Mainstream Economists Catch On: FDR Worsened the Great Depression

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

FDR was the granddaddy of government intervention in the economy, at least in America. Presidents before and since have intervened, but nobody with the width and depth of Franklin D. Roosevelt.

Today it’s considered self-evident that Roosevelt saved the American economy after the Great Depression. Of course, nobody ever asks why the Great Depression dragged on for another decade after Roosevelt came to office. In fact, there was even a recession within that depression, by some accounts.

Free market economists (Ludwig von Mises, Henry Hazlitt, Thomas Sowell, George Reisman), sadly out of the mainstream, have been saying for years that the Great Depression was created by government intervention in the economy. The two primary causes were the Federal Reserve’s mismanagement of the currency (which would not have happened under a gold standard); and the tariff laws imposed by President Herbert Hoover.

Nobody ever asks why the Great Depression went on for so long. If Franklin D. Roosevelt’s intervention in the economy—massive government spending, creation of Social Security, nationalized make-work programs—saved America, then why did it take World War II (according to these same theorists) to finally end the whole thing?

“Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump,” said Ohanian, vice chair of UCLA’s Department of Economics. “We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”

We live in a mixed economy. It’s an unstable, incoherent mixture of government controls/subsidies/taxes along with free or semi-free markets. Whenever anything goes wrong, the market gets the blame, and more subsidies/controls are imposed. This leads to further insecurity and eventual upheavals, at which time markets again get the blame.

This happened after the Great Depression and it also happened after the second worst economic upheaval, the economic crash of 2007-08. Like the Depression, that upheaval got blamed entirely on the lack of regulation. As Thomas Sowell and other free market thinkers point out, that real estate bubble was created entirely by government regulatory agencies that incentivized/required the market to give out easy home loans to attain the political goal of “housing for all.”

Did government even get some of the blame for that crash? No way. In today’s statist era, government does not get the blame for anything. Barack Obama said it was all due to a lack of government regulation and the “failed ideology” of capitalism. As a result, more regulations, taxes and subsidies than ever before were imposed.

When the next bubble, crash, recession or depression happens, and it will, the “market” will almost certainly get the blame, and then the whole cycle will repeat itself. It will end either with a total course reversal, in the direction of a free market economy, or a collapse into complete socialism/Communism (e.g., Bernie Sanders). Sooner or later, it has to be one or the other, because the mixed economy — socialism mixed with capitalism — is unsustainable.

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

“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.”

Antitrust laws are a separate discussion. For detailed discussions, I refer readers to economists Ludwig von Mises, George Reisman and Alan Greenspan when writing for Ayn Rand. However, in a free market economy there would be no antitrust laws. Monopolies are not possible in a free market. Monopolies involve coercion, by definition. If customers prefer only one supplier of a product, good or service, then that’s because the one company providing it all meets the needs of those customers best. There’s nothing to stop another company from opening up and luring away those customers.

Under Roosevelt, government tried to coerce employment into existence, via government regulations and subsidies, rather than by restoring the free market which preceded the creation of the Federal Reserve, the Hoover tariff, income taxation, and all the rest. Today, such a package might be unimaginable, but the underlying themes are still there. Progressives on the national and local levels are doing everything possible to hike minimum wage laws and impose other requirements (extended leave with pay, mandated long breaks, etc.) on employers, along with Obamacare. Like FDR, they seem to think that a vibrant economy can simply be legislated — literally ordered — into existence. Good luck with that.

You can’t legislate a healthy economy into existence. You cannot tax, subsidize, coerce or compel your way to prosperity. Communism tried and failed, and democratic socialists in Europe likewise failed. The only way for government to foster prosperity and growth is to protect property rights, and then stay the hell out of the way. FDR did just the opposite, which is why the Great Depression dragged on for so long. Today, Obama and his Republican enablers in Congress have done the same thing. That’s why the economy no longer grows like it once did, or like it should. Technically, the Great Recession ended, but in reality it lingers when you consider unemployment rates with those giving up on work factored in, and the shrinking middle class both left and right decry.

And it’s also why there’s a tremendous unease throughout the country which neither the screams of a Donald Trump nor the righteous indignation of a Bernie Sanders or Hillary Clinton can hope to resolve. Capitalism would, if only we’d give it a chance.