Did FDR End the Depression?

In a word: No.

Franklin Roosevelt assumed the Presidency in March of 1933. The National Bureau of Economic Research dates the end of the Great Depression as March of 1933. The notion that FDR had anything significant to do with ending the Great Depression is just a myth.

Of course, by the same data the idea that FDR prolonged the Great Depression is also clearly false. Why? The Great Depression ended pretty much when FDR became President. If he prolonged it, it was a matter of days nothing more at best.

Another way of putting it is that the economy during the Great Depression probably started to grow on its own and the limited policies of Herbert Hoover were of little significance. I think this maybe the case this time around as well, although we aren’t in a depression (at least not many think this yet). The stimulus spending will most likely kick in when the economy is already growing and such spending is no longer needed in terms of ending a recession. The Obama Administration will claim credit, and there wont be much way to disprove the claim.

FILED UNDER: Economics and Business, The Presidency, , , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Well, great Steve has settled this debate once and for all. And he didn’t even do it by citing a barely relevant factoid. Nope, he laid out both sides of the argument fairly. Analyzed the complex mass of data. And provided a conclusive answer.

    This was not, in any way, yet another lazy post to defend his own ideological preconceptions.

    I say, Well Done! A model the entire blog-o-sphere should seek to emulate.

  2. G.A.Phillips says:

    not a myth or a myth?

    lol, not a myth, Unemployment in Racine WI. 15.6% and only two liberals running for mayor, eyeeeeeeeeee!!!!

    But I did see some city workers planting what appeared to be some 150 dollar saplings the other morning, must be the stimulus money kicking in.
    I don’t like this game!

  3. William d'Inger says:

    I think it is all a matter of semantics. A half hour of intense research leads me to believe the NBER definition of “depression” only applies to the GDP curve from the top of the peak to the bottom of the trough. The rest of society considers the Great Depression to be the entire time until GDP and unemployment returned to pre-depression levels (basically just before WW II). Therefore, I consider the conclusion posted above to be an exercise in crafty mendacity.

  4. Steve Plunk says:

    Unfortunately any discussion about recessions and depressions have centered on the politics surrounding the time. This completely ignores the business cycles and any unusual circumstances that damage or heal the economy.

    The housing bubble obviously had a huge effect on the sudden downturn. Falling energy prices have certainly helped turn things around. Yet all the talk is about Obama’s plan, Bush’s failures, Barney Frank, Henry Paulson, and whoever else we may think wields endless power. The biggest thing these politicians influence is attitudes, expectations, and most importantly, fears.

  5. Drew says:

    Bernard –

    Methinks you have a personal issue with Steve. Did you actually read what he posted?

    He simply observes that the NBER cites the end of the downturn before/co-terminus with Roosevelt even taking office. Well, intellectually, game over. (By the way, this is exactly how I read it. Those who try to portray the Depression as a 10 year event rely on the stat of the GDP level recovering to the prior peak level, not the inflection point when its path turned upward. You should take issue with NEBR, not Steve. Unless you are just fix’n for a fight, that is.)

    Further, being intellectually honest, Steve says that those who castigate Roosevelt on this point are, by definition, also wrong.

    Seems pretty level headed to me.

    Just who is grinding the axe of preconceived political convictions here, Bernard??

    By the way. When the dust settles, and this current recession proves not to be the “catastrophe” Obama invoked for crass political gain, but is really just a hum dinger recession like 1974/5 and 1981/2 but not one experienced by most of the economically illiterate populace voting today…….will you be one who praises Obama for “saving” us, or one who correctly observes he really had not jack squat to do with its outcome?

    Unless current policy moves scuttle the recovery…….

  6. odograph says:

    Gosh, Steve gives Yglesias a “clueless” rap for posting something Steve had known “for at least 15 years”.

    I kidded Steve that he’d only post new things then?

    Suddenly we are back in 1933, for some reductionist BS. But Drew’s got the key! Maybe this reductionist 1933 BS can be used to tar Obama today! That’s the ticket.

  7. Drew, I expect the US economy to recover in GDP terms just in time for inflation to kick in in a big way. But hey, at least we won’t be in a recesssion as measured by a weak dollar driven GDP!

  8. anjin-san says:

    The notion that FDR had anything significant to do with ending the Great Depression is just a myth.

    I don’t think I have ever heard anyone argue the FDR ended the depression. Clearly, he did not.

    What he did do what hold the country together during one of its worst hours, and mitigate the terrible suffering that was being experienced by millions. When WW2 came along, America was strong enough to rise to the task. Under lesser leadership, that might not have been so.

    I don’t know anyone who was there who thinks that the depression ended in 1933, NBER or no…

  9. steve says:

    http://www.economics-charts.com/gdp/gdp-1929-2004.html

    There, I remembered to post the relevant chart. Rounding off, GDP was about $100 billion in 1929 and $50 billion in 1933. GDP then increased very fast until ’37 or ’38. IIRC, it is the largest sustained increase in GDP for the last century. So, by the NBER definition, we were out of an economic depression by 1933.

