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Government Jobs Don't Cure Depression

Government Jobs Don't Cure Depression
Jim Powell
Cato Institute
2009

In this installment of an ongoing debate between the author and Conrad Black, Jim Powell explains the very simple and important truth that government jobs are always zero-sum games and therefore irrelevant to any discussion of growing the economy:

Hence all the time Black spends arguing that the Federal Emergency Relief Act, the Civil Works Administration, the Public Works Administration, the Works Progress Administration, and other New Deal agencies gave citizens "real" jobs; by Black's definition, that term means simply that people did work and were paid.

Call those government jobs whatever you want, but they were line items in the federal budget, paid for by current taxes, by borrowing (repaid from future taxes), or by inflation (a tax that works by devaluing dollar-denominated earnings and assets). When the FERA, CWA, PWA, WPA, etc., line items went away, those government jobs went away.

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Schlaes discusses Alan Greenspan's flawed monetary policies and traces their roots to attitudes in the New Deal and World War II, "when there was enormous faith in central government."

"Today a lot of people are looking to economic history for help in understanding the current world economic situation and the options open to us. (This includes economists, many of whom have finally rediscovered an interest in economic history.)

Most of this attention is being paid to the Great Depression of the 1930s. However, it is worth pointing out the important ways in which the...

"Obama bases his confidence on an old story line with some appealing parallels to today:

A disastrously high stock market caused by excessive faith in the private sector generated an epic crash. A Republican, Herbert Hoover (George W. Bush), let us down. A new president, FDR (Obama), knew that action was imperative and understood the value in 'bold persistent experimentation.'

...

"Perhaps nowhere else in 20th century historical scholarship is the story line less flattering to conservatism. As it typically goes, the heartless, clueless conservative President Herbert Hoover, paralyzed by a dogmatic adherence to laissez faire individualism, stood by and watched as the nation slid into steep economic depression in the 1930s. Thank heaven, then, for the advent of Franklin D...

"We have been here before. Development economics -- the study of how poor countries can become rich -- was forever cursed by the timing of its birth after the Great Depression. That gave development economics a bias toward relying on governments, rather than markets, to create growth. The early development economists ignored a century and a half of European and North American development...

In this article, the Folsoms debunk the myth that FDR "got us out of the Great Depression. The New Deal's "various alphabet-soup agencies—the WPA, AAA, NRA and even the TVA (Tennessee Valley Authority)—failed to create sustainable jobs. In May 1939, U.S. unemployment still exceeded 20%. European countries, according to a League of Nations survey, averaged only...

A brief review of the book Depression, War and Cold War: Challenging the Myths of Conflict and Prosperity.

"The United States has entered its worst economic period since the 1930s, and wars in Iraq and Afghanistan continue to drain our resources. Though the public is...

This article contains charts comparing stock market trends from the Depression to those of the DOW in 2010.

"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.

...

The policies were contained...

Hendrickson gives a succinct review of Burton Folsom's New Deal or Raw Deal and while doing so helps introduce readers to the issues, problems, and personalities in the Great Depression. Here's a great example:

Having been fairly familiar...

In this installment of an ongoing debate between the author and Conrad Black, Jim Powell explains the very simple and important truth that government jobs are always zero-sum games and therefore irrelevant to any discussion of growing the economy:

Hence all the time Black spends arguing that the...

"During the Great Depression of the 1930s, Americans desperately needed bargains. But President Franklin Delano Roosevelt signed laws that forced businesses to charge above-market prices for everything. He made discounting a crime!

FDR did this...

"How did Latin America fare during the Great Depression? What economic effects did the 1929 crash have throughout the region? Can lessons from the past be of any use in view of today's mounting recession?"

The Foundation for Economic Education (FEE) argues that the Rural Electrification Administration, created by the Rural Electrification Act, is falsely promoting the efforts it subsidizes through loans as "private enterprise". While making its arguments, FEE gives a very brief and concise description of...

"More than ever, historians need to study the economic consequences of government programs. Only by analyzing the results of past government intervention can we calculate the impact of future government intervention.

