NCPA - National Center for Policy Analysis

"NEW DEAL" POLICIES HINDERED ECONOMIC RECOVERY

October 7, 2004

University of California economists Harold Cole and Lee Ohanian, writing in the Journal of Political Economy, evaluate why the recovery from the Great Depression was very weak even though real wages in several sectors of the economy were significantly higher than normal.

President Franklin Roosevelt believed that the severity of the Depression was due to excessive business competition that reduced prices and wages, which in turn lowered demand and employment.

Roosevelt's remedy was to impose wage and price controls by restricting competition (creating cartels) and raising labor bargaining power. Cole and Ohanian, however, assert that these policies did more harm than good:

  • Roosevelt's cartelization of America firms produced high wages and high prices, primarily in manufacturing and in some energy and mining industries.
  • Due to high employment losses during the Depression, a relatively small number workers ended up in these high paying jobs (cartel jobs).
  • Initially, the high wages attracted more workers to these industries and such businesses expanded -- increasing national output and reducing unemployment.
  • But over time, the inefficiencies of these arrangements began to restrict employment growth (in part, because workers were being paid more than their productivity merited) and economic recovery stalled.

Cole and Ohanian add that, not only did the adoption of these industrial and trade polices coincide with the persistence of the Depression through the late 1930s, but the subsequent abandonment of these policies coincided with the strong economic recovery of the 1940s.

Source: Harold L. Cole and Lee E. Ohanian, "New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis," Journal of Political Economy, August 2004.

 

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