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April 19, 2006

The New Deal Debunked

Most modern economists have not yet realized what Henry Hazlitt already knew in the 1930s that FDR's New Deal made the Great Depression last longer and deeper. It is a myth that Franklin D. Roosevelt "got us out of the Depression" and "saved capitalism from itself." However recently a few modern macroeconomists have finally come to this conclusion as witnessed by an article in the August 2004 Journal of Political Economyentitled "New Deal Policies and the Persistence of the Great Depression: This is a big deal, since the JPE is arguably the top academic economics journal in the world. "Real gross domestic product per adult, which was 39 percent below trend at the trough of the Depression in 1933, remained 27 percent below trend in 1939," and " private hours worked were 27 % below trend in 1933 and remained 21 % below trend in 1939."

This should come as no surprise to anyone who has studied the reality of the Great Depression without a preconceived political agenda. The U.S. Census Bureau of statistics shows that the official unemployment rate was still 17.2 % in 1939 despite seven years of "economic salvation" at the hands of the Roosevelt administration (the normal, pre-Depression unemployment rate was about 3 percent). GDP was lower 10 years later, in 1939 than in 1929 ($847Billion vs. $857Billion), as were personal consumption expenditures ($67.6 billion in 1939 vs. $78.9 billion in 1929), and Net private investment was minus a total $3.1 billion from 1930-40.

Most people including most economists are surprised-even shocked-to discover these facts, primarily because they are brain washed to accept the Ivey League Socialist leftist propaganda at face value. They can't seem to understand the fact that the recovery from the Great Depression was "very weak": simply because this data contrasted sharply with neoclassical theory and popular beliefs; that state that there should have been a booming robust economy. The weak recovery is puzzling to the Socialist Neoclassical economists because the large negative shocks that they believe caused the 1929-33 downturn, including monetary shocks, productivity shocks, and banking shocks-become positive after 1933." Thus, according to neoclassical theory, the economy during a depression is somewhat dead but is then "shocked" back into becoming a living breathing dynamic economy by the sharply lowered interest rates, the dramatic money supply increases and the massive demand augmentation by government spending.. The monetary base increased more than 100 percent between 1933 and 1939," making the case that such a "monetary shock" should have returned the economy to normalcy, according to some well-known macroeconomists who once proclaimed that "positive monetary shocks should have produced a strong recovery, with employment returning to its normal levels by 1936."

However, it was just those very same, easy money policies of the mid to late 1920s that created all the Over-investment, that inevitably resulted (as it always has and will) in the great Bubble followed by the Great Depression in the first place. The only wise thing that should have been done was to allow the liquidation of unprofitable and overcapitalized businesses to occur., as was done in 1919-1920 (President Harding stopped Hoover, then secretary of commerce, from implementing, those very same policies that he eventually implemented as President in 1930) that held that even sharper recession of 1919-1920 too less than two years. Instead, the Fed beginning after the 1929 crash drastically increased the monetary base by 100 percent in less than five years, causing more of the same overcapitalization problems that were the main source of the depressions problems in the first place.

On top of that, virtually every single one of FDR's "New Deal" policies (most of which were started by Hoover) were completely contrary to basic economic theory, making unemployment even worse, further prolonging the Depression. Austrian economists have known this for decades, but now at least a few of the socialist Keynesians and socialists neoclassical model builders are finally catching on. They have been building models for a long enough period of time to discover that the so-called First New Deal (1933-34) was one giant cartel scheme, whereby the government attempted to enforce cartel price fixing through output reductions in hundreds of industries as well as in agriculture, drastically reducing employment. This of course was well documented in John T. Flynn's book, The Roosevelt Myth, first published in 1948. Henry Hazlitt also wrote about it some fifteen years earlier. "New Deal cartelization policies were a key factor behind the weak recovery, accounting for about 60 percent of the difference between actual output and trend output," .The fact that it has taken so long to recognize this fact is truly astounding. For generations Princeton's and the other Ivey league universities own neoclassical textbooks have taught Keynesian nonsense; neglecting completely to notice the obvious fact, that if you restrict output you need fewer workers. It has also been no secret that the heart and soul of the First New Deal was to use the coercive powers of government to prop up wages (similar to minimum Wage Law) and prices by cartelizing the entire economy. (Centrally planned Socialism)


FDR and his Keynesian advisors mistakenly believed that the Depression was caused by low prices, therefore, high prices-enforced by threats of violence, coercion and intimidation by the state-would be the "solution." to demand deficiencies. Overlooking the fact that if less production takes place, fewer workers will be needed by employers and unemployment will subsequently be higher and demand greatly LOWER. It is also common sense that the higher you raise prices the less you will sell and the fewer employees you will need. Thus, the First New Deal could not possibly have been anything but a gigantic unemployment-producing schemeaccording to common sense and basic economic theory.

