Did FDR's policies help us get out of the Great Depression?

[PubliusInfinitum]

Capitalism fails when the entire Financial Industry collapses and causes just about every other industry to either collapse as well or take massive losses.

So... Capitalism is defined by the 'financial industry?' Well that's news...

Yesterday I exchanged value for value with several other people... yet the financial industry is in the toilet...

The day before that I exchanged value for value with several other people and the financial industry was in the toilet... I witnessed hundreds, if not thousands of other people exchanging value for value and the financial industry was in the toilet...

Tomorrow I will go out and trade value for value with other people and the news media will report of yet more turmoil in the financial industry... and capitalism will continue to succeed day in and day out until the last human being makes the last trade of value for value with another human being; and this will be without regard for whatever industry falls under the calamity of some derelect leftist policy that is trotted out in an effort to manipulate the laws of nature towards the pursuit of corrupt power by those who simply lack the common sense that God gave a turnip... OKA: Leftism.

So no sis... A failed market does not a failure of Capitalism make... A failed market is just that... "A" failure, which lies att the feet of the corrupt, who made promises they couldn't HOPE to keep, because they made those promises oon the bet that they could control that which they could never hope to control...

What failed is what will always fail... Leftist policy; and no amount of HOPE will THAT ever CHANGE.

 

[PubliusInfinitum]

One thing that has to be understood about WWII and the Depression:

Millions of young men and many women (in non-combat roles) went overseas to fight for the U.S which created a vacuum of jobs for women, miniorities, and others. Plus, supplies and weapons were in factories across the U.S which created even more jobs for people.

Two problems when applied today:

1.) There really are no new jobs being created for people to make supplies/weapons for war like WWII.

2.) The growing elephant in the room: Overpopulation

No prroblem there sis... you people have set the stage for the most prolific drop in global population since the dinasours departed the earth... and that, ironically, will be primarily at your expense.

 

[Toro]

I have a few problems with this argument. First off, the New Deal has nothing to do with your argument saying the Fed made matters worse, or the Smoot Hawley Tariff. Not saying you were implying that, but just adding that. I don't deny tariffs were a mistake, they were. And a loose money policy probably would have helped, especially with a free trade policy which would have kept Europe moving forward instead of back.

Still, how bad would things have been anyway? The spiraling problems of underconsumption and overproduction that plagued the economy were systemic. People had to buy things or the economy wasn't going to move. Free trade would have helped, but at the heart of the problem was a farm belt that had too many farmers. Remember, something like 45% of Americans lived on the farm in 1930, and they were broke for the most part. They needed new jobs and until the war factories opened they were not getting jobs to help the economy.

As to the bank failures, we can safely say the FDIC solved a lot of problems about panics and bank runs.

The New Deal did not prolong the Depression. It was counter-cyclical and acted to bring the country out of the Depression. What is open to debate is by how much.

Generally, academics now believe the primary cause of the Depression was the Fed's tight monetary policy exacerbated by terrible fiscal and trade policy. This was the cause of collapsing farm prices you referenced. Cyclical recessions and depression used to be quite common, occurring every four or five years. It has only been in the past 25 years when recessions became less common. Some believe that this suppression of economic volatility is the reason why we are in this mess today.

 

[Toro]

But are their managers effected by risk? Or do they just play for the short term and bail out early with golden parachutes?

There is an element of moral hazard. There's no doubt about that. However, that does not mean bank executives believe there is no risk.

 

[PubliusInfinitum]

Educate yourself girls...

http://www.cato.org/pubs/policy_report/v25n4/powell.pdf

"The 1950s through the 1990s were the
glory years for FDR hagiographers such as
James MacGregor Burns, Arthur M.
Schlesinger Jr., Frank Freidel, William Leuchtenberg,
Ted Morgan, and Kenneth S. Davis,
who embraced the view that the Great
Depression proved the failure of free-market
capitalism, the greatness of FDR, and
the need for continuing government intervention
in the economy. That view continues
to be heard, of course, as it was in
Freedom: A History of US by Joy Hakim,
whose children’s history books have sold
some 4 million copies. “The first hundred
days of [FDR’s] presidency are famous for
their accomplishments,” she gushes.
There is one small problem with this
view: its central premise is wholly false.
The New Deal failed to get America out
of the Great Depression. If anything, it
made matters worse. Throughout the New
Deal era, the median annual unemployment
rate was 17.2 percent. At no point
during the 1930s did unemployment go
below 14 percent. Although there was
episodic recovery, the 1937 peak for per
capita output was lower than the previous
peak in 1929. And the 1937 peak was followed
by a crash. As Milton Friedman and
Anna J. Schwartz have observed, that was
“the only occasion in our record when one
deep depression followed immediately
on the heels of another.”"

