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Old 11-03-2008, 08:29 PM   #1
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Statist Intervention Prolonged Depression

A failure of capitalism?
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Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.

In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

Roosevelt's role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th century's second-most influential figure.

"This is exciting and valuable research," said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. "The prevention and cure of depressions is a central mission of macroeconomics, and if we can't understand what happened in the 1930s, how can we be sure it won't happen again?"

NIRA's role in prolonging the Depression has not been more closely scrutinized because the Supreme Court declared the act unconstitutional within two years of its passage.

"Historians have assumed that the policies didn't have an impact because they were too short-lived, but the proof is in the pudding," Ohanian said. "We show that they really did artificially inflate wages and prices."

Even after being deemed unconstitutional, Roosevelt's anti-competition policies persisted — albeit under a different guise, the scholars found. Ohanian and Cole painstakingly documented the extent to which the Roosevelt administration looked the other way as industries once protected by NIRA continued to engage in price-fixing practices for four more years.

The number of antitrust cases brought by the Department of Justice fell from an average of 12.5 cases per year during the 1920s to an average of 6.5 cases per year from 1935 to 1938, the scholars found. Collusion had become so widespread that one Department of Interior official complained of receiving identical bids from a protected industry (steel) on 257 different occasions between mid-1935 and mid-1936. The bids were not only identical but also 50 percent higher than foreign steel prices. Without competition, wholesale prices remained inflated, averaging 14 percent higher than they would have been without the troublesome practices, the UCLA economists calculate.

NIRA's labor provisions, meanwhile, were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor's bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still remarkably high. By comparison, in May 2003, the unemployment rate of 6.1 percent was the highest in nine years.

Recovery came only after the Department of Justice dramatically stepped enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."
FDR's policies prolonged Depression by 7 years, UCLA economists calculate / UCLA Newsroom
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Old 11-05-2008, 10:53 PM   #2
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Whoa this thread was unduly ignored for obvious reasons.

This is a good article to add to the stack:

Capitalism and the Financial Crisis
Walter E. Williams
Wednesday, November 05, 2008

There has always been contempt for economic liberty. Historically, our nation was an important, not complete, exception. It took the calamity of the Great Depression to bring about today's level of restrictions on economic liberty. Now we have another government-created calamity that has the prospect of moving us even further away from economic liberty with the news media and pundits creating the perception that the current crisis can be blamed on capitalism. We see comments such as those in the New York Times: "The United States has a culture that celebrates laissez-faire capitalism as the economic ideal. Or, "For 30 years, the nation's political system has been tilted in favor of business deregulation and against new rules." Another says, "Since 1997, Mr. Brown (the British Prime Minister) has been a powerful voice behind the Labor Party's embrace of an American-style economic philosophy that was light on regulation."

First, let's establish what laissez-faire capitalism is. Broadly defined, it is an economic system based on private ownership and control over of the means of production. Under laissez-faire capitalism, government activity is restricted to the protection of the individual's rights against fraud, theft and the initiation of physical force.

Professor George Reisman has written a very insightful article on his blog titled "The Myth that Laissez Faire Is Responsible for Our Financial Crisis." You can decide whether we have in an unregulated laissez-faire economy. There are 15 cabinet departments, nine of which control various aspects of the U.S. economy. They are the Departments of: Transportation, Housing and Urban Development, Health and Human Services, Education, Energy, Labor, Agriculture, Commerce, and Interior. In addition, there is the alphabet soup cluster of federal agencies such as: the IRS, the FRB and FDIC, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, and NASA.

Here's my question to you: Can one be sane and at the same time hold that ours is an unregulated laissez-faire economy? Better yet, tell me what a businessman, or for that matter you, can do that does not involve some kind of government regulation. A businessman must seek government approval for the minutest detail of his operation or face the wrath of some government agency, whether it's at the federal, state or local level. Just about everything we buy or use has some kind of government dictate involved whether it's package labeling, how many gallons of water to flush toilets or what pharmaceuticals can be prescribed. You say, "Williams, there's a reason for this government control." Yes, there's a reason for everything but that does not change the fact that there is massive government control over our economy.

It is incorrect to say that laissez-faire or free markets are unregulated. There is ruthless regulation, but it's not by government. Take the mortgage industry. In the absence of government interference, it is unlikely that a lender would extend a mortgage to a person with a poor credit history, making no down payment, and providing no verifiable employment history. But under the pressure of the government's Community Reinvestment Act and Fannie Mae and Freddie Mac buying up or guaranteeing such mortgages, a lender will.

