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Sorry, Bernie Sanders, FDR's New Deal Actually Prolonged the Great Depression


Senator Bernie Sanders (I-Vt.) gave a highly anticipated speech at Georgetown University on Thursday, where he extolled socialism. The Democratic presidential candidate, whose proposed an estimated $18 trillion in new spending over the next decade, invoked President Franklin D. Roosevelt and the New Deal in his effort to sell his message to college students.

"Against the ferocious opposition of the ruling class of his day, people he called economic royalists, Roosevelt implemented a series of programs that put millions of people back to work, took them out of poverty, and restored our faith in government," said Sanders. "He redefined the relationship of the federal government to the people of our nation. He combatted cynicism, fear and despair. He reinvigorated democracy. He transformed the country, and that is what we have to do today."

"And, by the way, almost everything he proposed, almost every program, every idea, was called 'socialist,'" he added.

Certainly, Roosevelt did transform the country through a massive expansion of the federal government. Of course, Sanders does not see that as a negative. Nevertheless, much of his comments about the New Deal are just utterly false. We are indoctrinated to believe that Roosevelt's New Deal saved the United States from the throes of the Great Depression. But, in 2004, two UCLA economists, Harold Cole and Lee Ohanian, destroyed that narrative. Cole and Ohanian explained that Roosevelt extreme intervention in the economy actually prolonged the depression by seven years.

"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," Ohanian said in a 2004 release. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

"[Roosevelt] 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," Cole added. "The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Thomas Sowell has explained that the economy was on the path to recovery after the stock market crash of 1929. "[The unemployment rate] hit 9 percent in December — but then began a generally downward trend, subsiding to 6.3 percent in June 1930. Economic intervention by the Hoover administration interrupted the recovery and led to a deepening of the depression. Sowell views the protectionist Smoot-Hawley tariff, which was signed into law by President Herbert Hoover in 1930 against the advice of hundreds of economists, as the beginning of the worst of the downturn, though not the cause, and, similar to Cole and Ohanian, blames the extreme intervention of the Roosevelt administration for its severity.

The recovery from the Great Depression was tepid, to say the least. Unemployment jumped from 3.2 percent in 1929, the year the downturn began, to 24.9 percent in 1933, when it officially ended. There was a short period of robust economic growth from 1934 to 1936, but it did not last. The economy experienced another downturn in 1937, though not as severe as the Great Depression. Nevertheless, unemployment began rising once again, from 14.3 percent in 1937 to 19 percent the following year.

The Roosevelt administration, through the New Deal, effectively cartelized parts of the economy. "Just a few decades previously the federal government had passed anti-monopoly 'trust busting' laws like the Sherman Anti-Trust Act in order to combat anti-competitive collusion," writes Trevor Burrus. "During the New Deal, however, the government entirely changed course. What was once an unmitigated evil was seen as a necessary step on the road to recovery."

Ohanian cites the National Industrial Recovery Act and the National Labor Relations Act as a couple notable interventions in the economy that were hurdles to a quick recovery. "NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of “fair competition,” which spelled out what producers could and could not do, and which were designed to eliminate 'excessive competition' that FDR believed to be the source of the Depression," Ohanian explains. "These codes distorted the economy by artificially raising wages and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment." He notes that the policies at the heart of the NIRA continued even after the Supreme Court, in Schechter Poultry Corp. v. United States (1935), struck it down.

The National Labor Relations Act was a boon to labor unions to the detriment of the broader economy. "The downturn of 1937-38 was preceded by large wage hikes that pushed wages well above their NIRA levels, following the Supreme Court’s 1937 decision that upheld the constitutionality of the National Labor Relations Act. These wage hikes led to further job loss, particularly in manufacturing," Ohanian notes. "The 'recession in a depression' thus was not the result of a reversal of New Deal policies, as argued by some, but rather a deepening of New Deal polices that raised wages even further above their competitive levels, and which further prevented the normal forces of supply and demand from restoring full employment."

Roosevelt's approach to agriculture was also particularly mindboggling. Through the Agriculture Adjustment Act, passed in 1933, the federal government paid farmers not to produce to raise crop prices. Still reeling from the effects of the depression, people could not afford food, and the federal government was paying farmers not to work, as well as destroying crops and slaughtering cattle and pigs to boost the price of meat. "While millions of Americans were going hungry, the government plowed under 10 million acres of crops, slaughtered 6 million pigs, and left fruit to rot. Production of milk, fruits, and other products was cartelized to boost prices under 'marketing orders' begun in 1937," Chris Edwards explained in a 2005 analysis of the depression. "These policies reduced employment and burdened families with higher prices."