 

[Toro]

People like you are why we've seen failed economic policies for generations, because you fail to study the issue in depth and you believe whatever you're told. Savings did go up during the war years, because yes, government forced production to satisfy the military's needs rather than the consumer's. This was not good for the economy. The whole Keynesian argument is that war in of itself is stimulative is absolutely the same sort of horseshit that you have between your ears. Spending hundreds of billions of dollars on a missile defense system or a dam in the middle of Tennessee does absolutely jack shit to stimulate the economy, when taking that money of out the economy destroys more jobs than it can ever hope to create. That's what made the depression last 15 years instead of just one!

It depends.

Spending in the middle of Tennessee helps Tennessee immensely. But if the taxes are taken from a depressed part of the country, it hurts that part. America selling weapons to the allies from 1939 to 1941 was immensely beneficial to America. It was not to Europe from an aggregate economic standpoint, for obvious reasons.

Spending may or may not be beneficial to the economy as a whole. It depends what is happening to aggregate demand. If aggregate demand is collapsing, then increased demand from the government is generally beneficial to the economy. However, when aggregate demand is strong, there is little benefit to increased government spending, and probably, as you said, is detrimental to the economy as a whole since it increases demand for capital and increases the cost of financing investment in the private economy.

 

[PubliusInfinitum]

I don't know about that.

Agreed...

 

[Toro]

Educate yourself girls...

http://www.cato.org/pubs/policy_report/v25n4/powell.pdf

"The 1950s through the 1990s were the
glory years for FDR hagiographers such as
James MacGregor Burns, Arthur M.
Schlesinger Jr., Frank Freidel, William Leuchtenberg,
Ted Morgan, and Kenneth S. Davis,
who embraced the view that the Great
Depression proved the failure of free-market
capitalism, the greatness of FDR, and
the need for continuing government intervention
in the economy. That view continues
to be heard, of course, as it was in
Freedom: A History of US by Joy Hakim,
whose children’s history books have sold
some 4 million copies. “The first hundred
days of [FDR’s] presidency are famous for
their accomplishments,” she gushes.
There is one small problem with this
view: its central premise is wholly false.
The New Deal failed to get America out
of the Great Depression. If anything, it
made matters worse. Throughout the New
Deal era, the median annual unemployment
rate was 17.2 percent. At no point
during the 1930s did unemployment go
below 14 percent. Although there was
episodic recovery, the 1937 peak for per
capita output was lower than the previous
peak in 1929. And the 1937 peak was followed
by a crash. As Milton Friedman and
Anna J. Schwartz have observed, that was
“the only occasion in our record when one
deep depression followed immediately
on the heels of another.”"

Unemployment in the 1930s.

(Very) short reading list: unemployment in the 1930s. « The Edge of the American West

It was 3% in 1929, peaked in 1933 at 25% and fell thereafter. So it was above 14% but fell 11% during the New Deal.

 

[PubliusInfinitum]

Unemployment in the 1930s.

(Very) short reading list: unemployment in the 1930s. « The Edge of the American West

It was 3% in 1929, peaked in 1933 at 25% and fell thereafter. So it was above 14% but fell 11% during the New Deal.

I just know that you had a point... if you'll share it, I promise to take note of it.

The simple fact is that 'New Deal' policy incumbered the markets ability to correct, prolonging the correction for well over a decade. That unemployment fell from absurd levels created by the leftist regulatory policy is wholly irrelevant... Had leftist policy not interferred with the markets, there is no reason to believe that the employment market would not have returned to its mean state, which was at or below 5% within 12-18 months.

 

[Toro]

I just know that you had a point... if you'll share it, I promise to take note of it.