The Tennessee Valley Authority (TVA) provides a useful example. Established as part of the New Deal in the 1930s,...

"According to new deal historians, capitalism failed in the 1930s. What, then, is it doing flourishing in the United States, Britain, and Europe and taking root in Latin America and China, where it was never previously present? For the past 20 years there has been a large and growing incompatibility between the verdicts of historians and the performance of capitalism."

Chris Edwards examines several New Deal policies to debunk the myth that capitalism caused the depression and Roosevelt ended it.  Edwards describes how government intervention actually prolonged and exacerbated many of the problems it sought to solve. He compares all...

"The economic policies of the 1930s are a continuing source of myth and confusion. Many people believe that capitalism caused the Great Depression and that President Franklin Roosevelt helped to end it. A recent History Channel special on Roosevelt said that his New Deal resulted in 'recovery and reform' while creating 'millions of jobs.'...

Such often-stated claims are incorrect....

Higgs begins his discussion with a brief explanation of laissez-faire sentiment in the United States during the 19th and early 20th centuries. Higgs goes on to describe the inception, aided by wartime planning, of economic rescue and recovery programs during...

National Industrial Recovery Act (soon shortened to NRA) became law under President Franklin Roosevelt in 1933 and dramatically altered America’s traditional free-market system.

"In The Defining Moment, his recent paean to Franklin Delano Roosevelt, Jonathan Alter claims to have made a genuine historical find: in 1932, members of FDR's inner circle had urged the new president to deputize the American Legion as—in Alter's words—an 'extraconstitutional' 'private army.' In prepared remarks to be delivered to a meeting of the American Legion (and broadcast as his...

Today, fascism is a word that most people equate with the holocaust. In reality, fascism refers to an economic system that allows individuals to own property while the government manages the economy for the betterment of the people and the nation. Ebeling, the former president of FEE, presents a...

Swain describes the kind of work that the WPA was providing to women: "Many of the women’s work projects produced goods and provided services that were so much needed and so much appreciated by their communities that they were continued as vital to the welfare of the people. Even when some were dropped, they reappeared as parts of President Lyndon Johnson’s Great...

Chart or Graph

This chart, tracking agriculture hours vs. nominal hours, indicates that while manufacturing and other parts of the economy declined from 1929-31, hours worked in agriculture stayed steady and even increased slightly from 1929 to early-1931. Only mid-1931 did agriculture hours begin to decline significantly.

This chart shows the number of banks that failed from the mid 1920s to 1933.

A political cartoon from the 1930s in response to the New Deal plans. Note particularly the "Plan of Action for U.S." in the bottom left corner: "Spend! Spend! Spend under the guise of recovery -- bust the government --blame the capitalists for the failure -- junk the Constitution and declare a dictatorship."

"The time scales are different, but the similarities in the historical DOW chart and a recent 60 minute chart of the S&P 500 are amazingly alike."

"Figure 2 provides an alternative depiction of the course of private investment spending (along with government spending, for comparison). Using current-dollar investment as a proportion of current-dollar GDP, this approach avoids the distortions potentially affecting data shown in figure 1 due to the index-number problem or measurement errors in the deflators. As...

"As economic historian Alexander Field (1992) has written, 'no coherent account of the depth and duration of the Depression can ignore the causes of fluctuations in investment spending(786).' Figure 1 illustrates both real gross domestic product (GDP) and real gross private investment (GPI) from 1929 to 1950. As the figure shows, both real GDP (bars, left-side...

"Although the yield multiples of longer-term bonds fluctuated from year to year, they remained at extraordinarily high levels from 1936 through the first quarter of 1941. By the first quarter of 1942, however, the yield multiples had dropped precipitously. By 1943 they had returned to their 1934 levels and, despite rising slightly between 1943 and 1946, tended downward thereafter. By the early...

"By late 1931, real manufacturing average hourly earnings had increased more than 10 percent as a consequence of the Hoover program and deflation. By September 1931, manufacturing hours worked had declined more than 40 percent, and the average workweek in manufacturing had declined by about 20 percent.

