FDRs Folly: How Roosevelt and His New Deal Prolonged the Great Depression

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Instead, the Fed increased the monetary base by percent in five years, causing more of the same overcapitalization problems that were the source of the problem in the first place.

How Roosevelt And His New Deal Prolonged The Great Depression | Bartleby

On top of that, virtually every single one of FDR's "New Deal" policies made things even worse and prolonged the Depression. Austrian economists have known this for decades, but at least the neoclassical model builders have finally caught on—we can hope. Cole and Ohanian apparently emerged from the rarified world of macroeconomic model building for a long enough period of time to discover that the so-called First New Deal —34 was one giant cartel scheme, whereby the government attempted to enforce cartel pricing and output reductions in hundreds of industries and in agriculture.

This of course was well documented in John T. Flynn's book, The Roosevelt Myth , first published in Henry Hazlitt had also written about it some fifteen years earlier. The fact that it has taken "mainstream" neoclassical economists so long to recognize this fact is truly astounding.

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For generations their own neoclassical textbooks have taught that cartels "restrict output" to raise prices. It has also been no secret that the heart and soul of the First New Deal was to use the coercive powers of government to prop up wages and prices by cartelizing the entire economy. FDR and his advisors mistakenly believed that the Depression was caused by low prices, therefore, high prices—enforced by threats of violence, coercion and intimidation by the state—would be the "solution. Thus, the First New Deal could not possibly have been anything but a gigantic unemployment-producing scheme according to standard neoclassical economic theory.

FDR's tripling of taxes, his regulation of business, and his relentless anti-business propaganda also contributed to a worsening of the Great Depression, but his labor policies were probably the most harmful to the employment prospects of American workers.

In this regard the most disappointing thing about the Cole-Ohanian article is that they do not even cite the pioneering work of Richard Vedder and Lowell Gallaway— Out of Work: Unemployment and Government in Twentieth Century America — first published in Indeed, it is somewhat scandalous that they do not cite this well-known work while making essentially the same arguments that Vedder and Gallaway do. All of these policies made labor more expensive. Consequently, as the economic law of demand informs us, the inevitable result had to be less employment.

Strike activity doubled from 14 million strike days in to 28 million a year later, and wages rose by about 15 percent in alone. Newly-enacted Social Security payroll and unemployment insurance taxes made employment even more expensive. What all of this means is that during a period of weak or declining derived demand for labor, government policy pushed up the price of labor very significantly, causing employers to purchase less and less of it.

Vedder and Gallaway conducted an econometric evaluation of these labor cost-increasing policies and concluded that most of the abnormal unemployment of the s would have been avoided were it not for these policies.

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The Real Deal

They estimated that by the unemployment rate was eight percentage points higher than it would have been without the legislation-induced growth of unionism and government-mandated employment costs. They conclude that "The Great Depression was very significantly prolonged in both its duration and its magnitude by the impact of New Deal programs" p. Instead, the joint policies of increasing labor's bargaining power and linking collusion with paying high wages prevented a normal recovery by creating rents and an inefficient insider-outsider friction that raised wages significantly and restricted employment.

This last conclusion—that the abandonment of FDR's policies "coincided" with the recovery of the s is very well documented by another author who is also ignored by Cole and Ohanian, Robert Higgs. Private-sector production increased by almost one-third in alone, as private capital investment increased for the first time in eighteen years.


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How FDR's New Deal prolonged Great Depression unemployment

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