The simple fact is that 'New Deal' policy incumbered the markets ability to correct, prolonging the correction for well over a decade. That unemployment fell from absurd levels created by the leftist regulatory policy is wholly irrelevant... Had leftist policy not interferred with the markets, there is no reason to believe that the employment market would not have returned to its mean state, which was at or below 5% within 12-18 months.

There is every reason to think that unemployment would not have come down quickly, as anyone who has studied an economics text written after 1925 understands.

Contracts, explicit or implicit, are written with an implied rate of inflation. During a time of deflation, any contract that is fixed increases the cost of doing business for the buyer of the contract. For example, if a business has $100 in sales, $10 in profit, $20 in other costs and $70 in labor, if deflation is -20%, then the sales are $80, the profits are either squeezed or most likely, wiped out because labor costs will still be around $70 because labor cost curves are generally inelastic. If all costs were perfectly elastic, then all costs would fall in a some relatively proportionate manner. But we know that does not happen because labor costs are generally sticky. So the only way for the business to stay solvent is to fire a lot of people. Labor costs adjust slowly, so there is absolutely zero reason to believe that unemployment would have fallen below 10% within a year and a half.

Similarly, interest costs fluctuate with changes in price levels. If there is zero inflation and interest costs are 4%, then the real rate of borrowing is 4%. If, however, deflation is 20%, the real rate of borrowing becomes 24%, a prohibitive cost, which causes businesses to fire more people than they otherwise would have without the deflation. This is what happened during the Depression. Interest costs adjust faster than labor costs, but not necessarily by much. After all, there aren't many borrowers who will accept -5% on their money.

 

[PubliusInfinitum]

There is every reason to think that unemployment would not have come down quickly, as anyone who has studied an economics text written after 1925 understands.

Contracts, explicit or implicit, are written with an implied rate of inflation. During a time of deflation, any contract that is fixed increases the cost of doing business for the buyer of the contract. For example, if a business has $100 in sales, $10 in profit, $20 in other costs and $70 in labor, if deflation is -20%, then the sales are $80, the profits are either squeezed or most likely, wiped out because labor costs will still be around $70 because labor cost curves are generally inelastic. If all costs were perfectly elastic, then all costs would fall in a some relatively proportionate manner. But we know that does not happen because labor costs are generally sticky. So the only way for the business to stay solvent is to fire a lot of people. Labor costs adjust slowly, so there is absolutely zero reason to believe that unemployment would have fallen below 10% within a year and a half.

Similarly, interest costs fluctuate with changes in price levels. If there is zero inflation and interest costs are 4%, then the real rate of borrowing is 4%. If, however, deflation is 20%, the real rate of borrowing becomes 24%, a prohibitive cost, which causes businesses to fire more people than they otherwise would have without the deflation. This is what happened during the Depression. Interest costs adjust faster than labor costs, but not necessarily by much. After all, there aren't many borrowers who will accept -5% on their money.

Nonsense... The deflation was a FUNCTION F REGULATORY POLICY... Had hoover not succumbed to his 'Progressive' tendencies, deflation would not have been an issue... The Depression was a result of leftist policy... remove leftist controls and presto... No Depression. Same with today'ss market collapse... stop the bailouts, let the chips fall where they may, cut the capital gains, cut regulatory costs on the market and watch the market turn to collect the fallen chips and move on to greater le vels of prosperity.

None of this is complicated, it is made to appear complicated by the incessent rationalzations to avoid nature's law and the certain accountability inherent in it.

 

[Xenophon]

The answer to the thread's question is a resounding 'no.'

FDR was a disaster in so many ways it's unreal that anyone supports the American dictator.

 

[Toro]

Nonsense... The deflation was a FUNCTION F REGULATORY POLICY... Had hoover not succumbed to his 'Progressive' tendencies, deflation would not have been an issue... The Depression was a result of leftist policy... remove leftist controls and presto... No Depression. Same with today'ss market collapse... stop the bailouts, let the chips fall where they may, cut the capital gains, cut regulatory costs on the market and watch the market turn to collect the fallen chips and move on to greater le vels of prosperity.

None of this is complicated, it is made to appear complicated by the incessent rationalzations to avoid nature's law and the certain accountability inherent in it.

