A Newer Deal?

Recession to depression

In the wake of last fall's financial-market turbulence, New York Times columnist Paul Krugman's wish was clear. Interviewed by PBS's Charlie Rose on October 23, the newly minted Nobel laureate in economics said he hoped Barack Obama would announce a "new New Deal" for Americans.

But before a new New Deal is passed, it's worth considering the effects of the old one. Franklin Roosevelt's programs ranged from farm subsidies to public works to fixing prices and outputs in a variety of industries. A 2004 study[*] by two UCLA economists, Harold L. Cole and Lee E. Ohanian, argues that far from speeding along recovery, such interventions actually prolonged the Great Depression by about seven years.

Using data from the Bureau of Labor Statistics and other sources, Cole and Ohanian zero in on the effects of the 1933 National Industrial Recovery Act (NIRA), which exempted industrial sectors from antitrust prosecution if they agreed to collective bargaining agreements that raised workers' wages. Roosevelt believed that "excessive competition" was responsible for economic volatility and that by stabilizing labor costs he could stabilize the economy. At the act's peak, about 80 percent of nonagricultural industry was covered by NIRA, resulting in higher than market wages and prices and, ultimately, lower demand. NIRA eventually was declared unconstitutional, but not before the country felt its impact.

Without NIRA-style interventions rigidifying the economy, Cole and Ohanian believe, the Depression would have been a recession ending in 1936, rather than a prolonged slump that technically ended only in 1943. Roosevelt "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," Cole said when the study was released. "The economy was poised for a beautiful recovery, but that recovery was stalled by…misguided policies."

[*]: Corrected from print edition.