Thursday, April 16, 2009

On Roosevelt and the Depression

Published in Standard-Examiner, Ogden, UT, March, 3, 2009


In the media, among both politicians and the general public, the Great Depression is a hot topic. The Great Depression accelerated in October 1929 with the stock market crash and lasted almost three and a half years.

Recently questions have been raised about the efficacy of New Deal policies under President Franklin D. Roosevelt aimed at pulling the economy out of depression. Economists Harold Cole and Lee Ohanian argued (Wall Street Journal Feb. 2) that some of the New Deal policies on prices and wages were responsible for prolonging the depression.

This skepticism about the effectiveness of the New Deal has spilled over to the current debate on the stimulus package signed by President Obama. Hence, it might be instructive to put this skepticism to the test of empirical evidence before and during the time of the New Deal.

Let me first point out that during the economic depression (1929-1933), President Hoover increased income taxes to raise revenues and pursued protectionist policies to curb imports, which led to retaliation by other countries and shrinkage of world trade.

President Roosevelt served from 1933 to 1945. Many believe that it was World War II and not Roosevelt's New Deal that got us out of the Great Depression. In order to ascertain the effectiveness of the New Deal, let us compare the evidence based upon the data on several economic indicators for the periods 1929-33 and 1933-39 (just before WWII). My main sources of the data are U.S. Bureau of Economic Analysis, Macroeconomics by Robert Gordon, American Economic History by Jonathan Hughes, and America's Greatest Depression 1929-1941 by Lester Chandler.

One of the most important indicators of economic activity is real GDP (Gross Domestic Product adjusted for prices). It measures the real value of output in the economy. Real GDP (in 1929 prices) declined from $103.7 billion in 1929 to $76.1 billion in 1933 and rose to $114 billion in 1939. Hence, the average growth rate went from negative 7.4 percent per year under Hoover (1929-33) to positive 7.1 percent per year during (1933-39) under Roosevelt.

Most official and non-official data sources, including the ones above, overestimate the unemployment rates from 1929 to 1943. Economist Michael Darby's estimates, published in the Journal of Political Economy (1976), are based on analytically sound methodology. He found that the unemployment rate peaked at 20.6 percent in 1933and declined to 11.2 percent by 1939.

Other measures of economic activity, for example, personal consumption expenditure, fixed investment, net exports (exports minus imports), and annual real earnings of employed, rose sharply during the New Deal, more than offsetting the decline between 1929 and 1933. As measured by Consumer Price Index (1929 = 100), deflation of 25 percent in Hoover's time changed to inflation of 7.4 percent during 1933-39, providing incentive for businesses to grow. In money and financial markets, money supply -- a measure of liquidity -- decreased 27 percent from 1929 to 1933 but increased 74 percent during 1933-39. Long-term interest rates also declined more during 1933-39 than during the Hoover period. Even the stock market started rebounding significantly during Roosevelt's presidency.

President Roosevelt's mistake was to support the passage of the National Industrial Recovery Act of 1933, later ruled to be unconstitutional by the Supreme Court. It was designed to reduce competition in products and labor markets. It may have contributed to slower recovery, but the economy did rebound significantly, if not completely, during 1933-39. In those days economic policy was in its infancy. However, we have learned that in recessions and/or depressions one does not fix prices and wages, raise taxes or decrease public spending.

President Obama's stimulus package is not economically ideal due to political reasons, but it is based on sounder economic principles than followed in the past. The evidence from the New Deal provides us encouragement that the stimulus, in conjunction with other policies, has a great probability of success in combating this severe recession.

It may be advisable that politicians, media pundits and many so-called experts in the media reduce their rhetoric on the stimulus package and engage in constructive criticisms and/or present alternate solutions to handle the current crisis, not based on ideology but based on robust evidence and cogent arguments. It serves no productive purpose if leaders in all walks of life and the media feed on the fear of common citizens about their well being, because it leads to a vicious circle of fear. Americans are resilient people but the resiliency should be supported, and not stymied, by the burden of fear.

Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. At present he resides in Ogden.

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