To evaluate the quantitative impact of Hoover's...

"By late 1931, real manufacturing average hourly earnings had increased more than 10 percent as a consequence of the Hoover program and deflation. By September 1931, manufacturing hours worked had declined more than 40 percent, and the average workweek in manufacturing had declined by about 20 percent.

To evaluate the quantitative impact of Hoover's program, I calculate the...

"Figure 1 show monthly manufacturing hours worked and manufacturing output (source: NBER macro history database). At this time, manufacturing accounted for about 28 percent of employment. These data show that the industrial depression begins abruptly and severely in late 1929. Speci cally, industrial hours and output rise until Fall, 1929, but decline rapidly...

"The industrial depression coincides with a signi cant industrial labor market distortion, as real manufacturing wages rose during the Depression. Figure 3 shows the nominal manufacturing wage, and the real manufacturing wage. Real wages rise modestly at the start of the Depression, and continue to rise as the Depression deepens. The figure shows that for much of this period, higher real...

The chart above is important when considering that the purpose of the AAA of 1933 was to stabilize and elevate commodity prices to benefit farmers. In a deflationary economic environment most incomes are declining. Combine declining incomes with attempts to elevate food prices, and a non-farm worker's ability to feed his/her family becomes more difficult.

Using the above figure, Zobbe and Paarlberg present in their paper The Shaky Foundations of Farm Policy in the United States the argument that overproduction of commodities was not the root of the farmers' troubles, but rather the deflationary environment.

"Note that these data paint a very diff erent picture from the standard view that the Great Depression was initially a 'garden variety recession.' Instead these data show that the industrial Depression was immediately severe and deep."

This chart, measuring real investment in the economy between 1929 and 1931, would indicate that individuals and businesses substantially reduced investments in their businesses. Ohanian argues that this decrease was a result of deflation, contraction of incomes, investment dollars going to wages rather than investments, and fear of investment, much of which was a...

"Despite the encroachments of taxation, regulation, and other government action at all levels that had been occurring for half a century or more (Hughes 1991, 92-135; Higgs 1987, 77-167; Keller 1990), as late as 1932 businesspeople in general and investors in particular remained - certainly in retrospect - relatively free of major threats to the prevailing regime...

"Most students - somewhere in the high school curriculum - vaguely register the fact that late 1929 saw a devastating crash in the stock markets. The crash is, for many of us, directly linked to the narrative of the Great Depression of the 1930s. In reality, however, the link is hardly a direct one. Business took a significant turn for the worse in 1929, and the...

"Hoover was also a strong supporter of unions and high wages. Hoover emphasized in his Memoirs that he was delighted with the signi cant growth of union wages, which rose about 40 percent in the 1920s, compared to only about a 6 percent increase for non-union wages (Bureau of the Census, 1976)."

The evolution of gold reserves in Figure 2 reveals much about the monetary policies in each country. The United States lost reserves (relative to other countries) between 1926 and 1928 due in part to large capital lending to Europe.

Analysis Report White Paper

"The sharp break in stock prices last fall appropriately compelled a reassessment of economic prospects for the year ahead. In some quarters, analysis has gone beyond mere reassessment to raise fundamental issues about the likelihood of repeating...

While the tightening of U.S. monetary policy in 1928 is often blamed for having initiated the downturn, France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932 and effectively sterilized most of this accumulation.
This paper provides a reassessment and a restatement of the essential properties of gold standards. Second, it emphasizes the role of the Real Bills Doctrine in Federal Reserve policy as the primary cause of the Great Contraction of 1929-1933.

From the Abstract: "Gauti Eggertsson uses a dynamic stochastic general equilibrium model in arguing that the period 1933 to 1937 represented recovery from the Great Depression, by virtue of regime change between the Hoover and Roosevelt administrations. He claims that the Hoover administration was defined by adherence to three 'policy dogmas,' and that...

Smiley presents a very thorough analysis of the Great Depression and the events/attitudes that led  ot it. He hits upon a variety of topics inlcuding the "Roaring Twenties," monetary policy including the contraction of the money supply, wage & price controls, the influences of World War I, World War...

