NCPA - National Center for Policy Analysis

HOW GOVERNMENT PROLONGED THE DEPRESSION

February 3, 2009

The goal of the New Deal was to get Americans back to work.  But it didn't restore employment.  In fact, there was even less work on average during the New Deal than before FDR took office, say Harold Cole, professor of economics at the University of Pennsylvania, and Lee Ohanian, professor of economics at the University of California, Los Angeles. 

For example:

  • Total hours worked per adult were 18 percent below their 1929 level between 1930-32, but were 23 percent lower on average during the New Deal (1933-39).
  • Even comparing hours worked at the end of 1930s to those at the beginning of FDR's presidency doesn't paint a picture of recovery; total hours worked per adult in 1939 remained about 21 percent below their 1929 level, compared to a decline of 27 percent in 1933.

So why wasn't the Depression followed by a vigorous recovery, like every other cycle? Part of the problem stems from some of the New Deal policies; the most damaging of those were at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), say Cole and Ohanian:

  • The NIRA covered over 500 industries, and each industry created a code of "fair competition" which spelled out what producers could and could not do, and were designed to eliminate "excessive competition."
  • These codes distorted the economy by artificially raising wages and prices, restricting output and reducing productive capacity by placing quotas on industry investment in new plants and equipment.
  • And these policies continued even after the NIRA was declared unconstitutional in 1935.

However, by the late 1930s, New Deal policies did begin to reverse, and by 1947, through a combination of wage restrictions and rapid productivity growth, the large gap between manufacturing wages and productivity had nearly been eliminated.  Since that time, wages have never approached the severely distorted levels that prevailed under the New Deal, nor has the country suffered from such abysmally low employment, say Cole and Ohanian.

Source: Harold L. Cole and Lee E. Ohanian, "How Government Prolonged the Depression," Wall Street Journal, February 2, 2009.

 

Browse more articles on Government Issues