Yes, quite the "progressive," that Hoover. I was reading a piece a few weeks ago that estimated that Hoover's "progressive" response was worth $22 billion in today's dollars. Yeah, that's quite the stimulus!

Deflation in the 1930s occurred because asset prices went too high then collapsed. Asset prices went too high because there was too much liquidity and debt in the financial system - sounds familiar, doesn't it? Then, the Fed exacerbated the deflation by keeping interest rates too high and removed banking reserves from the financial system. This is what caused The Depression.

Do you know who made this conclusion?

[ame=http://www.amazon.com/Monetary-History-United-States-1867-1960/dp/0691003548/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1230252171&sr=8-1=]Milton Friedman. [/ame]

Deflation wasn't because of FDR's progressive policies. That's a bizarre conclusion. Say what you want about government spending but it certainly is not deflationary when there is an output gap.

And again, as any macro 101 student today knows, labor cost curves are inelastic. This seems to escape the fringe revisionists who blame the Depression on FDR.

 

[Orange_Juice]

Nonsense... The deflation was a FUNCTION F REGULATORY POLICY... Had hoover not succumbed to his 'Progressive' tendencies, deflation would not have been an issue... The Depression was a result of leftist policy... remove leftist controls and presto... No Depression. Same with today'ss market collapse... stop the bailouts, let the chips fall where they may, cut the capital gains, cut regulatory costs on the market and watch the market turn to collect the fallen chips and move on to greater le vels of prosperity.

None of this is complicated, it is made to appear complicated by the incessent rationalzations to avoid nature's law and the certain accountability inherent in it.

HA HA!! That's so funny!

 

[Orange_Juice]

Yes, quite the "progressive," that Hoover. I was reading a piece a few weeks ago that estimated that Hoover's "progressive" response was worth $22 billion in today's dollars. Yeah, that's quite the stimulus!

Deflation in the 1930s occurred because asset prices went too high then collapsed. Asset prices went too high because there was too much liquidity and debt in the financial system - sounds familiar, doesn't it? Then, the Fed exacerbated the deflation by keeping interest rates too high and removed banking reserves from the financial system. This is what caused The Depression.

Do you know who made this conclusion?

Milton Friedman.

Deflation wasn't because of FDR's progressive policies. That's a bizarre conclusion. Say what you want about government spending but it certainly is not deflationary when there is an output gap.

And again, as any macro 101 student today knows, labor cost curves are inelastic. This seems to escape the fringe revisionists who blame the Depression on FDR.

Deflation was happening because consumers lost their buying power about the same time the economy was reaching a new maximum effiency in producing goods.

A part of the problem on the consuming side of things was that agricultural prices dropped like a rock throughout the 1920's and farmers were broke. When European farms recovered from the first world war and as Soviet collectivism began producing massive amounts of grain for the world market our farmers were ruined. As this was going on our farmers borrowed more money to plant more acres and the price fell and fell. The farmers were ruined, the banks that lent them the money were ruined and the whole system was effected

 

[BaronVonBigmeat]

There is every reason to think that unemployment would not have come down quickly, as anyone who has studied an economics text written after 1925 understands.

Contracts, explicit or implicit, are written with an implied rate of inflation. During a time of deflation, any contract that is fixed increases the cost of doing business for the buyer of the contract. For example, if a business has $100 in sales, $10 in profit, $20 in other costs and $70 in labor, if deflation is -20%, then the sales are $80, the profits are either squeezed or most likely, wiped out because labor costs will still be around $70 because labor cost curves are generally inelastic. If all costs were perfectly elastic, then all costs would fall in a some relatively proportionate manner. But we know that does not happen because labor costs are generally sticky. So the only way for the business to stay solvent is to fire a lot of people. Labor costs adjust slowly, so there is absolutely zero reason to believe that unemployment would have fallen below 10% within a year and a half.

Similarly, interest costs fluctuate with changes in price levels. If there is zero inflation and interest costs are 4%, then the real rate of borrowing is 4%. If, however, deflation is 20%, the real rate of borrowing becomes 24%, a prohibitive cost, which causes businesses to fire more people than they otherwise would have without the deflation. This is what happened during the Depression. Interest costs adjust faster than labor costs, but not necessarily by much. After all, there aren't many borrowers who will accept -5% on their money.

