Cautionary Lessons from the Great Depression;

Joe Biden may have gotten a few factual details wrong when he urged President Bush to act like Franklin D. Roosevelt did when he sought to counter the Great Depression. But the basic sentiment that we should now follow FDR's example and take swift, decisive action in the current crisis is one that is widely shared.

In considering this view, it's worth recognizing that many of the massive, decisive government interventions that FDR and the New Deal Congress enacted actually made the situation worse. As I discuss in in this article, the administration and various interest groups used the crisis of the Great Depression to enact sweeping legislation that benefited themselves at the expense of the general public, sometimes in ways that made the crisis worse than before. In these efforts, they were abetted by voters' sense of desperation and widespread ignorance of economics and public policy. This made it easy to portray measures that benefited narrow interest groups at the expense of the general public as "emergency measures" needed to address the crisis.

Perhaps the most egregious example was the National Industrial Recovery Act, the centerpiece of FDR's 1933 "First New Deal" (discussed at pp. 649-55 of my article). The NRA (not to be confused with the National Rifle Association) established a system of cartels to raise prices and wages throughout nearly the entire nonagricultural economy. This benefited certain big business interests and unions, which were able to suppress their competitors. But it also had the predictable result of greatly reducing economic output and increasing unemployment, especially among the poor and unskilled who were already suffering greatly. Economists estimate that it reduced GDP by as much as 6 to 1l percent (pg. 650). Co-blogger David Bernstein points out in his book Only One Place of Redress that the NRA particularly harmed low-wage black workers and that it was supported by some white labor unions in part because they hoped it would stifle black competition. The NRA - the biggest and most ballyhooed of FDR's early New Deal policies - made the Depression significantly worse than it would have been otherwise.

The NRA was the biggest and most damaging of the New Deal's harmful interest group power grabs. But it was far from the only one. For example, all law students study the Supreme Court's decision in Wickard v. Filburn, which upheld the Agricultural Adjustment Act requirement that farmers limit their production in order to raise prices. Like the NRA, the AAA was a cartel scheme intended to raise prices in order to benefit big producers (AAA production quotas and subsidies were based on the amount of farmland each farmer owned, thus benefiting bigger producers who owned more land) at the expense of consumers and smaller competitors. The predictable and intended effect of the AAA was to raise food prices - this in the midst of a Depression when many people were already suffering from malnutrition and could not easily tighten their belts further.

The NRA, AAA and other similar measures were made possible by the crisis atmosphere of the time, combined with widespread political ignorance (discussed in my article) which made it difficult for voters to tell the difference between genuinely needed emergency measures and interest group rent-seeking masquerading as such. As a result, many policies were enacted that made the Depression longer,deeper, and more painful than it would have been otherwise. Today, even many historians sympathetic to FDR and his policies concede that they failed to end the Depression (unemployment remained in double digits until World War II) and that some of them worsened the lot of the poor and unemployed more than they helped. Econometric studies show that much of the increased government spending generated by the New Deal was transferred to politically powerful interest groups who could help FDR and his allies win reelection rather than to the poor and needy.

I don't claim that every aspect of the New Deal was harmful. Some parts of it were either beneficial or at least defensible given the information available at the time. Still, a great deal of extremely damaging legislation was enacted because powerful interest groups were able to exploit the combination of a crisis atmosphere and public ignorance.

Today's situation isn't exactly equivalent to that of the 1930s. The bank crisis is much less severe than that of the Depression and the bailout proposed by the Bush Administration is probably not as damaging as the NRA was. But we still could end up repeating some of the policy fiascoes of the Depression era, even if on a lesser scale. The history of the 1930s suggests that we should be skeptical when political leaders claim that we must act immediately to address an economic emergency - especially if they want to do so in ways that transfer enormous amounts of wealth from the general public to influential interest groups. Widespread political ignorance is still with us; indeed Americans' average level of political knowledge has risen very little, if at all, over the last fifty years. And political pressure to "do something" to alleviate the perceived emergency can easily be exploited by interest groups at the expense of the rest of us. Already, a variety of interest groups are trying to take advantage of the crisis atmosphere by obtaining bailouts of their own - just as happened during the Depression. We should do all we can to avoid going down that road again.

UPDATE: I have corrected a couple of typos, including one where I accidentally typed "NRA" when I meant "AAA."

UPDATE #2: I suppose it's only fair to point out that Joe Biden's remarks, linked in the first sentence of the post, only urged Bush to go on TV and explain the crisis (as Biden said FDR had done in 1929). However, this remark has to be considered in the broader context in which Biden and many others have been calling for swift government intervention similar to what was done in the 1930s. Biden has even expressed anger at John McCain for supposedly preventing the administration's massive bailout from going through fast enough. This last comment should not be read as an endorsement of McCain's own conduct, since he also strikes me as overly eager for a massive bailout.