.

Again, Caplan could just as easily be talking about today’s half-cocked but full-priced attempt by politicians to “fix” the economy by spending us into nearly unimaginable levels of debt…all without having any real idea of the other likely consequences of their actions.

Some other reading material on the subject:

In 2003, Jim Powell’s “FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression” was published. Comments on its inside flap from leading economists and authors included two from Nobel Laureates. Here’s what Milton Friedman said: “Admirers of FDR credit his New Deal with restoring the American economy after the disastrous contraction of 1929-33. Truth to tell - as Powell demonstrates without a shadow of a doubt - the New Deal hampered recovery from the contraction, prolonged and added to unemployment, and set the stage for ever more intrusive and costly government. Powell's analysis is thoroughly documented, relying on an impressive variety of popular and academic literature both contemporary and historical.”

It’s worth noting that much of the New Deal was found to be unconstitutional. However FDR stayed in office long enough to appoint anti-capitalist Supreme Court Justices (and threaten the Court with his infamous Court-packing scheme) so that some of the policies were then ruled to be constitutional…though they clearly aren’t.

Chris Edwards at the Cato Institute has a short piece explaining some of the worst parts of the New Deal: “The Government and the Great Depression.”

In 1995, Robert Higgs wrote a short piece entitled “How FDR Made the Depression Worse. ”It’s not big on statistics, but offers an interesting short history lesson for those who haven’t studied the period.

As usual, when it comes to economics, David Sirota couldn’t be more wrong.The evidence that the New Deal prolonged the Depression is substantial and compelling. The economy improved because that’s what economies do after major downturns…and it did it despite the poison being injected into it by FDR.

The question now is whether our incoming government wants to be the second coming of the economic Dr. Frankenstein that FDR was. My guess is that the level of economic understanding among our elected politicians and their desire to “do something” for public consumption are so strong that we are doomed to repeat our destructive history with something like a second New Deal, meaning a second major round of long-term erosion of liberty, free markets, and economic opportunity for future generations.