Yes this is true, and certainly the ideal thing would have been for the fed to not shrink the money supply in the first place.

However, if you're going to take deflation as a given, the worst thing to do would be to institute price controls. And FDR's brain trust was obsessed with keeping prices propped up. (I have never heard a satisfactory answer as to why--did they even realize that the money supply had shrunk, I wonder?)

So in order to keep prices up, they passed all sorts of price floors (the minimum wage, for instance). The NRA was a cartel arrangement that formally got manufacturers to agree to certain prices and so forth, crops were burned and livestock was slaughtered in order to keep prices up, etc. Hoover had done this informally, calling leaders of the biggest companies to the white house and getting them to promise to keep wages and employment high, with the implied threat of government action.

What do we know about price controls? Well, price ceilings produce shortages. Anti-gouging laws in some states resulted in gasoline shortages recently for instance, just like price caps did in the 70's. Nothing controversial here, this is econ 101. And price floors on the other hand, they do the opposite. Instead of a shortage, there is a glut. What do you call a glut in the labor market? Unemployment, of course.

Yes, labor prices are sticky. I suppose companies prefer to have layoffs because it's not as bad for morale. Nothing worse for your product than a company full of grouchy employees. Still, you'd think that after a year or two, people would swallow their pride and take whatever jobs were available at the new lower wage rate. The fact that they desperately wanted to, but couldn't, can be laid directly at the feet of FDR's New Deal.

 

[BaronVonBigmeat]

Deflation was happening because consumers lost their buying power about the same time the economy was reaching a new maximum effiency in producing goods.

I think you meant to say "gained" instead of "lost"(?). Consumers gain buying power under deflation, they lose buying power under inflation.

Toro is right though. The Fed overreacted, and actually shrank the money supply. Some say that this was due to hamfisted bungling by the fed, that they were still new at this. Like a teenager driving a car who, instead of lightly applying the brake, rams the car into reverse. Others allege a conspiracy of some sort. Whatever the reason, they did shrink the money supply.

Of course there is "deflation" due to factories and workers becoming more productive, as you said. Henry Ford caused "deflation" in the price of cars, Rockefeller caused "deflation" in the price of kerosene, etc. This is completely different, and a good thing. Unfortunately the fed today doesn't make any distinction between the two, but that's a separate topic I suppose.

 

[dilloduck]

The Fed overreacted, and actually shrank the money supply. Some say that this was due to hamfisted bungling by the fed, that they were still new at this. Like a teenager driving a car who, instead of lightly applying the brake, rams the car into reverse. Others allege a conspiracy of some sort. Whatever the reason, they did shrink the money supply.

I like the analogy. Don't you think someone knows whether this was some egghead economist's botched attempt at "working" the economy or a manipulative plan with a designed purpose in mind ?

 

[PubliusInfinitum]

Yes, quite the "progressive," that Hoover. I was reading a piece a few weeks ago that estimated that Hoover's "progressive" response was worth $22 billion in today's dollars. Yeah, that's quite the stimulus!

Deflation in the 1930s occurred because asset prices went too high then collapsed. Asset prices went too high because there was too much liquidity and debt in the financial system - sounds familiar, doesn't it? Then, the Fed exacerbated the deflation by keeping interest rates too high and removed banking reserves from the financial system. This is what caused The Depression.

Do you know who made this conclusion?

Milton Friedman.

Deflation wasn't because of FDR's progressive policies. That's a bizarre conclusion. Say what you want about government spending but it certainly is not deflationary when there is an output gap.

And again, as any macro 101 student today knows, labor cost curves are inelastic. This seems to escape the fringe revisionists who blame the Depression on FDR.

ROFLMNAO... Oh GOD that's precious... Amongst other things, Hoover went along with a massive contraction of the money supply by the Federal reserve from '29 -32 which caused the bank failures, which only exascerbated the money supply shrinkage and public panic; Hoover also signed Smoot- Hawley raising import tax in 25,000 imported product categories to 60%, causing a retaliation by most of the free world... causing our exports to tank... AGAIN INFLUENCING DEFLATION; he further promoted preventing banks from 'branching' which prevented diversification of bank portfolios... ALL OF WHICH lead to massive deflation... He then signed the 'Revenue Act of '32' which was the largest peace-time tax increase in US history at the time... raising the top marginal rate from 25 - 63%...

