Did Roosevelt prolong the Great Depression?

Yes. I know this from reading Eric Rauchway‘s great book The Great Depression and the New Deal. He provides a lot of data in support of the idea that Roosevelt implemented inefficient policies. Granted it takes a little bit of economic reasoning to get from that data to the conclusion that Roosevelt prolonged the depression, but its basically Econ 101 stuff so bare with me.

Roosevelt created an “alphabet soup of bureaucracies” (pg. 66) that provide direct aid to the unemployed, created public works programs, enacted price controls in agriculture and implemented various forms of industrial policy reminiscent of that sort of policy in the first World War. The CCC was created early in the administration (pg. 64) and the WPA later (pg. 67) to employ young men in projects that, Rauchway assures the reader, didn’t compete with the private sector and where jobs creating the “comforts of civilization” (pg. 68). The Public Works Administration was created in 1933 with a budget 6% of the GDP. Rauchway informs us this program wasn’t big enough to put a dent in unemployment so the Civil Works Administration was created the next year and soon employed nearly 10% of the labor force (pg. 65).

I’ll make the case that these new programs were inefficient, but to do so I need to appeal to a little economic theory. I apologize in advance. Imagine you’re unemployed and you’re looking for a job. You have a desired wage in mind and you can’t find a job. There can be two reasons why you can’t find a job. There’s not many job offers out there or all the job offers you’ve entertained haven’t been good fits for you (meaning you think you can be more productive, and higher paid, somewhere else). In either case, if you lower the wage you expect, you’d eventually find a job and the lower the wage you’d expect the faster you’d find a job.

Now, suppose the government comes in and offers a job with a “security wage” (pg. 69, basically a minimum wage). With this outside offer, you can afford to look longer for a job that pays that higher wage or you can go ahead and take the job with the government. If you take the job, you have to assume the work you do in it is just as valuable as the work you’d do in a private sector job at the same wage or you have to conclude the government job offer is inefficient ((The key assumption for inefficiency of the government job is that the government job generates at most as much value as private sector job and most likely it creates less value. I won’t spend much time substantiating this assumption, but it seems likely to be true because if the government job provided a lot of value, you have to wonder why a private firm didn’t create the job in the first place.)). If you don’t take the job and wait longer in the private sector, that’s time resources, namely you, are spent idle and that too is inefficient.

Chapter five in Rauchway’s book is devoted to showing agriculture and industrial policies in the Roosevelt administration were inefficient and because of this, they were subsequently dropped by him by his second term. The AAA was created in 1933 with the explicit instruction to decrease the “severe and increasing disparity between the prices of agriculture and other commodities” (pg. 77). The AAA asked farmers to destroy their crops and the “spectacle of … government destroying food in the midst of hunger positively hurt” (pg. 79). Needless to say, having farmers plant crops and then destroy them isn’t the best use of resources.

As for industrial policy, the NRA was created in the spirit of Hoover’s managed economy to have “management, labor, government, and consumer representatives negotiating regulatory codes” and to fix prices (pg. 83). This increased monopoly power irked businesses not in on the deal and workers complained about increasing prices, as prices are wont to do in consolidated industries (pg. 84). Beyond the political economy and backlash against the NRA, standard economic theory tells us efficiency suffers with an increase in monopoly power.

So, Rauchway has given us data that makes us think some of the New Deal policies were inefficient. Even if you don’t think the “emergency” work programs were inefficient, its pretty clear that the agriculture and industrial policy were.

Why does the inefficiency of these policies imply Roosevelt prolonged the Depression? In the macro economy unemployment is a measure of inefficiency ((As is GDP being far from its trend, which is was in the ’30s, but let’s ignore that for now.)). By any measure of unemployment, it was much higher in the 1930s than any other decade before or since. New Deal policies created inefficiencies, which created unemployment which prolonged the Great Depression.

But you don’t have to believe all this hocus pocus economic theory because Rauchway says as much when he concludes: the agriculturial and industrial policies were intended “to promote not a speedier, but a better distributed, recovery” (pg. 82). Many New Deal policies were meant to redistribute wealth not generate more of it. There’s no shame in that, but if you admit it, you’re admitting Roosevelt prolonged the Great Depression.

UPDATE: Krugman thinks Roosevelt prolonged the depression, too… by not doing enough. Who you going to believe some two-bit Nobel laureate… or me?

3 thoughts on “Did Roosevelt prolong the Great Depression?”

  1. In December 1933,the economist John Maynard Keynes wrote an open letter to President Roosevelt, which began:

    “You have made yourself the trustee of those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out.”

    (quoted from Donald Markwell,”John Maynard Keynes and International Relations: Economic Paths to War and Peace”, Oxford University Press, 2006, page 176)

    Although the circumstances are different, exactly 75 years later President-elect Obama is in something like the same position. People around the world see him as the trustee of their hopes, both for better international relations and for revival of the world economy.

    As in FDR’s time, when Depression led remorselessly to war, so today, the two may be more closely connected than we would like to think.

    President Obama must ensure that the US provides leadership in dealing with the global economic crisis of our day. This, too, is one of the lessons – probably not widely enough appreciated – of FDR’s time, and of Keynes’s insights (see Markwell’s book quoted above).

  2. As long as comparisons between the current situation in the US and the Great Depression are properly considered in context. The downside of globalization is that everything is globalized. Foreign markets are down too, and we rely on trade a lot more than we used to. Even if the US ran a perfect ship, we would still feel the drag from our trading partners.

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