Monday, February 02, 2009

What caused the Depression? Opinion: Policies Prolonged Depression -

Here is hoping that we learned our lesson since the 1930s.

The WSJ ran a good op/ed piece by Harold L. Cole and Lee Ohanian describing how government policies helped create the Great Depression. As we ponder what the role of government should be in helping the economy to recover from the current recession, politicans could do much worse than to read this!

Opinion: Policies Prolonged Depression -
"Why wasn't the Depression followed by a vigorous recovery...? It should have been. The economic fundamentals that drive all expansions were very favorable during the New Deal. Productivity grew very rapidly after 1933, the price level was stable, real interest rates were low, and liquidity was plentiful. We have calculated on the basis of just productivity growth that employment and investment should have been back to normal levels by 1936....

So what stopped a blockbuster recovery from ever starting? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles ... choked off powerful recovery forces.....The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA)....covered over 500 industries.... created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression.

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....Our research indicates that New Deal labor and industrial policies prolonged the Depression by seven years."

And it should be noted that this was not a knee jerk reaction to the current recession; Cole and Ohanian published their famous work which is the basis for for the current WSJ piece in the Journal of Political Economy in 2004.

Not coincidentally I am finishing up The Forgotten Man by Amity Shlaes who largely comes to the same conclusion and paints a picture of FDR as a really bad economist to say the least.

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