FDR's tripling of taxes, his regulation of business, and his relentless anti-business propaganda also contributed to a worsening of the Great Depression, but his labor policies were probably the most harmful to the employment prospects of American workers. The NIRA codes established minimum (higher) wages for less-skilled and higher-skilled workers alike; employers were told that they must bargain collectively with unions, which were given a myriad of legislated advantages in the bargaining process, all enforced by the newly-created National Labor Relations Board. All of these policies made labor more expensive. Consequently, as the economic law of supply and demand tells us, the inevitable result must be less employment.(can you see any similarities to today? (Gm and Ford ) Strike activity doubled from 14 million strike days in 1936 to 28 million a year later, and wages rose by about 15 percent in 1937 alone. The union - nonunion wage differential increased from 5 percent in 1933 to 23 percent by 1940. Newly-enacted Social Security payroll and unemployment insurance taxes made labor even more expensive. What all of this means is that during a period of weak or declining demand for labor, government policy pushed up the price of labor causing employers to naturally require less and less workers. Any decent econometric evaluation of these labor cost-increasing policies would have concluded that most of the abnormal unemployment of the 1930s would have been avoided were it not for these policies. It's estimated that by 1940 the unemployment rate was eight percentage points higher than it would have been without the legislation-induced growth of unionism and government-mandated employment costs. The conclusion is that "The Great Depression was very significantly prolonged in both its duration and its magnitude by the impact of New Deal programs.

Recently a few Ivey league economists have also finally come to the conclusion that New Deal labor and industrial policies did not lift the economy out of the Depression . . . . Instead, the joint policies of increasing labor's bargaining power and legalizing collusion prevented a normal recovery by creating rents (monopolies) and an inefficient insider-outsider friction that raised some wages significantly and restricted employment . . . . the eventual abandonment of these policies coincided with the strong economic recovery of the mid 1940s.

In more recent analysis as to why the Depression Lasted So Long and Why Prosperity Resumed only after the War rather that as most might expect during the war, showed that it was the relative neutering of New Deal policies, along with a reduction (in absolute dollars) of the federal budget from $98.4 billion in 1945 to $33 billion in 1948, that brought forth the economic recovery. Private-Sector production increased by almost one-third in 1946 alone, as private capital investment increased for the first time in eighteen years. In short, it was capitalism that finally ended the Great Depression, not FDR's…cartel, wage-increasing, unionizing, and welfare state expansion policies. It's good to see that the Journal of Political Economy, the University of Chicago, and UCLA are finally beginning to catch up with the Austrian School, concerning the New Deal at least.

Modern Day Economic Policy

However when it comes to modern day economics everyone from both sides of the isle, all seem to be Keynesians. Even though in their Ivory towers they all know that Keynesianism doesn't work most still seem to be focusing on increasing demand, expanding credit and the money supply while keeping interest rates low as a solution to all their problems. For some reason they can't grasp the fact that it has always been, easy money in the form of below market interest rates, easy credit, a rapidly expanding money supply all backed up by massive Government spending that causes the problems in the first place.

The definition of Insanity

Is doing the exact same actions over and over again and yet always expecting a Different outcome. Perhaps expecting economists and politicians to study the past, going back 78 years is too much to ask since none of them were alive then. But what about studying Japan? Is looking back 20 years too much to ask? Do they really believe that instituting the exact same monetary and fiscal policies that Japan has implemented over the last 20 years, will produce a different result here in the USA than they have in Japan.



At the rate things are going, due to the wide spread anti Bush campaign by both the left wing media and the democrats; primarily against the war and the economy it looks like that there is a strong possibility that the democrats will regain at least one of the houses of congress in 2006, setting the stage for a lame-duck final two years of the Bush Presidency, resulting in the beginning of a recession at best. The stage would then be set for a Clinton victory in 2008.

So what is so bad about that you may ask?

History Repeats, The Road to Hell Is Paved with Good Intentions

As Hilary becomes the new FDR of the 21st Century, the first thing that gets done is a roll back of the most effective parts of the Bush tax cuts followed by massive government spending, a government take-over of health care to solve our health care problems, and of course payroll tax increases to save social security: Almost a complete replay of the New Deal policies which will bring about a replay of the 1930's.for exactly the same reasons to day as then…



The only thing to do is to continue to accumulate Gold and go back and re-read the articles, all posted on, that I've written since November. The Markets are unfolding almost exactly as expected down to the exploding of the gold market in conjunction with the stock market breakout to new highs, as the final hook that will lead to a crash by no later than March.


Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL
[email protected]


April 19, 2006

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