I recently read an interesting articles regarding the The New Deal. it gave me an interesting and deeper understanding about the Economic plan by Roosevelt that had unintended consequences on the worlds economy and how it relates o the current economic downturn face by us today and the parallels that President Obama faces with his own plan. Mind you the articles is long but if you can get bear it and get through it ,you'll be surprise how interesting the notion of a highly regarded and lauded plan may have done the opposite in what it was suppose to do.



THE New Deal is widely perceived to have ended the Great Depression. This has led many to support a "new" New Deal to address the current crisis. But the facts do not support the perception that Franklin Delano Roosevelt's policies shortened the Depression, or that similar policies will pull our nation out of its economic downturn.

The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office. Total hours worked per adult, including government employees, were 18 per cent below their 1929 level between 1930-32, but were 23 per cent lower on average during the New Deal (1933-39).

And it wasn't just work that remained scarce during the New Deal. Per capita consumption did not recover, remaining 25 per cent below its trend level throughout the New Deal, and per-capita non-residential investment averaged about 60 per cent below trend. The Great Depression clearly continued long after FDR took office.

Why wasn't the Depression followed by a vigorous recovery, like every other cycle? It should have been. Productivity grew rapidly after 1933, prices were stable, real interest rates were low and liquidity was plentiful. We calculated on the basis of just productivity growth that employment and investment should have been back to normal levels by 1936. Nobel Laureate Robert Lucas and Leonard Rapping calculated on the basis of just expansionary Federal Reserve policy that the economy should have been back to normal by 1935.

So what stopped a blockbuster recovery from starting? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net with social security and unemployment benefits, and by stabilising the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. These anti-market policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.

The most damaging policies were those at the heart of the recovery plan, including the National Industrial Recovery Act, which tossed aside the nation's anti-trust acts and permitted industries to collusively raise prices provided they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered more than 500 industries, ranging from automobile 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.

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. Following government approval of each industry code, industry prices and wages increased substantially, while prices and wages in sectors that weren't covered by the NIRA, such as agriculture, did not.

Manufacturing wages were as much as 25 per cent above the level that would have prevailed without the New Deal. And while the artificially high wages benefited the few that were fortunate to have a job in those industries, they significantly depressed production and employment, as the growth in wage costs far exceeded productivity growth.

These policies continued even after the NIRA was declared unconstitutional in 1935. There was no anti-trust activity after the NIRA, despite overwhelming evidence of price-fixing and production limits in many industries, and the National Labor Relations Act of 1935 gave unions substantial collective-bargaining power. While not permitted under federal law, the sit-down strike, was tolerated by governors in a number of states and was used with great success against major employers, including General Motors in 1937.

The downturn of 1937-38 was preceded by large wage hikes 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. 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 policies that raised wages even further above their competitive levels. Indeed, New Deal labor and industrial policies prolonged the Depression by seven years.

By the late 1930s, New Deal policies began to reverse, which coincided with the beginning of the recovery. In a 1938 speech, FDR acknowledged that the American economy had become a "concealed cartel system like Europe", which led the Justice Department to reinitiate anti-trust prosecution. And union bargaining power was significantly reduced, first by the Supreme Court's ruling that the sit-down strike was illegal, and during World War II by the National War Labor Board, which limited large union wage settlements to cost-of-living increases. The wartime economic boom reflected not only the enormous resource drain of military spending, but the erosion of New Deal labor and industrial policies.

By 1947, through a combination of war-time wage restrictions and rapid productivity growth, the large gap between manufacturing wages and productivity had nearly been eliminated. Since then, wages have never been so distorted, nor has the country suffered such abysmally low employment.

The main lesson from the New Deal is that wholesale government intervention can - and does - deliver the most unintended of consequences. This was true in the 1930s, when artificially high wages and prices kept us depressed for more than a decade; it was true in the 1970s when price controls were used to combat inflation but only produced shortages. It is true today, when poorly designed regulation produced a banking system that took on too much risk.

President Obama and Congress have a great opportunity to produce reforms that return Americans to work and provide a foundation for sustained economic growth. These reforms should include specific plans that update banking regulations and address a manufacturing sector in which several large industries - including automobile and steel - are no longer internationally competitive. Tax reform that broadens rather than narrows the tax base and that increases incentives to work, save and invest is also needed.

We must also confront an education system that fails many of its constituents. A large fiscal stimulus plan that doesn't directly address the specific impediments our economy faces is unlikely to achieve either the country's short-term or long-term goals.

Harold L. Cole is professor of economics at the University of Pennsylvania. Lee E. Ohanian is professor of economics and director of the Ettinger Family Program in Macroeconomic Research at UCLA.
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