FDR and the Great Depression

There's an interesting discussion on Masson's Blog about the Great Depression and FDR.

As I wrote there:
One can make a reasonable (although quite debatable) case about Roosevelt’s economic policies from a political angle. But government policy was an almost unmitigated failure as economics– theoretically and empirically. The extent to which this is true is somewhat debatable– extending the Depression to just treading water– but it is absolutely clear that FDR’s (and Hoover’s similar) policies were not helpful to the economy. (As a statistical factoid, the unemployment rate in the 7th year of FDR’s “New Deal” was 19%…hardly a success!)

To expand on that with a detailed discussion of the relevant policies:
-Smoot-Hawley Tariff Protection Act: Although it went into effect in 1930, anticipation of its impact is generally considered to be the primary catalyst for the stock market crash of late October 1929. The stock market crash, itself, was certainly a hit for the economy-- but one from which it would have recovered relatively quickly. (We saw evidence of this when the same percentage crash in 1987 did not even cause a recession!) As for the impact of dramatically reducing foreign trade, this would be expected to have a longer effect!

-Price and wage ceilings: Congress and FDR passed laws to artificially increase the price of goods (particularly farm products) and labor. Both of these make market activity more difficult and create persistent surpluses. In labor markets, a surplus is called "unemployment". Making labor more expensive is not a recipe for macro-economic success or labor market success for those with relatively few skills. (Part of the logic here was that higher prices and wages would increase purchasing power for those receiving the higher prices/wages. A great idea-- except that it assumes just as many people will buy product and rent labor services!)

-Tax increases: Congress and FDR increased taxes four times during the Great Depression-- again, not helpful for a market economy trying to recover. Most notably, they initiated Social Security payroll taxes-- again, making labor artificially more expensive!-- the primary cause for increasing unemployment from 13-14% to 19% the next year. A tax on labor was a big kick in the pants to a recovering economy. (Part of the logic here was that tax revenues tend to fall during a recession, so higher rates would lead to higher revenues, leading us out of the recession. Uhhhh, no...)

-Fed policy: The Fed was woefully passive, allowing the money supply to fall by 25-30%. The monetary base remained stable (reducing that would have been incredibly stupid). But with confidence in the economy plummeting, bank lending and borrowing were dramatically reduced, significantly decreasing the money that was active in the economy. If the money supply falls, then prices or quantity must fall. Since it is difficult for prices to fall (let alone fall by 25-30%)-- what Keynes called "sticky wages and prices"-- reductions in output and employment were almost inevitable.

People often ask/wonder if the Great Depression could ever happen again. It's quite doubtful. It's unlikely that the government would combine such bone-headed policies again into a "solution" to an economic downturn. In particular, given what we now understand about money and Fed policy (as evidenced in 1987), it is inconceivable that the Fed would allow its vital part of this to happen again.

It is often said that the market was to blame for the Great Depression-- not a recession, but the length and depth of America's most painful time in its economic history. But at a minimum, an objective outsider would have to admit that the government must at least share in the blame.