    However, most people care more about jobs and being able to eat. The Great Depression, as seen by most people went on a bit longer. Does FDR get any credit for that rapid economic expansion? Probably some. The creation of the FDIC was pretty important in stopping bank runs IMHO. Monetary supply policy may have helped stop deflation. OTOH, the wage support and price support policies were probably misguided.

    Barro had a very nice piece on this topic this w/e (too lazy to find link). I would highly recommend it. He notes that FDR stopped programs that were not working, which fits with how I tend to see FDR, ie, he shotgunned a lot of programs, hoping something would work. As an aside, I would take some issue with Barro trying to use increased govt. spending during WWII as a model for determining multipliers. That was an economy that had rationing and industry was largely turning out military products. Does one really expect to see much of a multiplier form a tank?

    Steve

  10. buermann says:

    Suspended gold convertibility, April 1933.

  11. anjin-san says:

    Unless current policy moves scuttle the recovery…….

    Hope springs eternal, eh?

    Nice little talk track you have there. If it gets better, Obama had nothing to do with it, if it gets worse, its all his fault…

  12. Steve Verdon says:

    Odograph,

    Gosh, Steve gives Yglesias a “clueless” rap for posting something Steve had known “for at least 15 years”.

    I kidded Steve that he’d only post new things then?

    Suddenly we are back in 1933, for some reductionist BS. But Drew’s got the key! Maybe this reductionist 1933 BS can be used to tar Obama today! That’s the ticket.

    You did see all that sturm und drang in Alex Knapp’s post on whether or not FDR made the recession worse….right?

    Oh, and FDR becomes President the very same month the NBER dates the end of the Great Depression…did he use his magic wand? No reductionist BS, the simple fact of the matter is that even today with the massive federal government and all sorts of ways to influence the economy a modern President has at best imprecise influence on the economy. Back then FDR would have even less precision…but he ended the Great Depression in days or weeks.

    However, most people care more about jobs and being able to eat. The Great Depression, as seen by most people went on a bit longer.

    No it didn’t. When the economy is growing it is not in recession let alone in depression.

    Does FDR get any credit for that rapid economic expansion? Probably some.

    Now we come to the real crux of the issue. Did FDR’s policies help or hinder the recovery. That is open to debate.

    Barro had a very nice piece on this topic this w/e (too lazy to find link). I would highly recommend it. He notes that FDR stopped programs that were not working, which fits with how I tend to see FDR, ie, he shotgunned a lot of programs, hoping something would work. As an aside, I would take some issue with Barro trying to use increased govt. spending during WWII as a model for determining multipliers. That was an economy that had rationing and industry was largely turning out military products. Does one really expect to see much of a multiplier form a tank?

    Problem is that the fiscal expenditures during the Great Depression weren’t that large, while the spending during the war was much, much larger. And I think Barro’s reserach was on GDP not necessarily welfare social or otherwise. In that regard rationing while restricting one area of GDP means another would increase. But even he admits it isn’t the best evidence. However, even the proponents of the New Deal and Keynsian policies often admit that the big problem was that the New Deal wasn’t big enough–i.e. they don’t have any data, or at least less than Barro does.

    anjin-san,

    What he did do what hold the country together during one of its worst hours, and mitigate the terrible suffering that was being experienced by millions. When WW2 came along, America was strong enough to rise to the task. Under lesser leadership, that might not have been so.

    The economy and country probably would have survived without him as well. Now he isn’t the one who ended the Great Depression, now he is the Great Savior, not once but twice. Twice in that he saved us from despair as the depression was ending and the economy was starting to grow again, but also saved us from WWII. But he didn’t end the Great Depression, okay.

    William,

    Therefore, I consider the conclusion posted above to be an exercise in crafty mendacity.

    LOL, so now you decide to use your own definition on when a recession ends. With this definition there was no recession under Bush. Oh and you have a piss poor grasp of the facts. Real GDP exceeded its 1929 level in 1936 well before WWII. Some mendacity on your part?

  13. sam says:

    It may well be, as Steve says, that the Depression ending as FDR took office–but the national depression didn’t. One thing that goes unremarked in these discussions is the effect FDR’s personality had on a dispirited people. I may have recounted this story before, if so, forgive me for repeating it. I once asked my grandmother, who lived in the rural South during those times–a really not very nice place to be during those economically troubled years–how she felt about FDR and the Depression. She told me that she really didn’t know much about the effect of his programs and such, but just hearing him on the radio made her feel that things would turn out alright. I think you could multiply her experience by millions. That, of course, was an unquantifiable effect, but it was very, very real.

  14. odograph says:

    The most interesting thing to me is not The Depression, but that a wave of Second-Guessing The Depression began… what, last fall?