When businesses make unwise decisions that lead to bankruptcy, their assets are sold off to someone else who might be able to put them to wiser use. Government bailouts give businesses a reprieve that the market wouldn't give them. Bailouts have at least two effects. They permit continued unwise use of resources and it creates what economists call moral hazard, the expectation of future bailouts and others hopping on the bailout wagon.

The blame for our current financial mess rests with government, with the major player being the Federal Reserve Board keeping interest rates artificially low and the congressional and White House market interference in the name of more home ownership. In the clamor for more regulation over our financial institutions, has anybody bothered to ask whether people in government know what they're doing?
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Old 11-05-2008, 10:57 PM   #3
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But the Fed is privately owned.
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Old 11-05-2008, 11:02 PM   #4
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Originally Posted by purpleoscar View Post
Whoa this thread was unduly ignored for obvious reasons.
What are those obvious reasons

Weren't you the one that said something about how economist are only good at predicting what has already happened?

Yet now these TWO economist give their interpretation of what happened 70 years ago and it's suppose to be telling somehow?
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Old 11-06-2008, 08:23 AM   #5
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Originally Posted by purpleoscar View Post
Whoa this thread was unduly ignored for obvious reasons.
Actually, the reason I left it is because I have to pick my battles these days.

Anyway, what I was going to write is summed up as the fact that all the mainstream economists, including our Bush-appointed Federal Reserve chairman, strongly believe that the Great Depression was prolonged because of not enough intervention in the beginning.
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Old 11-06-2008, 11:21 AM   #6
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But the Fed is privately owned.
Appointed people are never independent.
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Old 11-06-2008, 11:44 AM   #7
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Actually, the reason I left it is because I have to pick my battles these days.

Anyway, what I was going to write is summed up as the fact that all the mainstream economists, including our Bush-appointed Federal Reserve chairman, strongly believe that the Great Depression was prolonged because of not enough intervention in the beginning.
Please post your opinion and information. This is a debate that is actually the most paramount right now.
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Old 11-06-2008, 12:46 PM   #8
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Appointed people are never independent.
Interestingly Bernanke was appointed a couple of years ago with notable expertise on the on the causes and effects of Great Depression policies.

A couple of years before that he is often quoted as having said that with the US dollar as the world reserve currency in a fiat system, all that is required to avoid deflation is a printing press to print more money to pump the system with liquidilty.

Which he's been doing at breakneck speed lately.

2 big problems with that -

Inflated money supply causes inflation.

What happens when the US dollar is no longer the world's reserve currency?
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Old 11-06-2008, 12:49 PM   #9
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What happens when the US dollar is no longer the world's reserve currency?
What will replace the US dollar? The euro is not backed by any single government, and there may be some reluctance to use the yuan.
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Old 11-06-2008, 01:29 PM   #10
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What will replace the US dollar? The euro is not backed by any single government, and there may be some reluctance to use the yuan.
No idea.

Could the finanical meltdown be a tipping point to greater political cooperation of the EU countries to back the Euro? I think that's quite possible.
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Old 11-06-2008, 03:10 PM   #11
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Some interesting points.

Here are some libertarian opinions on the current priming of the pump

Markets Need Time, Not More Poison - Robert P. Murphy - Mises Institute
(Japan primed the pump and still didn't receive success just by creating currency alone.)

The Importance of Capital Theory - Robert P. Murphy - Mises Institute
(This one talks about capital goods vs. consumer goods.)
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Old 11-06-2008, 07:59 PM   #12
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Hmmm.

I liken economists and their theories to IT people and the Wizard of Oz. The average person really doesn't want to know what's going on behind the curtain, they just want the damn thing to work and the illusion of greatness.
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Old 11-06-2008, 08:04 PM   #13
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Hmmm.

I liken economists and their theories to IT people and the Wizard of Oz. The average person really doesn't want to know what's going on behind the curtain, they just want the damn thing to work and the illusion of greatness.
Always remember that there are many economists with different points of view just like the political spectrum. Sometimes you have to learn some economics so you don't get fooled by them.

IT and the Wizard of Oz is very apt. They also need jobs so they will ignore their beliefs so they can get political jobs. Economists have to eat too.
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Old 11-06-2008, 08:38 PM   #14
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Could the finanical meltdown be a tipping point to greater political cooperation of the EU countries to back the Euro? I think that's quite possible.
Actually the crisis has increased strains among EU countries, which is one reason the dollar is appreciating. Taxpayers are reluctant to bail out troubled banks in other countries.
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Old 11-06-2008, 10:24 PM   #15
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True enough for now. At some point when the recession really takes hold, they may stop pointing fingers at each other and start pointing west.
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