According to the Congressional Research Service, between 1930 and 1940, there was a net increase of 382,000 workers and employment as a percentage of the population actually declined from 50.5 percent to 44.8 percent. The unemployment rate did not drop to pre-depression levels until after the United States entered World War II. Of course, the number of enlisted men, the vast majority of whom were conscripts, grew substantiallly, from 458,365 in 1940 to 12.2 million in 1945. This was a sizable chunk of the available labor force of the time, so the natural result was a drop in unemployment.

True to form, Sanders is glossing over the serious follies of economic intervention. Really, he does not have to go back as far as the Great Depression to see how intervention can hamper a recovery. More than six years after the end of the Great Recession, the economy still has not seen its full potential as Congress and unelected bureaucrats spent billions in the form of "stimulus," increased taxes, and promulgated regulations that have held it back.

Karl Landgren's picture
Karl Landgren

So, Bernie is either misinformed or lying. Either way, he's a typical demonic-rat/ socialist.

Starsfan22's picture

Economists generally believe WW2 got the country out of the Great Depression. So do we need another war-time economy? No, just the accompanying austerity and build-up of 'capital' goods like infrastructure and manufacturing capacity. IMHO, we've been in a "consumer-based economy" for too long and eaten up our capital stock. Time to retrench and build up or put back what the Baby Boomer generation has taken out. (Sorry, Grandkids!)

cud's picture

Two countries spent their way out of the global depression that followed WW I -- One of them was Germany, the other was USA. The depression was caused by (among other things) over production to support WW I, suddenly left with no outlet - no consumers. WW II gave an outlet for the surplus production capacity.

The idea that WW II somehow reduced the labor force enough to end a depression is odd, since the reduction of labor via WW I didn't save the world from the depression. Do we need a war-time economy? I like to think not. Have we had one continuously since WW II? Yes we have.

Yes, the consumer-based economy has run its course. Capitalism as we know it (if you want to call it capitalism) has to die off -- either gently or violently. Knowing history, I expect the latter. The economy has to represent physical reality -- the transfer of energy -- thermodynamics... If a pound of chicken can cost less than a pound of bread, the economy is surreal. No wonder things are so hosed.

This isn't about Obama or Trump or any of the other buffoons kowtowing to the ruling class. Yes, I said it. Class. Funny how the Repubs are all saying the middle class is getting trashed by corporate interests. 2 years ago, any Democrat saying that would be accused of class warfare. Well, maybe it IS all about class warfare. It's time to drop the partisan politics and deal with the real issues.

cryptodemocrat's picture

The Depression resulted from a failure to regulate, speculators and pump-and-dump schemes running riot while recently-formed international cartels enabled by the Webb-Pomerene act took the place of recently-outlawed national trusts and greatly impeded competition. This situation was not just a bottom in the normal business cycle. With the Glass-Steagall act in place, constraining speculation and misuse of deposits, the economy immediately begain to recover. Roosevelt's program of intense infrastructure development made the whole economy more efficient and raised productivity dramatically. The failure of Smoot-Hawley, one of the very few instances in our history where a tariff has not achieved its aim, is likely a consequence of the constraints on production emplaced by the abovementioned cartels, constraints which some American partners persisted in even after the 2nd world war started, until they were caught at it by Federal authorities.

Starsfan22's picture

You are addressing the Wall Street manipulation of banks and the stock market. That is nibbling around the edges of the systemic problems the nation faced. How come all other nations recovered more quickly? Could FDR have been wrong about the remedies he tried to put in place? Do Keynesian economic policies ever work? Isn't it better to let the economy recover on its own without government interference? You blamed "speculation and misuse of deposits," "cartels" and lack of oversight by "Federal authorities." Though you do give credit to "program of intense infrastructure development." That was a drop in the bucket and did little to spur economic activity. As FDR's Secretary of the Treasury Henry Morganthau Jr. said, "“We have tried spending money. We are spending more than we have ever spent before and it does not work.” “After eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot!” Sound familiar??