    I think anyone following those threads saw a lot of ways to measure depressions, valleys, recoveries, and so on. We also saw a lot of picking and choosing of which feature of the Great Depression cycle we should focus upon.

    There is a lot of room for that, to pick this or that in a quick blog post, and hang a modern political narrative upon it. This short post and its title is pretty skeletal in that regard. Did FDR (like Superman) lift the economy on his shoulders? No, it was more complicated than that. Any world spanning economic cycle would of course be more complicated than that.

    So what’s up? I’d say this seems in the traditional vein of picking and choosing, making (as many have noted) unsupported assertions, and making it all spin toward today, and our fairly different environment and President.

  15. Drew says:

    Some fascinating points made here by people unable to decouple politics from economic analysis.

    Until a few months ago, I had no idea there were two definitions of recession. For me it had always been two quarters of negative growth. Then, all the sudden I hear about the NEBR definition, which puts the start date back in January 2008. Why? Politics of course. Bad for Bush, good for Obama. Now in this thread some seem mystified or dismissive about the NEBR definition when it comes to FDR. How convenient.

    In addition, Obamaphiles, be careful what you say today. All that Obama talk about “catastrophe” and potential depression was just so much political BS. We have contracted about 3%, in line with the 74/75 and 81/82 recessions. We may go a bit lower, but no depression. However, what COULD very well happen, is that growth off the bottom could be very slow. This will no doubt generate observations from the right that the recession is lingering on, and it will be called Obama’s recession. I guarantee those in this thread who insist the Depression was still existant post 1933 will be vociferously arguing the economy is not in recession………probably citing NEBR!

    Sam – so given the “very, very real” effect of Presidential rhetoric you cite, what say ye about Obama invoking “national catastrophe” to talk down the economy for political gain and to pass his spending bill? And what do you say to those who lost their jobs as the nation panicked due to this “very, very real” effect??

  16. anjin-san says:

    But he didn’t end the Great Depression, okay.

    Steve… are you talking just to hear yourself talk? I have said that about six times in the last few days:

    I don’t think I have ever heard anyone argue the FDR ended the depression. Clearly, he did not.

  17. odograph says:

    Then, all the sudden I hear about the NEBR definition, which puts the start date back in January 2008. Why? Politics of course. Bad for Bush, good for Obama. Now in this thread some seem mystified or dismissive about the NEBR definition when it comes to FDR. How convenient.

    Why can’t I flip that around?

    “All of a sudden I saw complaint about NEBR and their recession start date. Why? Politics of course. Bad for Obama, good for Bush.”

    How convenient.

    In addition, Obamaphiles, be careful what you say today. All that Obama talk about “catastrophe” and potential depression was just so much political BS.

    I can certainly turn that and call BS on it. The “Bushophiles” have run a trailing argument, a retreat, that there was never anything wrong with the economy, or choices of the free market.

    It’s been quite difficult for those outside the center to look both ways (right and left) and see elements of truth. So, far-rightists have been constructing an alternate narrative.

    WTF Drew, are you back to Obama “talking down” a healthy economy?

  18. anjin-san says:

    All that Obama talk about “catastrophe” and potential depression was just so much political BS.

    Dunno about that. A failure of the banking system would be a real disaster. We came too close for comfort last fall. Remember, last fall, when Bush was telling us we were on the brink of economic catastrophe?

  19. odograph says:

    Well you see Pilot, we have short term memory loss. None of us here remember, say, the total panic in money market funds.

  20. Raoul says:

    Well, SV, there will not be much to dispute your allegations either; such is the beast. Also, you take a rather narrow definitional view of what is a depression. Presumably by your applied definitions, if the country had not grown for 10 years and people had continued to live in abject misery with 25% unemployment you would not call it a depression. Personally, I find these kind of semantic games disingenuous at a minimum. Now here is my take, WWII did get us out of the depression because the war meant stimulus spending. The amount of proportional spending vis-s-vis GDP at the time is roughly the same as the current stimulus package. And that my troglodyte friend is why the economy will improve.

  21. Drew says:

    That was incoherent, odo. Come again?

  22. Drew says:

    anjin –

    Let’s try to keep our facts straight, eh? Obama’s rhetoric was at the time he was trying to get the spending bill passed, not last fall.

  23. Bithead says:

    It’s interesting, the amount of frothing spittle produced by such a post. Invariably the reactions to it tell the tale:

    To state that FDR was not responsible for ending the depression and in fact made it worse is to challange the underlying collectivist notion that FDR’s socialism is not only valid, but the answer to capitalism. The most … ummm…. interesting responses invariably come from people whose worldview cannot tolerate the slightest of challange.

  24. G.A.Phillips says:

    Dudes, Japan ended the great depression by waking a sleeping giant and I guess FDR helped by allowing them to attack us, so he gets some credit I think.

