President Roosevelt Gave the US Economy its Worse Economic Recovery, Not President Bush
Monday, July 09, 2007
I'm still getting emails form demented democrats about how "Bush's fascist cabal is destroying America by trampling on the Constitution" and "how Bush has presided over the worst economy ever" blah, blah, blah. This garbage makes it pretty clear that hardcore Democrats do not have a sense of irony, let alone a sense of humour. The message has changed somewhat of late. These hate-filled wingnuts are now claiming that "Bush has given the country the worse economic recovery in its history". So not only are these Dems economic illiterates they are also ignorant of their country's economic history.
It was 1937 and the US economy was showing definite signs of recovering from the depression. Unemployment was falling and business confidence was strengthening. Unemployment had dropped from a catastrophic 12.5 million in 1933 to 9.5 million in 1935 after which the drop in unemployment quickened, bringing unemployment down to 6.4 million by 1937. As for further evidence that activity was accelerating, iron and steel production had risen to over 100 per cent the 1933-34 level and car production more than doubled the 1933 level.
Production trends were similar for other products. Even so, it was still a weak recovery and aggregate wages as a per centage of national income exceeded 70 per cent while profits were only about 15 per cent. This meant a 10 per cent increase in labour costs would be enough to slash profits by more than 50 per cent. Clearly, any wage-push would quickly derail the recovery.
So how did Roosevelt manage to turn an emerging recovery into an economic disaster?
Let us begin with 1935, the year in which the Wagner Act was passed in reaction to the Supreme Court's decision to declare the economically destructive National Recovery Act unconstitutional. Constitutional lawyers had advised business that the Wagner Act was unconstitutional. In view of this advice, most big businesses ignored the Act and used free market prices to increase output and employment.
In 1937 Roosevelt-appointed judges dealt the economy a savage blow. The Supreme Court in a series of 5 to 4 decisions reversed its reasoning in the NRA case and upheld the Wagner Act as constitutional. (The Act had the effect of raising union membership from about 8 per cent of the workforce to 25 per cent). The court's decision meant that business was now forced by law to 'negotiate' with politically privileged unions.
As one would expect, the unionocracy and its political allies refused to tolerate market wage rates. (In fairness I should point out that President Hoover also strongly opposed market rates). The court's judgment was immediately followed by an immense outbreak in union activity (some of it quite violent) resulting in a rapid rise in labour costs. The result was as predictable as it was tragic - unemployment leapt from 6.4 million in 1937 to 10 million in 1938.
In an effort to absolve the Roosevelt administration of any responsibility for aborting the recovery apologists cooked up three principal alibis. One blamed the Fed for reducing bank reserves. This excuse overlooked the fact that the Fed was only removing idle reserves, which explains why their removal had no effect on short-term interest rates, including commercial paper.
The second alibi had it that that the disappearance of the government's deficit caused the crash by reducing government spending. The problem with this argument is that total federal expenditure for the whole of 1937 and the first four months of 1938 was $10,058,000,000 while revenue equalled $8,229,000,000*.
The third argument had that by sterilising the gold inflow the Fed inadvertently created a deflation that caused the economy to contract. What this argument misses is that that sterilisation only prevented incoming gold from adding to excess reserves. As we have seen, these reserves were successfully reduced without affecting economic activity.
It was the destructive behaviour of unions - countenanced by the Roosevelt administration - that sent the American economy into a vicious tailspin. One does not have to be a genius to figure out that if a union grabs all of a firm's profit someone will have to be sacked. For evidence of this self-evident fact let us look at the situation in 1929 when the two-way division between employees and corporations was 81.6 per cent and 18.4 per cent respectively. In 1933 employees' share had rocketed to 99.4 per cent while payrolls fell from $32.3 billion to $16.7 billion and unemployment rose to a horrific 25 per cent.
In every free market there exists a tendency for every factor of production - including labour - to be paid the full value of its marginal product. It follows that when labour costs exceed the market clearing rate unemployment will rise. Gallaway and Vedder put this economic axiom to a statistical test. Taking 1929 as equal to 100 they found that by 1933 the adjusted real wage (the real wage adjusted for productivity) had risen to 122 while unemployment had jumped to 25 per cent. (Gallaway and Vedder, Out of Work. New York University Press, 1997, p. 103).
They also gave 1933 an index number of 100 for the adjusted real wage. In 1934 the index had risen to 104.5 and unemployment stood at 21.7 per cent. (Gallaway and Vedder , Review of Austrian Economics, 1987, 1, pp. 33-80). Unemployment for 1935 fell to 20.7 per cent while the adjusted real wage had dropped to 102.2. Now 1936 is of particular interest. In that year the adjusted real wage fell to 97.6 which brought the unemployment rate down to 16.9 per cent. The following year saw unemployment fall to 14.3 per cent. But 1937 was also the year in which Roosevelt sanctioned the union thuggery that drove the real adjusted wage up to 107.2 and then to 114.5 in 1938, the year which saw unemployment leap to 19 per cent.
So much for the myth that Roosevelt ended the Great Depression.
*The idea that a significant drop in government spending will drive up unemployment is, unfortunately, still with us. Yet the employment record for the fiscal years from 1944 to 1947 completely demolish this erroneous thinking.
During those years the US government slashed Federal spending from an annual $95 billion to $36 billion per year - a $59 billion cut in three fiscal years. This was a staggering 62 per cent reduction. Instead of the economy spiralling into a depression with 8 million unemployed, as predicted by Keynesians, including Samuelson, it boomed.