"What ended the Great Depression in the United States? This paper suggests that the recovery was driven by a shift in expectations. This shift was triggered by President Franklin Delano Roosevelt's (FDR) policy actions. On the monetary policy side, Roosevelt abolished the gold standard and announced an explicit policy objective of inflating the price level to pre-...

This careful and succinct overview by the current Foundation for Economic Education president offers an Austrian school, free-market perspective on the Great Depression. Indeed, many of our modern day assumptions about the Great Depression may be skewed.

"About six months following the nadir of the Dow Jones Industrial Average's roughly 50% decline from its bubble-era highs, it rose to 48% off its lows. Speculation that another bull market was in the offing, brought anxious capital back in from previously frightened traders. Unemployment threatened to define the economic picture in a way that hadn't been seen in decades. The Federal Reserve...

Hoover's big-spending, interventionist policies prolonged the Great Depression, and similar policies today could do similar damage.

"The Great Depression has had an immense influence on our thinking, particularly about ways to handle an economic crisis, yet we know surprisingly little about it. Most historians have focused on chronicling Franklin D. Roosevelt's charismatic personality, his brilliance as a strategist...

The Great Recession continues to generate calls for at least New Deal-style response, if not much more.

This 40-part series from the Future of Freedom Foundation covers every aspect of the Great Depression:

Part 1: A Little Bit of Inflation Never Hurt Anyone. Right?
Part 2:...

Abstract:
"There are two striking aspects of the recovery from the Great Depression in the United States: the recovery was very weak and real wages in several sectors rose significantly above trend. These data contrast sharply with neoclassical theory, which predicts a strong recovery with...

Higgs spends thirty pages thoroughly analyzing how regime uncertainty (changes in law and policy) during the Great Depression stifled investment and growth, and therefore prolonged the time until recovery. He also debunks the idea that World War II pulled the United States out of the Great Depression.

"The Great Depression typically appears in the historical literature like an earthquake or plague. Its effects are noted, but its causes are neither explained nor located in conditions under the control of historical figures. We think this is a mistake: the Depression was the result of actions taken by historical personages for reasons that are explicable using the...

An overview and analysis of Friedman's conception of the Great Depression. Pongracic, like Friedman himelf, gives special attention to the role of the Federal Reserve and debates Keynes' theories on the Great Depression.

"In the decades following...

"It is now well over a half-century since the Great Depression of the 1930s, the most severe and protracted economic crisis in American history. To this day, there exists no general agreement about its causes, although there tends to be some consensus regarding its consequences. Those who at the time argued that the depression was symptomatic of a profound weakness...

Abstract:
"There were two schools of thought to the roots of the farm depression in the United States during the 1920s. One school argued that there was overcapacity in agriculture and recommended production adjustment programs. Another school argued that the problem of agriculture had to do with financial and monetary chaos in the general economy and advocated better central banking and...

"Herbert Hoover. I develop a theory of labor market failure for the Depression based on Hoover's industrial labor program that provided industry with protection from unions in return for keeping nominal wages fixed. I find that the theory accounts for much of the depth of...

Reynolds explains how tariffs, taxes, monetary mismangement and political manipulation of wage rates and prices caused the Great Depression, and in doing so makes a strong case for the inherent strength and resilience of markets.

Video/Podcast/Media

"'History is an argument without end. That is why we love it so.'

These words come from the late scholar of the New Deal, Arthur Schlesinger, Jr. Schlesinger in turn was quoting a colleague, the historian, Pieter Geyl. It is in Schlesinger's collegial spirit that the Council on Foreign Relations and NYU/...

This podcast gives an overview of the governmental policies and programs leading up to and through the Great Depression. The latter half of the program delves into details behind New Deal programs and initiatives such as the AAA and the Wagner Act.

"Thomas Rustici of George Mason University and author of Lessons from the Great Depression talks with EconTalk host Russ Roberts about the impact of the Smoot-Hawley Act on the economy. The standard view is that the decrease in trade that followed Smoot-Hawley was not big enough to be a significant contributor to the Great Depression....