  25. Steve Verdon says:

    Drew,

    Until a few months ago, I had no idea there were two definitions of recession. For me it had always been two quarters of negative growth. Then, all the sudden I hear about the NEBR definition, which puts the start date back in January 2008. Why? Politics of course. Bad for Bush, good for Obama. Now in this thread some seem mystified or dismissive about the NEBR definition when it comes to FDR. How convenient.

    I’m going to disagree here. NBER used to use that GDP definition. It was later replaced with the current approach that doesn’t fixate on GDP. As for politics I don’t think too many people would argue that Martin Feldstein is a raging liberal. Same goes for Zarnowitz, who is also on the dating committee. I think the NBER dating committee doesn’t look at politics really. I think they take their job very seriously and try to be as objective as possible.

    anjin-san,

    Steve… are you talking just to hear yourself talk? I have said that about six times in the last few days:

    I don’t think I have ever heard anyone argue the FDR ended the depression. Clearly, he did not.

    No, you’ve just about beatified him for what he did during the recovery and preparing us for war (with double digit unemployment by the way).

    Raoul,

    Well, SV, there will not be much to dispute your allegations either; such is the beast. Also, you take a rather narrow definitional view of what is a depression.

    No, I’m using the accepted definition at that time. A growing economy is not an economy in recession let alone depression.

    Presumably by your applied definitions, if the country had not grown for 10 years and people had continued to live in abject misery with 25% unemployment you would not call it a depression.

    WTFAYTA? Of course not. But the economy started growing again in 1933. It grew at a very rapid pace for the next several years. In fact, I believe it was Sam who noted is was the highest peace time economic growth on record.

    Personally, I find these kind of semantic games disingenuous at a minimum.

    If you acquainted yourself with the actual data you’d see that there are no semantics games, disengenuous or otherwise.

    Now here is my take, WWII did get us out of the depression because the war meant stimulus spending.

    Wrong, the economy was growing before the start of WWII. There was another recession in 1937 that ended in 1938 second quarter.

    And that my troglodyte friend is why the economy will improve.

    A dubious claim at best. Even supporters of the New Deal today (e.g. Krugman) argue that FDR’s big failing was not going far enough with the spending in 1933, 1934, an onwards. That he should have done far, far more. In other words, the impact of the New Deal, beyond its psychological impacts is still an issue to be resolved because the data is inconclusive.

    Odograph,

    I can certainly turn that and call BS on it. The “Bushophiles” have run a trailing argument, a retreat, that there was never anything wrong with the economy, or choices of the free market.

    Who the f*ck has made this assertion?

    It’s been quite difficult for those outside the center to look both ways (right and left) and see elements of truth. So, far-rightists have been constructing an alternate narrative.

    Both sides are constructing their narratives.

    I think anyone following those threads saw a lot of ways to measure depressions, valleys, recoveries, and so on. We also saw a lot of picking and choosing of which feature of the Great Depression cycle we should focus upon.

    This is nonsense. You are rendering the issue moot by making it completely un-measurable. We can’t look at GDP, that’s not William’s preferred measure. anjin-san has yet another, and why they are totally valid therefore we are still in the Great Depression.

    By the way the implication of your view renders the experience from the Great Depression irrelevant. Did it help? Don’t know. Did it hurt? Don’t know. Can that time in our history tell us anything? No. Okay, so we ignore it? Yes.

    Drew is right, you are incoherent.

    Did FDR (like Superman) lift the economy on his shoulders? No, it was more complicated than that. Any world spanning economic cycle would of course be more complicated than that.

    But that is the narrative of many who think the New Deal was the key. Here is a hint: the economy is resilient. It would have grown without the New Deal, in fact it started to before FDR did much of anything that is one of the things you should take away from the OP.

    The question is did the New Deal help? That is a debatable question. Spending government money probably helped. But at the same time FDR did things that probably didn’t help and may have hindered the recovery. For example, he really wanted to raise prices. To that end he slaughtered pigs and paid farmers not to grow crops. A questionable policy when hunger and privation were the rule of the day. He also favored an industrial policy that looked somewhat like cartels. Cartels act like monopolies. When you create a monopoly do they have higher or lower output relative to a competitive market? The answer is lower…lower and with higher prices. Again, a dubious policy when hunger and privation are the order of the day for the common man. Firside chats and boosting consumer confidence are a good thing, but a confident consumer who still has few options in terms of basics of life is not going to be considerably better off. Then again, the TVA was most likely a good thing. So its a mixed bag, what the overall dominant effect is hard to say even all these years later.

    So yes its complicated, but it is pretty much indsiputable that the Great Depression was all but over by the time FDR took office.

  26. Grewgills says:

    Now we come to the real crux of the issue. Did FDR’s policies help or hinder the recovery. That is open to debate.

    And that is the debate that most are having.
    Is your issue simply people’s imprecise use of language?
    It can be annoying but wouldn’t you be better served by placing that correction within a post that dealt with the debate people are having/intending to have?
    I know every time I see someone use the term ‘begs the question’ to mean ‘asks the question’ I feel like correcting them, but that moves the debate nowhere.

