Great Depression, FDR, New Deal, John Maynard Keynes, Labor Unions, Collusion, Unemployment, Lend-Lease and Stages of Production

Posted by PITHOCRATES - September 11th, 2012

History 101

FDR increased the Power of Labor Unions and allowed Big Corporations to Collude with Each Other

Those in mainstream economics (i.e., Keynesian economics) studied the Great Depression and determined that the problem was a lack of spending.  Which is why they cheer FDR and his New Deal programs.  Because the New Deal spent enormous amounts of money.  And according to prevailing Keynesian thought that was all that was needed to end the Great Depression.  Spending.  And if the private sector wasn’t going to spend money then the government could.  And the government’s spending could replace all that economic activity that disappeared when the private sector stopped spending.  So the government spent.  But in those 10 to 15 years they failed to pull the nation out of the Great Depression.

According to Keynesian thought, and John Maynard Keynes himself who visited FDR in the White House, the government needed to spend money.  Even money they didn’t have.  Keynes urged the president to deficit spend.  To run huge deficits in the short term to kick-start the economy.  Keynes showed that it was the only way with a lot of figures and math.  FDR later said Keynes was more a mathematician than an economist.  Still, FDR spent.  But he did even more.  Believing part of the reason for the lack of spending was the evils of capitalism.  There was just too much competition keeping prices low.  And businesses selling at low prices couldn’t pay high wages.  Ergo to stimulate economic activity FDR wanted to increase the cost of doing business.

FDR increased the power of labor unions to help them negotiate higher wage packages.  And he allowed big corporations to collude with each other so they could raise their prices so they could afford to pay those higher union wages.  These two things really helped workers get better pay.  Some 25% higher they otherwise would have had.  This was a big win for labor.  And for the socialists and communists in America who hated capitalism.  (The 1930s were a time of nationalist, socialist, fascist and communist movements sweeping the world.  And strong elements in the U.S. wanted to join these movements.  The Soviet Union even had agents working inside the Roosevelt administration.)  In fact, they were angry that FDR didn’t take this chance to deliver the deathblow to capitalism once and for all by nationalizing some big industries.  Something FDR wasn’t willing to do.

FDR did Everything in his Power to Increase Wages & Prices because of the Massive Deflation of the Great Depression

Then came the alphabet soup of make-work agencies.  Civilian Conservation Corps (CCC) paid young unemployed men to do landscaping and other outdoor activities.  Tennessee Valley Authority (TVA) paid young men to build dams and other water related activities.  Agricultural Adjustment Act (AAA) raised food prices by paying farmers not to grow crops and to kill off some of their livestock herds instead of bringing them to market.  National Industrial Recovery Act (NIRA) reduced unfair competition by letting big corporations collude with each other to keep their prices high.  Public Works Administration (PWA) was a whole new agency that built roads and bridges.  Works Progress Administration (WPA) paid for more construction work for men, sewing work for women and arts projects for the creatively inclined.  National Labor Relations Act (NLRA) gave more power to unions to keep their wages (and the prices of the things they made) high.  And many other alphabet agencies.

Most of these programs passed between 1933 and 1935.  So FDR put a lot of money into workers’ pockets during the 1930s.  And according to Keynesian economics all that money would cause an explosion in consumer spending.  Thanks to the Keynesian multiplier.  For every dollar a consumer received from the government it would generate up to $5 of new GDP.  Which was probably one of the mathematical equations Keynes discussed that so underwhelmed FDR.  And that formula is 1/(1-MPC).  Where MPC stands for the marginal propensity to consume (and if it’s 0.80 you get a multiplier of 5).  If a person receives $100 and spends $80 then their MPC is 0.80 or 80%.  This is basically trickle-down economics Keynesian style.  If the person above spends that $80 those receiving it will spend $64.  Those who receive $64 will spend $51.20.  And so on until these other people create an additional $400 of economic activity in addition to that original $100.

And FDR couldn’t ask for a better time to spend that money.  During the Great Depression.  He was doing everything in his power to increase wages and prices because of the massive deflation of the Great Depression.  So even though he was trying to raise prices they were still low throughout much of the economy.  Which meant a little bit of money bought a lot of stuff.  Because deflation strengthened the dollar.  Giving it more purchasing power.  Allowing buyers to get a lot of bang for the buck.  Especially those union workers making 25% more than they normally would have been making.  Talk about kick-starting an economy.  It was so easy.  They even had mathematical formulas saying this would end the Great Depression.  The Great Depression was as good as over.

Had President Obama not been Elected the Great Recession would have Ended some time in 2010

The unemployment rate topped out at around 25% in 1933.  Excluding the government make-work, the true unemployment rate didn’t fall below 20% until 1936.  And never got below 14% until 1941.  When America began tooling up to build the instruments of war.  To become the Arsenal of Democracy.  A few things happened during this time to greatly reduce the unemployment rate following 1941.  The war removed a lot of men from the workforce to serve in the military.  The Supreme Court found parts of the New Deal unconstitutional.  And there was a split in organized labor that helped conservatives (Republicans and Democrats) gain power in Congress.  And they shut down some of those liberal New Deal programs.  So while one war began (World War II) another ended (the war on business).

And how did things progress after they ended their war on business?  Pretty well.  The unemployment rate fell.  To 14.6% in 1940.  To 9.9% in 1942.  To 1.9% in 1943.  To 1.2% in 1944.  Then it soared back up to 1.9% in 1945.  With the war over the unemployment rate rose again.  But nowhere near where it was during FDR’s New Deal 1930s.  From 1948 to 1968 it averaged 4.7%.  Not too bad considering full employment is 5%.  So for the 30 years or so following the end of New Deal policies the economy returned to full employment.  And stayed at full employment.  The conservatives in Congress needed but 4 years to do what FDR couldn’t do in 10 years with his Keynesian, New Deal policies.

Yes, the war helped.  A lot.  It pulled a lot of men out of the workforce.  And American industry ramped up to provide the war material for war.  However, we financed that buildup with deficit spending and American war bonds.  As most of that war material went to our allies via Lend-Lease.  Which means we gave most of it away to allow others to fight the war.  So it was little different than Keynesian spending.  So why did the war spending work when all those alphabet soup make-work agencies didn’t?  Because of the stages of production.  Putting more money into consumers’ hands only helped the retail and wholesale stages.  It did not do anything to stimulate the manufacturing or raw commodities stages.  Especially with those high union wages and lack of competition thanks to the collusion to keep prices high.  All that did was pay the very few who actually had jobs very well.  While making it economically foolish to hire any new workers because of the exceptionally high cost of labor (25% higher than it would have been without the New Deal programs).  That high cost of business just slammed the brakes on economic activity.  Economic activity picked back up only after conservatives in Congress undid some of the damage of the New Deal.  In fact, had it not been for FDR’s New Deal the Great Depression would have ended some 7 years earlier.  Extrapolating this to the Great Recession today one could estimate that the Great Recession would have ended 7 years earlier had it not been for the Keynesian policies of President Obama.  So if the current recession lasts as long as the Great Depression and President Obama wins a second term and continues his anti-business policies the recession will last 7 years longer than it need be.  Or, had President Obama not been elected it would have ended some time in 2010.  Giving us full employment today instead of 14.7% U-6 unemployment.


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