Monday, February 02, 2009

How Government Prolonged the Depression

Policies that decreased competition in product and labor markets were especially destructive.
The New Deal is widely perceived to have ended the Great Depression, and this has led many to support a "new" New Deal to address the current crisis. But the facts do not support the perception that FDR's policies shortened the Depression, or that similar policies will pull our nation out of its current economic downturn.

The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office. Total hours worked per adult, including government employees, were 18% below their 1929 level between 1930-32, but were 23% lower on average during the New Deal (1933-39). Private hours worked were even lower after FDR took office, averaging 27% below their 1929 level, compared to 18% lower between in 1930-32.

The main lesson we have learned from the New Deal is that wholesale government intervention can -- and does -- deliver the most unintended of consequences. This was true in the 1930s, when artificially high wages and prices kept us depressed for more than a decade, it was true in the 1970s when price controls were used to combat inflation but just produced shortages. It is true today, when poorly designed regulation produced a banking system that took on too much risk.
Read the whole thing.


Shawn said...

Perhaps, in one sentence, that which I've found most convincing is that "uncertainty kills investment."

Regime uncertainty is among the strongest.

thinking said...

This is wrong. Many economists, including Nobel Laureates Joseph Stiglitz and Paul Krugman, deeply disagree with this analysis.

Ben Bernanke also disagrees w/ the analysis:
"Only with the New Deal's rehabilitation of the financial system in 1933-35 did the economy begin its slow emergence from the Great Depression."

A 1995 survey of economic historians asked whether "Taken as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression." Of those in economics departments 27% agreed, 22% agreed 'with provisos' (what provisos the survey does not state) and 51% disagreed. Of those in history departments, only 27% agreed and 73% disagreed.

The New Deal wasn't perfect, nor did it produce utopia. But it did save the banking system, and it did reduce unemployment sharply, and it did institute many badly needed reforms, such as the minimum wage, the SEC, FDIC, Social Security, the 40 hr work week, outlawed child labor, etc.

Think of how much worse the current crisis would be without the FDIC, or Social Security for instance. Many people still drive on roads built by the WPA, and still send their kids to WPA built schools.

Arguably, the New Deal saved capitalism, in that without it, the nation may have turned to far worse solutions, as many nations did during that time.

The same conservative pundits who spent the last 8 years propping up failed policies are trying to discredit FDR. In other words, conservatives don't want to return to Franklin Roosevelt's policies, they want to continue George W. Bush's.

Shawn said...

Seen. And. Unseen. Frederich Bastiat.

Pay attention to those as you use words like "fixed".

thinking said...

What is also funny is the author's contention that "poorly designed regulation produced a banking system that took on too much risk."

The problem was too little regulation, and often outside of the formal banking system. Most of the bad loans originated from private mortgage lenders, and were sold to the investment banks. Both parties went largely unregulated in the process.

Perhaps the authors can identify exactly which regulations caused lenders to make loans with no income verification, or at greater than 100% loan to value?

Which regulations caused the credit rating agencies to give high grade ratings to securities backed by subprime mortgages?

Which regulations caused the investment banks to come up with complex securities and derivatives that leveraged themselves even more?

How about the SEC in 2004 dramatically relaxing rules on leveraging?

I call this article "faith based economics" because it represents a blind faith in unregulated markets.

Shawn said...

Oh yes. And: Post hoc, ergo propter hoc.

That's still a logical fallacy.