  27. Drew says:

    Steve V –

    I wondered (actually suspected) if in academic circles the current NBER measure standards hadn’t become the norm. I say that because after I became aware of it I sampled some sites (BLS, BEA) etc and saw that the data series they published used the current standard.

    However, ham fisted as it might have been, my real point wasn’t aimed at academics, especially breathren like Zarnowitz, but the press. Because I can flat damned guarantee that in the pop press the two quarters definition continued to be used throughout 2008……..until they, apparently like I, became aware of the alternative. And that was a very useful and convenient change in standard for them. So they changed their reporting without any discussion of why, when or how the standard had changed. Their politics, not Victor’s.

  28. odograph says:

    The question is did the New Deal help? That is a debatable question.

    Would a rational observer really consider it en-masse?

    It was a “throw everything at it” campaign, and FDR himself pulled the plug on things seen not to work.

  29. odograph says:

    So yes its complicated, but it is pretty much indsiputable that the Great Depression was all but over by the time FDR took office.

    LOL, you definitely got carried away by your rhetoric there. “all but over”

  30. odograph says:

    Drew, you are normally a very rational guy … why do you expect there to be a single definition for recession? The world is fuzzy. I know I have my definition for recession (when the young folks in the office switch from restaurants to sack lunches), the press has another, and NBER has another again. I don’t yield to them the “official” title other than by custom.

    I reserve the right to judge recovery on my own terms as well. We aren’t there yet. By my terms we haven’t even bottomed yet.

  31. Drew says:

    odo –

    “….. why do you expect there to be a single definition for recession?”

    Because if we all have our own definitions no rational policy discussion can be had. Its a food fight. I simply was offering up my own ignorance for not being in synch with the state of the art in academia, and observing that the press was similarly ignorant, but did a 180 the moment they realized they had a definition that fed the Obama-mania script.

    “The world is fuzzy. I know I have my definition for recession (when the young folks in the office switch from restaurants to sack lunches)”

    Fuzzy, yes, but what next, a recession index based upon the affordability of hookers?? There are certain standards of measurement in any field of endeavor which, if bastardized, lead to chaotic arguments. See: this thread.

    “I reserve the right to judge recovery on my own terms as well.”

    Of course you can. I would say that watching the bag lunch crowd has a certain warm, folksy appeal, but the field of economics has progressed. M2, fixed structure investment, housing prices, inventories, employment etc etc probably give a better indicator.

    I wasn’t trying to be pissy. Your previous post was, well, incoherent. What is it you are trying to say?

  32. An Interested Party says:

    It’s interesting, the amount of frothing spittle produced by such a post.

    Indeed…we see much of the same kind of reaction from the other side of the political aisle whenever someone wants to give FDR credit for helping the country out of the depths of the worst periods of the Great Depression or denying that he was a “socialist”…of course he was only human, he had his faults like ever other man that has sat in the White House…but it’s funny the reaction that is gotten whenever someone wants to praise him the way that many around here would praise…say…Reagan…

  33. Bithead says:

    Because if we all have our own definitions no rational policy discussion can be had. Its a food fight

    Mmmppphhhf.
    At the botom line, when you see people adding complexity to a discussion, or for that matter demanding ‘bipartisan’ solutions… you’re really dealing with people who don’t want to discuss the principles of the thing. Usually, it’s because they know application of such principles defeats their arguments, and eliminates the goal they desire.

    Indeed…we see much of the same kind of reaction from the other side of the political aisle whenever someone wants to give FDR credit for helping the country out of the depths of the worst periods of the Great Depression or denying that he was a “socialist”…of course he was only human, he had his faults like ever other man that has sat in the White House…but it’s funny the reaction that is gotten whenever someone wants to praise him the way that many around here would praise…say…Reagan…

    And here’s the prime example; There’s a difference in principle, that many would like to avoid between these two. Reagan worked on the idea that the individual, not the government, was the key to success. FDR, rather the reverse.

  34. Steve Verdon says:

    And that is the debate that most are having.
    Is your issue simply people’s imprecise use of language?

    In part. People seem to have this notion that the Great Depression ran right up until Pearl Harbor or something. Then there is the notion the New Deal made the Great Depression worse. Both position are false.

    It can be annoying but wouldn’t you be better served by placing that correction within a post that dealt with the debate people are having/intending to have?

    The point would get lost, IMO. Shutting down the nonsense that FDR made the Depression worse shouldn’t be part of any conversation, IMO. Beatifing FDR on the other hand is just as silly.

    Odograph,

    Would a rational observer really consider it en-masse?

    It was a “throw everything at it” campaign, and FDR himself pulled the plug on things seen not to work.