"Douglas Irwin of Dartmouth College talks with EconTalk host Russ Roberts about the role the gold standard played in the Great Depression. Irwin argues that France systematically accumulated large amounts of gold in the late 1920s and 1930s, imposing massive deflation on the rest of the world. Drawing on a recent paper of his, Irwin argues that France's role in worldwide deflation was greater...

iTunes has President Roosevelt's Fireside Chats available as free downloads. Whatever your opinion on FDR, it's important to listen to this collection to understand the times and his influence.

Terkel interviewed hundreds of people across the United States for his book on the Great Depression of the 1930s. In 1973, he selected several interviews that were included in his book to be broadcast in eleven parts on the Studs Terkel Program on WFMT radio.

"Amity Shales discusses her bestselling book on the history of The Great Depression The Forgotten Man. Shlaes is a syndicated columnist and a Senior Fellow at The Council on Foreign Relations. In this discussion she helps put our current global economic crisis in perspective by providing a new context on what worked and what didnt work to fix The Great Depression of the 1930s."

"On July 9, 2010 at the FreedomFest Conference in Las Vegas (www.freedomfest.com), FEE president Lawrence W. Reed debated University of Nevada-Las Vegas economist Bernard Malamud on the subject of the New Deal policies of Franklin Roosevelt. This is a video recording of that 50-minute debate."

"Jim Powell, senior fellow, is an expert in the history of liberty. He has lectured in England, Germany, Japan, Argentina and Brazil as well as at Harvard, Stanford and other universities across the United States. He has written for the New York Times, Wall Street Journal, Esquire, Audacity/American Heritage and other publications.

He is the author...

Reed reminds viewers that the Great Depression was not the first depression America experienced, but that it stood out because of the impact on American psyche and policy. It also lasted four times longer than all of the previous depressions and could be even said to have lasted 16 years. He believes that the Great Depression can be broken into four phases:

1) Monetary/...

"Milton Friedman explains what happened during the great depression and what the role of the federal reserve is during economic ups and downs. This is from a 10 hour documentary series which can be viewed online at: http://www....

"Nobel laureate economist and New York Times columnist Paul Krugman says he wants President-elect Barack Obama to enact 'something like a new New Deal.' Historian Douglas Brinkley has said that Obama could come to office with a 'sweeping legislative agenda which will be Johnson-like or...

Primary Document

This article describes the vociferous opposition to the Smoot-Hawley Tariff Act, which raised tariffs and, as virtually all economists now agree, plunged the US deeper into the Great Depression.

"The Wall Street collapse…and the Great Depression which followed it were among the most important events of the twentieth century….[B]y undermining confidence in the efficacy of the market and the capitalist system, they helped explain why the absurdly inefficient and murderous system of Soviet communism survived for so long.

"For half a century, the conventional, orthodox explanation...

Governor Bernanke of the Federal Reserve presents his opinion on monetary policy and how to correctly handle asset-price "bubbles." Some of his opinion is based on the historical examples found in the 1920s and the 1930s. An excerpt from his speech that relates to...

FDR outlined many of his proposals and programs that constituted the New Deal. You can read the speech below:

Radio Address of the President

"On a Sunday...

In this speech, FDR discusses Jefferson's philosophy in connection with idea that the "purpose of Government [is] based on a universality of interest." As examples of the execution of such a purpose, Roosevelt argues for the proper regulation of public utilities in order to keep prices down and ensure equal access, as well as the establishment of a tariff system...

Annual presidential address to Congress, describing key domestic and foreign developments of the previous year.  FDR used the opportunity to discuss the FDIC, NIRA and the AAA. He also touches on the situation in Europe, where many nations have failed to pay...

"By virtue of the authority vested in me by the Act of Congress entitled 'An Act for the relief of unemployment through the performance of useful public work, and for other purposes,' approved March 31, 1933 (Public No. 5, 73d Congress), it is hereby ordered that:

(1) For the purpose of carrying out the provisions of said Act Robert Fechner is hereby appointed Director of Emergency...

