Whenever conservatives want support for their policies of free market capitalism, they often cite a study by two UCLA economists on the New Deal. The article is New Deal Policies and the Persistence of the Great Depression by Cole and Ohanion (you can find it on-line, via Google). It runs about 75 pages. In short, it proposes that the Great Depression was lengthened by New Deal policies, specifically the National Industrial Recovery Act (NIRA), which inflated prices and thus reduced demand for goods.
The good professors have prepared a number of impressive looking formulas to support their contention; I will leave their dissection to real economists. However, even if their mathematical models are correct, their analysis is fatally undermined by a number of false premises and outright distortions. For those interested, my analysis follows, and will be longish to cover the many shortcomings in the Cole and Ohanion article.
Their argument is based on a number of assumptions, some stated, others underlying, which do not hold up. First, their study focuses solely on the NIRA and posits that this was the most important and central facet of New Deal policies. Any reading of New Deal history shows that they have way over emphasized the importance of the NIRA, both in substance and as to its role. An underlying assumption is that FDR had a coherent ideology and set of policies, of which the NIRA was the center post. FDR was no ideologue and many of the New Deal policies were ad hoc, including the NIRA. A little background is in order. FDR and his advisers thought that the major problem was over production (when, in fact, it was lack of demand). The US had been in a deflationary spiral for about 3 years and prices and wages had both plummeted. However, the courts had ruled unconstitutional government efforts to enact any laws governing wages, hours, or, in some cases, even restricting child labor. The NIRA was an attempt to address this problem by requiring companies engaged in interstate commerce to reach agreement with the federal government over working conditions and production. Thus, it tried to reduce production and inflate the economy. The law was passed during the 100 Days, but it was not until September/October of 1933 that agreements had been hammered out with those industries which participated. The law was declared unconstitutional in May, 1935 (Schecter vs. US, or the "sick chicken" case). The law had ceased to be effective even before May, 1935, so it was only really influential for about a year.
By agreeing to the NIRA, a company was allowed to post a blue sticker and people were encouraged to do business only with those companies who had taken part. However, not every major company did participate. Ford Motors, as one large example, never participated. And with those who did sign agreements, there was a serious problem in enforcing compliance with the agreements. Thus, we have a law that was in actual effect for only about a year and which covered only a portion of manufacturers and retailers. Arthur Schlesinger in The Coming of the New Deal, Chapters 6-10 has a comprehensive account of the NIRA and its implementation.
Just from this short background sketch, it is obvious of some glaring weaknesses with the Cole and Ohanion study. By focusing on only a portion of the economy and legislation that was only in actual effect for about a year, it seems beyond plausibility to think that this one law was responsible for lengthening the Great Depression. According to Cole and Ohanion's own article, agriculture employed 30% of all workers at this time. When you consider those engaged in the service industry, the unemployed, and those not participating in NIRA, it is obvious that this law affected much less than one half of the economy for only a year. Further, the authors suppose that the NIRA was affecting the economy even after it was declared unconstitutional. They propose that 75% of manufacturers were still affected by the NIRA after 1935, a percentage they seemed to have pulled out of thin air. Even if their number is close to correct, because it only affected a segment of the economy, it would mean only a third of the economy, at most, would have been affected by the NIRA after 1935. However, even a third would undoubtedly be vastly over stated, since many industries never complied with their agreements in the first place and most all ceased following them after the court decision.
Another problem with Cole and Ohanion is that the NIRA was never that important to begin with. It was only one of many bills which sought to address the problems of the Depression. Cole and Ohanion totally ignore all the jobs programs such as PWA, WPA, and CCC. They ignore things like the the Social Security Act which included unemployment insurance. They totally ignore the Agricultural Adjustment Act, which FDR considered one of the most important aspects of the New Deal, and the whole agricultural portion of the economy. They ignore the TVA and the REA and their importance in economic development. In short, by focusing on one small aspect of the New Deal, their analysis is woefully incomplete and pretty much worthless.
Another problem with Cole and Ohanion is other assumptions they make. They assume that the economy would have recovered on its own without any government action. And yet, this is the position which the Hoover Administration took. As a result, unemployment went from about 3.5% to about 25% and the GDP dropped around 40% over three and on-half years because of government inaction. It was only in the last six months or so of the Hoover Administration, when it was obvious that classical economic theory had totally failed, that he belatedly tried to stimulate the economy with the RFC (Reconstruction Finance Corporation), which never actually accomplished much of anything. Cole and Ohanion look at the New Deal as if it were something apart from the history which preceded it. They ignore the deflationary spiral which preceded it, the total collapse of the economy which made a normal recovery next to impossible. In congressional hearings prior to FDR taking office, economists and business leaders admitted that their ec0onomic theories had failed and they were at a loss about what to do next. FDR was an experimenter who had few fixed ideas. He staffed his administration with people who often had opposing views about how to restore the economy and he would sometimes play one off against another. He was the ultimate pragmatist who relied on what worked. Cole and Ohanion state that by 1939 unemployment had dropped to 11% from 25% and yet they count FDR's policies as having failed and lengthened the Depression. They don't mention that by 1939 the GDP had almost doubled since FDR took office in 1933. That's some failure.
Like most of the Chicago school, they ignore the whole issue of demand. They assume that higher profits by companies would lead to more employment, totally ignoring the demand function. As we see today with companies sitting on record profits, lack of demand suppresses hiring much more than profits encourage it. In their analysis they never look at things like household income or other measures of demand/consumption. They do include a little on consumption, but it is almost an after thought.
Finally, in their analysis they put a lot of emphasis on monopoly and strikes and lay the 1937 recession to strike activity. They ignore the fact that 1937 was the only year that FDR cut back on spending and had a balanced budget and that it was the first year of the collection of social security taxes. Social Security did not make its first payments until 1940, so it was a temporary drag on the economy. Also, it is ironic that they fault the FDR Administration for failing to enforce monopoly statutes prior to 1940, since to regulate business this way violates one of the basic tenets of conservative economics that the market should be free to police itself. I wonder if they are quick to criticize Reagan and Bush for failing to restrict monopolies? Hence, in addition to using a very short sighted analysis, they seem intellectually inconsistent if not outright dishonest.
I believe the fact that conservatives, even so-called intellectual conservatives, rely on such flawed scholarship is a testament to the bankruptcy of their theories. So much of core conservative values today are based on belief, and not evidence. Time and again I see the same statements made over and over again, without any supporting evidence; as if repeating something often enough will make it true. It is worth remembering something said by an unnamed top Bush official (I believe it probably was Karl Rove). To paraphrase, when a journalist pointed out something he said that was incorrect, the official said to the effect, "You live in a reality based world. We create our own reality." Is it any surprise that conservatives are largely coincident with fundamentalist Christians?
No comments:
Post a Comment