    Of course you wouldn’t try to look at the whole thing. You’d want to look at parts of it and then try to see how the whole thing added up. For example, FDR mandated wage hikes, cartelized industries, mandated price hikes, and then mandated cuts in hours worked. The results when looking at the various points in time when these mandates came out are not good for those supporting the New Deal in total. In looking at industrial production it was not good since these coincide with drops in production, not increase. [Link, Link]

    Here is James Hamilton,

    After 1933, the economy began to grow again, with real GDP increasing at an average compound rate of 6.7% per year from 1933-1939. However, although growth over this period was strong, the unemployment rate stayed high, and there surely remained substantial excess production capabilities. So, in my mind, the third part of the question of “What caused the Great Depression?” is to explain why did the recovery take as long as it did after the contractionary monetary forces were removed?

    What is supposed to help the economy recover is that a substantial pool of unemployed workers should result in a fall in wages and prices that would restore equilibrium in the labor market, as long as the government just keeps the money supply from falling (which, as just noted, the Fed failed most spectacularly at doing during 1931-32). And yet, in the midst of quite significant unemployment, between 1933 and 1934, average hourly earnings increased by over 25% in sectors such as iron and steel, furniture, and cement, and over 50% at lumber mills. How could that be?

    Those numbers, by the way, come from a paper by UCLA Professors Harold Cole and Lee Ohanian that appeared in the Journal of Political Economy in 2004. And their answer to the question is that the persistence of so many unemployed workers was due in no small part to the National Industrial Recovery Act of 1933 and the National Labor Relations Act of 1935.

    Cole and Ohanian noted that many in the Roosevelt Administration believed that the severity of the Depression was due to excessive business competition that led to wages and prices that were too low. I actually agree, in a perverse sense, with part of that diagnosis– I see the rapid deflation of 1929-33 as quite destabilizing. But I’m inclined to believe that the way to fix that would have been through a monetary and fiscal expansion rather than trying to lift nominal wages and prices back up by sheer government fiat.

    The purpose of the NIRA and NLRA was to promote labor and trade practice provisions so as to limit the extent of competition between firms and competition between workers. Among the NIRA codes that Cole and Ohanian highlight include minimum prices below which firms were not allowed to sell their products, restrictions on productive capacity and the amount that could be produced, and limitations on the workweek. Cole and Ohanian concluded on the basis of model simulations that these kinds of New Deal policies might have accounted for 60% of the persistence in the output gap.

    Outside of manufacturing, the Agricultural Adjustment Act of 1933 and Soil Conservation and Domestic Allotment Act of 1936 — paying farmers not to grow wheat– were designed with the specific goal of reducing agricultural production in order to raise agricultural prices. State regulatory commissions like the Texas Railroad Commission ordered oil producers to cut back production in an effort to increase oil prices.

    The notion that if we can just create more monopoly power for every single sector of the economy, encouraging every sector to produce less so they can raise their wages and prices, that we will then somehow make everybody richer, is so spectacularly wrong-headed that I would be just as dumbfounded to find that Brad De Long believes it as he seems to be by those of us who maintain that some aspects of New Deal policy surely did make the recovery from the Great Depression slower.

    I openly confess to believing that government policies that were explicitly designed to limit manufacturing, agricultural, and mining output may indeed have had the effect of limiting manufacturing, agricultural, and mining output.

    I would say, that these programs were likely really bad and slowed down the recovery in terms of reducing unemployment–in other words, the New Deal prolonged the period in which unemployment remained high.

    Of course you can. I would say that watching the bag lunch crowd has a certain warm, folksy appeal, but the field of economics has progressed. M2, fixed structure investment, housing prices, inventories, employment etc etc probably give a better indicator.

    Absolutely. The announcement of a recession shouldn’t have come as much of a surprise this last time. Why? Payroll employment had been falling for months. Unemployment/employment is a lagging indicator. When you have month in and month out drops in the payroll employment we are probably past the peak. Of course it is a lagging indicator so you’ll always be behind the curve, but you can look at other indicators and try to get a clearer picture.

    By the way, Cole and Ohanian argue the economy should have recovered to 1929 levels by 1936. Lucas and Rapping put it at sometime in 1935. What seems to have people scratching their head is, given that GDP was growing so fast and that there was considerable slack productive capacity…why did it take unemployment so long to drop? Could it have actually been the New Deal? If so, then maybe we don’t want to emulate it today. Not because of Republican Wing Nuts or Democrat Dopes, but because it would simply be bad policy.

    If you are going to argue that we’ve learned alot and know what not to do then you need to make that case. Lay it out, show us what you have learned. What were the bad policies, what were the good ones. DeLong, Krugman, et. al. have not done that.

  35. Steve Verdon says:

    By the way, if the following is true,

    I would say, that these programs were likely really bad and slowed down the recovery in terms of reducing unemployment–in other words, the New Deal prolonged the period in which unemployment remained high.

    And we decide to just call the Great Depression that period from 1929 to 1939, then it is likely the case the FDR prolonged the Great Depression.

