Discussion from legalclarity.org
Pro and Con snippets from the Legal Clarity article are given below.
The Case That FDR Prolonged the Depression
The Cole-Ohanian Study
The most influential academic argument that New Deal policies extended the Depression came from economists Harold Cole and Lee Ohanian in a 2004 study published in the Journal of Political Economy. Using a dynamic general equilibrium model, they concluded that policies under the National Industrial Recovery Act of 1933 and the National Labor Relations Act of 1935 effectively cartelized large portions of the American economy, keeping output and employment well below where they should have been.
Their core finding was striking: New Deal cartelization policies accounted for roughly 60 percent of the gap between actual economic output and where it would have been based on long-run trends. By 1939, real wages were far above what the labor market could sustain, output per adult remained 27 percent below trend, and private hours worked were 21 percent below trend. The NIRA had allowed industries to set prices collectively and suspended antitrust enforcement, while labor provisions empowered unions to bargain for wages that, in Cole and Ohanian’s model, priced many workers out of jobs entirely. Although the Supreme Court struck down the NIRA in 1935, the researchers argued that the Roosevelt administration continued to tacitly permit these monopolistic arrangements for years afterward.
Ohanian estimated that these policies lengthened the Depression by approximately seven years, reducing real income and output by 14 percent compared to a scenario where the NIRA had never been enacted.
Economist Robert Higgs offered perhaps the most focused version of the investment argument. His “regime uncertainty” thesis held that the Depression persisted not because of any single bad policy but because the cumulative weight of New Deal legislation — the Social Security Act, the National Labor Relations Act, the Revenue Acts of 1935 through 1937, and the threat of more to come — made business owners too afraid to invest. Net private investment for the entire period of 1930 to 1940 totaled negative $3.1 billion.
The Case That the New Deal Aided Recovery
Growth Was Actually Spectacular
Critics of the prolongation thesis point to what the economic data actually show about the recovery’s pace. Christina Romer, the Berkeley economist who later chaired President Obama’s Council of Economic Advisers, documented in a widely cited 1992 paper that real GNP grew at an average rate exceeding 8 percent per year between 1933 and 1937. Between 1938 and 1941, it grew at over 10 percent annually. Romer called this “spectacular” growth and noted it was among the fastest sustained expansions in American history outside of wartime.
The puzzle is that despite these growth rates, the economy remained below its long-run trend. GNP was still 26 percent below trend in 1937 — but that was because the hole created by the 1929–1933 collapse was so deep, not because recovery was slow. The economy had fallen 35 percent from 1929 to 1933; climbing back from that depth at 8 percent a year simply took time.
Romer attributed the recovery primarily to monetary expansion rather than fiscal policy. The money supply grew at nearly 10 percent per year from 1933 to 1937, driven largely by gold inflows after Roosevelt devalued the dollar in 1933 and by capital fleeing political instability in Europe. Without this monetary expansion, Romer calculated, real GNP would have been roughly 25 percent lower by 1937.
What Complicates the Debate
Several factors make a clean verdict difficult. One is the question of what counts as “prolonging” the Depression. If the standard is whether unemployment returned to 1929 levels, it did not until wartime mobilization — unemployment was still 14.6 percent in 1940. If the standard is whether growth was rapid, it clearly was: 9 percent annual real GDP growth from 1933 to 1937 is hard to characterize as stagnation. The Cole-Ohanian model measures the gap between actual output and a theoretical trend; critics counter that assuming the economy would have snapped back to trend without intervention is itself an unproven assumption, especially given the banking collapse and deflationary spiral of 1929–1933.