When FDR was elected in 32 he further increased regulation cost and taxation on the market and raised the top marginal rate to 80%. At the same time, in this frenzy of Keynsian progressivity... State and Local governments began to implement their OWN incentive killing TAXATION on personal and Corporate income... adding FURTHER DEFLATIONARY influences... add to that the National Industrial Recovery Act of 1933 which amounted to a litanny of price freezes in an effort to slow deflation WHICH HE AND HOOVER CAUSED... ONLY ADDING TO DEFLATIONARY PRESSURE by driving the cost of business beyond a sustainable level, causing GREATER LAYOFFS, DECREASING THE SIZE OF THE VIABLE MARKET... by substantially reducing the number of people with sufficient discretionary money to BUY MANY PRODUCTS...

Look dumbass... NONE OF THIS IS COMPLICATED. Nature works on SUPPLY AND DEMAND... when DEMAND IS HIGH AND SUPPLY IS DOWN... PRICE GOES UP... when DEMAND IS DOWN PRICE GOES DOWN... And FYI: Price going down equals DEFLATION.

 

[Toro]

Yes this is true, and certainly the ideal thing would have been for the fed to not shrink the money supply in the first place.

However, if you're going to take deflation as a given, the worst thing to do would be to institute price controls. And FDR's brain trust was obsessed with keeping prices propped up. (I have never heard a satisfactory answer as to why--did they even realize that the money supply had shrunk, I wonder?)

So in order to keep prices up, they passed all sorts of price floors (the minimum wage, for instance). The NRA was a cartel arrangement that formally got manufacturers to agree to certain prices and so forth, crops were burned and livestock was slaughtered in order to keep prices up, etc. Hoover had done this informally, calling leaders of the biggest companies to the white house and getting them to promise to keep wages and employment high, with the implied threat of government action.

What do we know about price controls? Well, price ceilings produce shortages. Anti-gouging laws in some states resulted in gasoline shortages recently for instance, just like price caps did in the 70's. Nothing controversial here, this is econ 101. And price floors on the other hand, they do the opposite. Instead of a shortage, there is a glut. What do you call a glut in the labor market? Unemployment, of course.

Yes, labor prices are sticky. I suppose companies prefer to have layoffs because it's not as bad for morale. Nothing worse for your product than a company full of grouchy employees. Still, you'd think that after a year or two, people would swallow their pride and take whatever jobs were available at the new lower wage rate. The fact that they desperately wanted to, but couldn't, can be laid directly at the feet of FDR's New Deal.

It was more than that. For example, unions often would not take cuts. After decades of fighting for labor recognition - which included the deaths of hundreds of labor activists - organized labor simply refused to give up the gains they felt they had fought hard for and won. And this phenomenon was more pronounced in Britain and Europe where organized labor was more powerful. Hence, Keynes conclusion that labor was nearly perfectly inelastic. (We now know that labor markets are more elastic than Keynes believed at the time.) Also, within organizations, even those that are not unionized, there is resistance to taking pay cuts, even when it means some people will lose their jobs. In some cases, when offered say a 25% pay cut or 25% work force reduction, employees will take a large pay cut, but that is usually not the case. Usually, the 75% who would stay employed see little reason to take a pay cut, and for good reason - they have a mortgage to pay, they have car payments, they have a kid in college, etc. To take a 25% pay cut means a substantial decline in their own and their family's living standards. Usually, people do not make such significant adjustments unless they are forced to, i.e. they are fired. This is why blaming FDR's policies on the stickiness of labor does not hold. Keynes observed this before FDR was elected, even though he wrote about it in the General Theory.

You are correct in your analysis about price floors and ceilings. However, the adjustment in prices and supply and demand are dependent upon the level of friction in any given market, which can be caused by a variety of factors. Labor markets have a fairly high level of friction. (It is relatively lower in America than Europe, which is perhaps the main reason why unemployment is lower and productivity is higher in America.) If labor markets had a low level of friction, unemployment would never be much of a problem. However, people's lifestyles are static, not volatile, leading to stickiness in labor markets.