  36. Raoul says:

    SV-I appreciate your response but methinks you do not see the contradiction in what you are saying- on one hand you go by a “definition” of what is depression; on the other you say that if the economy sucks but it is not shrinking is still a depression( the commnet “Of course not. But the economy started growing again in 1933” implies that if things suck- then it is a depression even if there was slow growth)- so feel free to use any definition anytime as long as it suits your preordained thesis- and please do not say the depression was over before FDR was inagurated- I am afraid you will not be invited to many reunions. As to the modicum growth in the late 30’s- it does not compare with the real stimulus which began for WWII.

  37. Steve Verdon says:

    SV-I appreciate your response but methinks you do not see the contradiction in what you are saying- on one hand you go by a “definition” of what is depression; on the other you say that if the economy sucks but it is not shrinking is still a depression( the commnet “Of course not. But the economy started growing again in 1933” implies that if things suck- then it is a depression even if there was slow growth)- so feel free to use any definition anytime as long as it suits your preordained thesis- and please do not say the depression was over before FDR was inagurated- I am afraid you will not be invited to many reunions. As to the modicum growth in the late 30’s- it does not compare with the real stimulus which began for WWII.

    No Raoul, nowhere have I said that if the economy is growing but sucks it is still a depression. I’ve come out saying that claims that FDR prolonged the Depression are wrong. This does not fit with the narrative you’ve devined from from comments. In other words, you’ve misread between the lines.

    If however, you insist that the Great Depression did not end up until WWII, then fine, I’m in the camp that FDR and the New Deal likely prolonged the Depression, under your definition. While some of the progrmas like the TVA, FDIC, and SEC were all good, NIRA, NLRA, AAA, and probably some others were bad with the latter likely outweighing the former.

  38. sam says:

    @Drew

    Sam – so given the “very, very real” effect of Presidential rhetoric you cite, what say ye about Obama invoking “national catastrophe” to talk down the economy for political gain and to pass his spending bill? And what do you say to those who lost their jobs as the nation panicked due to this “very, very real” effect??

    Is it you contention that things were just fine prior to his Jan 8, president-elect, speech at GMU? I think the facts are, and can be shown to be, otherwise.

  39. Drew says:

    “Is it you(r) contention that things were just fine prior to his Jan 8, president-elect, speech at GMU?”

    C’mon Sam – You know better than that. That the economy had headed south prior to Jan 8 (and Obama’s subsequent cheerleading for the spending bill) is indisputable. In fact, the Sept/Oct melt down sealed it.

    But you are arguing a straw man. The economy was not in danger of plummeting into “catastrophe” (depression) in January or February. And, empirically, here we are in May and contraction is 3%. Severe? Yes, like a good solid 70’s or 80’s recession. Depression? Not even close.

    So I ask again. If the words of a President are oh, so vitally important in setting the tone of the nation (your position), and affecting the economy, how do you justify Obama’s talking it down as he stumped for a bill? Unemployed people would like to know, Sam.

  40. odograph says:

    Drew, I think there can always be rational discussion about what is “arguably” a recession. You don’t need to worry about all the time, because no one is going to believe it in periods of solid GDP growth. Growth approaching zero or going negative is going to be more arguable.

    Steve, first I note James says:

    I divide the U.S. Great Depression (1929-1939) into three episodes: (1) the initial downturn (1929-30), catastrophic free fall (1931-32), and slow recovery (1933-39). I believe there were different factors in play in each.

    The also says:

    Cole and Ohanian noted that many in the Roosevelt Administration believed that the severity of the Depression was due to excessive business competition that led to wages and prices that were too low. I actually agree, in a perverse sense, with part of that diagnosis– I see the rapid deflation of 1929-33 as quite destabilizing. But I’m inclined to believe that the way to fix that would have been through a monetary and fiscal expansion rather than trying to lift nominal wages and prices back up by sheer government fiat.

    Are we still on the assertion that “it is pretty much indsiputable that the Great Depression was all but over by the time FDR took office” ?

    Man, who dropped that groaner into the discussion?

  41. sam says:

    Drew:

    I guess I fail to understand what this means:

    Obama invoking “national catastrophe” to talk down the economy for political gain and to pass his spending bill?

    Since, by your own admission in your last, the economy was already down and heading further. What, exactly, do you mean by the expression ‘to talk down the economy’? I don’t think I’m the only one to construe that as asserting his speech (in the broadest sense) caused a further decline. What do you mean by ‘talk down’?

    Oh, and my anecdote about FDR’s fireside chats was simply to point out that, in at least one instance (my grandmother’s, and, I assert, many, many more), he supplied reassurance and hope to folks far from the levers of any kind of power during those times.

