Harold L. Cole and Lee E. Ohanian today explain how their 2004 UCLA study of the New Deal’s failures can help shape better economic policy for the 21st century.
The economists say their research into the 1930s proves that today’s sagging U.S. economy needs more competition, tax incentives to work, save and invest, wiser bank regulation and better education for all.
Prolonged Depression. On Franklin Roosevelt’s New Deal, they write in The Wall Street Journal:
The goal of the New Deal was to get Americans back to work. But the New Deal didn’t restore employment. In fact, there was even less work on average during the New Deal than before FDR took office. Total hours worked per adult, including government employees, were 18% below their 1929 level between 1930-32, but were 23% lower on average during the New Deal (1933-39). …
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 by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.
The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation’s antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. …
Our research indicates that New Deal labor and industrial policies prolonged the Depression by seven years.
Ohanian had outlined this argument for this blog on Dec. 29.
To create jobs. What lesson from the New Deal can we apply to today’s “Panic of 2008”? As the Senate considers a $820 billion “stimulus” bill, Cole and Ohanian now write:
President Barack Obama and Congress have a great opportunity to produce reforms that do return Americans to work, and that provide a foundation for sustained long-run economic growth and the opportunity for all Americans to succeed.
These reforms should include very specific plans that update banking regulations and address a manufacturing sector in which several large industries -- including autos and steel -- are no longer internationally competitive. Tax reform that broadens rather than narrows the tax base and that increases incentives to work, save and invest is also needed. We must also confront an educational system that fails many of its constituents. A large fiscal stimulus plan that doesn’t directly address the specific impediments that our economy faces is unlikely to achieve either the country’s short-term or long-term goals.
Deserve a listen. Cole now is an economics professor with the University of Pennsylvania. Ohanian remains a professor and researcher at UCLA.
Read their whole Wall Street Journal piece by clicking here. Congress would do itself a favor by asking these two men to testify in depth. Obama should talk with them, too. Challenge them. And learn from them.
Frank Warner
See also: UCLA economist: Don’t tell me you see New Deal success in 1939’s woe (the prolonged Depression).
See also: Economist Martin Feldstein: Wait a month or two to avoid ‘stimulus’ mistake.
See also: ‘Stimulus’ bill: Some economists ignore all data.
See also: The ‘stimulus’ bill looks like a bad last bet.
See also: Larry Summers rules: Stimulus must be ‘timely, targeted, temporary.’
See also: Depression: David Sirota attacks New Deal critics as ‘right-wing automatons.’
See also: March 4, 2009: Professor Barro: 20% odds of a depression.
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