More Evidence Against My Least Favorite Legislation of the 20th Century

I have written about the National Industrial Recovery Act many times, a love-note from FDR to Mussolini's fascist economic system that was thankfully overturned by the Supreme Court.  Its intent was to make the corporate-crony state the default economic system of the US.

Essentially, the NIRA cartelized the US economy, creating government-sponsored cartels in every industry that would set prices and wages as well as output and quality.  You can imagine exactly how well upstart competitors would have fared under this system.  I am pretty sure, for example, that the government mainframe cartel would never have let apply, or even DEC, see the light of day.

Now, a couple of academics have laid the blame for the long duration of the Great Depression at the NIRA's doorstep.

"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.

Hmm.  Certainly wages and prices are going to be especially "sticky" if the government creates cartels to keep them that way.

  • joe

    One of the tricks in determining the validity of a study is to spot the biases in the study. My quick scan of the report indicates that bias that the authors were attempting to discredit FDR.

    That being said, there is ample evidence that the very policies the FDR did in fact prolong and deepen the recession. Lending became much more restrictive, etc
    Canada suffered a relatively mild recession during the same time period with very few banks going under. England, France and even Germany pre WWII emerged much sooner from the depression.

  • J K Brown

    On the upside, these high mandated wages caused businesses to upgrade to more automation and less skill-required machinery. This change is kind of hidden in history, but factories and shops either invested in more automation or went out of business. The benefit being, that the US was primed for the move to productivity needed to win the war. Japan for example, had some behemoth producers but most of their suppliers were still mom-pop shops. Also, these suppliers were still in the old wooden building which were wiped completely out by the fire bombing.

  • TruthisaPeskyThing

    FDR led us in the Great Depression; he did not lead us OUT of the Great Depression.

  • CT_Yankee

    So maybe stupid US national policies deepened the depression that helped Hitler put the Nazi Party in power. Other than that, no harm, no foul?

  • joe

    1) Smoot Harwley act - help spread the recession world wide
    2) A lot of things help propel hitler to power, though germany emerged from the great depression much sooner than the US

  • http://occamsrazr.com Ike Pigott

    Let me get this straight:

    It's a net positive, because corporate owners were able to modernize faster and achieve major productivity gains, at the expense of prolonged poverty for a third of America.

    How would that explanation play with the Income Inequality crowd today, of it weren't for dealing a pass to FDR's legacy?

  • MS61

    The Supreme Court found the NRA unconstitutional by a vote of 8-0. I wonder how the Court would rule today in a similar case?

  • MJ

    Shouldn't the validity of a study be based on the quality of methods and evidence presented by the authors, and not on ex ante assumptions about their biases?