By Chief Contributor Frederic J. Rohner
A regular conservative talking point regarding Obama’s stimulus plan has been the argument that his policies are nothing more than recycled solutions from Roosevelt’s New Deal, and furthermore New Deal policies actually prolonged the Great Depression by up to 7 years. As evidence of this, right-wing pundits invariably point to a famed UCLA study which argued exactly that point.
But what does this study actually argue? And why do conservatives always bring it up? Well, to answer the last question first, they use it in their arguments because it’s pretty much all they have. The UCLA study is famous precisely because it is in a select few that have asserted FDR’s role in the Great Depression as that of villain rather than hero.
The 2004 study, authored by Harold L.Cole and Lee E. Ohanian, argues that the Great Depression would have ended in 1936 had the free market been able to correct itself, but because of government meddling in the form of New Deal policies the Great Depression dragged on until 1943. Conservatives argue that this should sway anyone from interfering with the free market, and they contend that the actions currently being undertaken by the Obama administration will have a similar effect in prolonging this economic downturn. An excellent argument against this position can be found here, written by Scot Lehigh of the Boston Globe. Click here for a good summary of the paper and here for a 50 page pdf document laying out its findings.
The problem with the conservative argument and their use of the UCLA study to prove their point is that Cole and Ohanian point to a single policy as the cause for much of the stifled economic recovery, one that was only in existence for two years, the National Industrial Recovery Act (NIRA).
Harold L. Cole summarizes:
“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. 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.”
Ohanian continues:
“High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns… salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market’s self-correcting forces.”
So basically, what the 2004 UCLA study concluded was that inflated prices and wages were the cause of the slowed recovery, and the NIRA which FDR signed into law was the cause of that inflation, resulting in a 60% weaker recovery. However, because NIRA was deemed unconstitutional by the Supreme Court two years after it was enacted, a repeat of this particular economic policy mistake by the Obama administration would be impossible. While NIRA may have been somewhat of a blunder in terms of New Deal solutions, it was but one of many policies instituted by FDR, and although Cole and Ohanian present a good case, the general consensus remains that New Deal policies by and large were successful.
I agree with most of the UCLA article, but note that those things that FDR was criticized for within it are not to be confused with the idea of stimulus spending in general, but rather specifically the “anti-competition and pro-labor measures” within it. Obama has learned from history, and isn’t pushing for higher wages right now, and is doing just the opposite on the anti-trust front.