    And I think you 3% contraction figure is off:

    Purchases climbed 2.2 percent in the first three months of this year, halting their biggest slide since 1980. The economy shrank at a 6.1 percent annual pace after contracting 6.3 percent in the fourth quarter of 2008.[Source]

  42. anjin-san says:

    Reagan worked on the idea that the individual, not the government, was the key to success.

    MMM. Yes. Of course. After all, it was individuals who deployed Pershing II’s in Europe, throwing the Soviet Union into its death spiral.

    Oh, wait… guess sometimes government is the answer sometimes, just as individual action is the answer sometimes. Just as small entrepreneurs are sometime the answer, just as huge corporations are sometimes the answer.

    Gee bit, the big complicated world must be very confusing to you…

  43. anjin-san says:

    how do you justify Obama’s talking it down as he stumped for a bill?

    Well the market is up, and confidence overall is up, way up really from where it was at then end of Bush’s term. Maybe that Obama feller just knows what he is doing after all. I know we are coming of of 2 very solid months…

  44. Mark says:

    I’m very interested in this debate because it so goes against what I’d thought was true. Fascinating.

    I’m no expert but, I had a question. If you look at the data where it shows the time span from peak to peak between 1929 and 1937 I believe it shows 93 months? Did I get that right?

    Wouldn’t that prolonged time period between those dates have created the perception that “hard economic times” really did run well into FDR’s presidency? And after it dipped again I wonder how that “felt” to the people living at the time? Does that mean that FDR had really no effect at all? Meaning – could his policies have both raised the economy up and then dropped it again 4 years later? Or was this up and down out of the control of govt policy all together?

    I’m curious because I seem to recall at the end of 07 and start of 08 it was widely accepted that we were in a recession even though data did not say we were.

    So, I’m wondering if you’re arguing a technical definition against the perception that, while yes the economy started growing again in 1933, the hole it was coming out of was so deep that there was no perception that things were better until much, much later…93 months later. And if that’s the case – I agree, we’re really arguing about how effective FDR was in aiding the rise or hindering it. Does that subsequent dip then tell us he wasn’t doing enough since, war time spending then brought it back and, at lease seems to keep subsequent troughs short?

    I think it would be more helpful if this data were represented by a curve. I think the visual representation of the height and depth of these peaks and troughs would illuminate a lot.

    thanks for bringing this up! Very interesting!

  45. Bithead says:

    MMM. Yes. Of course. After all, it was individuals who deployed Pershing II’s in Europe, throwing the Soviet Union into its death spiral.

    Comparing foreign policy with a domestic policy of individualism is comparing apples and Banannas, Anjin. That difference is why foreign policy is, constitutionally speaking, strictly the province of the Executive.

    And am I hearing you correctly that Reagan ended the cold war?

  46. anjin-san says:

    Bit pull the wax out of your ears. I have been saying for years that Reagan was an excellent President. Many factors went into the end of the cold war, but it was Reagan who broke the soviet union’s back. So domestic policy is all about the individual? Great, send me a photo of you building the freeway you drive to work on. And start calling for marriage equality, since you are all about the individual, I know you don’t want government in the business of telling individuals how to live.

  47. Bithead says:

    Apparently, Anjin, the fact slipped your mind that the freeway system was essentially a military operation.

    since you are all about the individual, I know you don’t want government in the business of telling individuals how to live.

    That enters the realm of the culture… and I think you’ve read my extended notes on that. Need the link?

  48. anjin-san says:

    Apparently, Anjin, the fact slipped your mind that the freeway system was essentially a military operation

    How about the street you live on? Is the DOD in on that? Did the pentagon build the sewer system your house is hooked up to?

    a domestic policy of individualism

    Is there a more important domestic issue than national security? I think not. And clearly, national security is not the purview of individuals.

    That enters the realm of the culture

    No, it is the realm of law and the government telling people how to live their lives. Funny how you have no problem with government grinding people under its heel if they are people you don’t approve of…

  49. Drew says:

    Sam –

    1. The figures you cite are annualized. Take each one and convert it to a quarter. Add the two quarters. That’s 3.1%.

    For the life of me I don’t know why they report these things on an annualized basis. The average length of post war recessions is 10 months, so what does an annual rate really mean??

    If you care to do the research, you will see that the 58, 75 and 81 recessions all had about 3% contractions.

    2. You can’t have it both ways. You can’t invoke the soothing effect of Presidential rhetoric when it comes to FDR, but then tell me Obama crying “fire” in a theatre doesn’t matter.

  50. Grewgills says:

    People seem to have this notion that the Great Depression ran right up until Pearl Harbor or something.

    Because the depression plus the recovery ran up to near that point. When people talk about Roosevelt shepherding the country out of the depression they are generally talking about him shepherding the country through the recovery. I think the comments make that plain.

    Now that definitions have been laid out it seems that now would be the time to tackle the broader argument.

    BTW, why attack people in the comments section who assert Roosevelt ended the depression did and ignore those that claim he extended the depression? (the odo bit dichotomy if you will)