"By virtue Of the authority vested in me by Section 5 (b) of the Act of October 6, 1917, as amended by Section 2 of the Act of March 9, 1933, entitled 'An Act to provide relief in the existing national emergency in banking, and for other purposes,' in which amendatory Act Congress declared that a serious emergency exists, I, Franklin D. Roosevelt, President of the...

"By virtue of and pursuant to the authority vested in me under the Emergency Relief Appropriation Act of 1935, approved April 8, 1935 (Public Resolution No. 11, 74th Congress), I hereby establish an agency within the Government to be known as the 'Resettlement Administration,' and appoint Rexford G. Tugwell, Undersecretary of Agriculture, as Administrator thereof,...

In his first inaugural address, President Roosevelt (FDR) gives a speech that borders on messianic with references to the money changers in the temple and the need to move away from a society based on profit. He then outlines various steps towards restoring the economy...

"Whereas there have been heavy and unwarranted withdrawals of gold and currency from our banking institutions for the purpose of hoarding; and

Whereas continuous and increasingly extensive speculative activity abroad in foreign exchange has resulted in severe drains on the Nation's stocks of gold; and

...

In his annual address to the Congress, FDR outlines his plan to reestablish the security of the American people.  He addresses 1)The security of a livelihood through the better use of natural resources of the land in which we live, 2)The security against the major hazards...

In his annual letter to Congress, President Hoover, again, tries to explain why the country has not yet recovered from the Crash.  He places most of the blame on international forces beyond his or the American people's control.  He furthermore tries to balance the Government's interventionist activities with a...

Hoover's letter to the Congress describes the challenges facing the country during the first year of the Depression.  Hoover tries to explain why the economy has not yet recovered, and goes on to highlight the government's agenda to cope with unemployment and...

The U.S. Department of State gives a brief introduction to the Smoot-Hawley Tariff, stating:

The Smoot-Hawley Tariff was more a consequence of the onset of the Great Depression than an initial cause. But...

Federal Reserve Chairman Ben Bernanke speaks about "the role of the Federal Reserve and of monetary factors more generally in the origin and propagation of the Great Depression." Bernanke concludes his speech with a summary of his points:

Some important lessons emerge from the story. One lesson is that ideas are critical. The gold standard...

"The National Industrial Recovery Act (soon shortened to NRA) became law under President Franklin Roosevelt in 1933 and dramatically altered America's traditional free-market system. Under the NRA, a majority of firms in any industry had government approval backed by force to determine how much a factory could expand, what wages had to be paid, the number of hours to be worked, and the prices...

NATIONAL LABOR RELATIONS ACT

cited NLRA or the Act; 29 U.S.C. §§ 151-169

[Title 29, Chapter 7, Subchapter II, United States Code]


FINDINGS AND POLICIES

1.[§151.] The denial by some employers of the right of employees to organize and the refusal by some employers to accept the procedure of...

"I want to talk for a few minutes with the people of the United States about banking—with the comparatively few who understand the mechanics of banking but more particularly with the overwhelming majority who use banks for the making of deposits and the...

An act : "To provide for rural electrification, and for other purposes."

"SEC. 4. LOANS BY SECRETARY OF AGRICULTURE FOR ELECTRICAL PLANTS AND TRANSMISSION LINES, PREFERENCES; CONSENT OF STATE AUTHORITIES.-- The Secretary is authorized and empowered, from the sums hereinbefore authorized, to make loans for rural electrification to persons, corporations,...

An Act to Improve the Navigability and to Provide for the Flood Control of the Tennessee River: To Provide for Reforestation and the Proper Use of Marginal Lands in the Tennessee Valley; to Provide for the Agricultural and Industrial Development of Said Valley; to Provide for the National Defense by the Creation of a Corporation for the Operation of Government Properties at and Near Muscle...

From the Preface:

"I have written this book as a contribution to a popular agitation. I have not troubled myself to keep or to throw off scientific or professional dignity. I have tried to make my point as directly and effectively as I could for the readers whom I address, viz., the intelligent voters of all degrees of...

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