I'm still getting emails form demented democrats about how "Bush's fascist cabal is destroying America by trampling on the Constitution" and "how Bush has presided over the worst economy ever" blah, blah, blah. This garbage makes it pretty clear that hardcore Democrats do not have a sense of irony, let alone a sense of humour. The message has changed somewhat of late. These hate-filled wingnuts are now claiming that "Bush has given the country the worse economic recovery in its history". So not only are these Dems economic illiterates they are also ignorant of their country's economic history.
It was 1937 and the US economy was showing definite signs of recovering from the depression. Unemployment was falling and business confidence was strengthening. Unemployment had dropped from a catastrophic 12.5 million in 1933 to 9.5 million in 1935 after which the drop in unemployment quickened, bringing unemployment down to 6.4 million by 1937. As for further evidence that activity was accelerating, iron and steel production had risen to over 100 per cent the 1933-34 level and car production more than doubled the 1933 level.
Production trends were similar for other products. Even so, it was still a weak recovery and aggregate wages as a per centage of national income exceeded 70 per cent while profits were only about 15 per cent. This meant a 10 per cent increase in labour costs would be enough to slash profits by more than 50 per cent. Clearly, any wage-push would quickly derail the recovery.
So how did Roosevelt manage to turn an emerging recovery into an economic disaster?
Let us begin with 1935, the year in which the Wagner Act was passed in reaction to the Supreme Court's decision to declare the economically destructive National Recovery Act unconstitutional. Constitutional lawyers had advised business that the Wagner Act was unconstitutional. In view of this advice, most big businesses ignored the Act and used free market prices to increase output and employment.
In 1937 Roosevelt-appointed judges dealt the economy a savage blow. The Supreme Court in a series of 5 to 4 decisions reversed its reasoning in the NRA case and upheld the Wagner Act as constitutional. (The Act had the effect of raising union membership from about 8 per cent of the workforce to 25 per cent). The court's decision meant that business was now forced by law to 'negotiate' with politically privileged unions.
As one would expect, the unionocracy and its political allies refused to tolerate market wage rates. (In fairness I should point out that President Hoover also strongly opposed market rates). The court's judgment was immediately followed by an immense outbreak in union activity (some of it quite violent) resulting in a rapid rise in labour costs. The result was as predictable as it was tragic - unemployment leapt from 6.4 million in 1937 to 10 million in 1938.
In an effort to absolve the Roosevelt administration of any responsibility for aborting the recovery apologists cooked up three principal alibis. One blamed the Fed for reducing bank reserves. This excuse overlooked the fact that the Fed was only removing idle reserves, which explains why their removal had no effect on short-term interest rates, including commercial paper.
The second alibi had it that that the disappearance of the government's deficit caused the crash by reducing government spending. The problem with this argument is that total federal expenditure for the whole of 1937 and the first four months of 1938 was $10,058,000,000 while revenue equalled $8,229,000,000*.
The third argument had that by sterilising the gold inflow the Fed inadvertently created a deflation that caused the economy to contract. What this argument misses is that that sterilisation only prevented incoming gold from adding to excess reserves. As we have seen, these reserves were successfully reduced without affecting economic activity.
It was the destructive behaviour of unions - countenanced by the Roosevelt administration - that sent the American economy into a vicious tailspin. One does not have to be a genius to figure out that if a union grabs all of a firm's profit someone will have to be sacked. For evidence of this self-evident fact let us look at the situation in 1929 when the two-way division between employees and corporations was 81.6 per cent and 18.4 per cent respectively. In 1933 employees' share had rocketed to 99.4 per cent while payrolls fell from $32.3 billion to $16.7 billion and unemployment rose to a horrific 25 per cent.
In every free market there exists a tendency for every factor of production - including labour - to be paid the full value of its marginal product. It follows that when labour costs exceed the market clearing rate unemployment will rise. Gallaway and Vedder put this economic axiom to a statistical test. Taking 1929 as equal to 100 they found that by 1933 the adjusted real wage (the real wage adjusted for productivity) had risen to 122 while unemployment had jumped to 25 per cent. (Gallaway and Vedder, Out of Work. New York University Press, 1997, p. 103).
They also gave 1933 an index number of 100 for the adjusted real wage. In 1934 the index had risen to 104.5 and unemployment stood at 21.7 per cent. (Gallaway and Vedder , Review of Austrian Economics, 1987, 1, pp. 33-80). Unemployment for 1935 fell to 20.7 per cent while the adjusted real wage had dropped to 102.2. Now 1936 is of particular interest. In that year the adjusted real wage fell to 97.6 which brought the unemployment rate down to 16.9 per cent. The following year saw unemployment fall to 14.3 per cent. But 1937 was also the year in which Roosevelt sanctioned the union thuggery that drove the real adjusted wage up to 107.2 and then to 114.5 in 1938, the year which saw unemployment leap to 19 per cent.
So much for the myth that Roosevelt ended the Great Depression.
*The idea that a significant drop in government spending will drive up unemployment is, unfortunately, still with us. Yet the employment record for the fiscal years from 1944 to 1947 completely demolish this erroneous thinking.
During those years the US government slashed Federal spending from an annual $95 billion to $36 billion per year - a $59 billion cut in three fiscal years. This was a staggering 62 per cent reduction. Instead of the economy spiralling into a depression with 8 million unemployed, as predicted by Keynesians, including Samuelson, it boomed.
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