Government Intervention Prolonged the Great Depression

Special thanks to Josef_K for challenging me in this debate. Remember that we are debating that government intervention in the United States economy prolonged the Great Depression. My opponent has to argue that increased intervention by Hoover, FDR, and WW2 accelerated the recovery.C1: Herbert HooverWhen the Great Depression hit, Republican Herbert Hoover, did not hold to free market policies that his predecessors did. Hoover's plan to deal with the Great Depression was actually quite interventionist. Hoover interened in the relationship between labor and business by ordering large labor unions to not strike in exchange that businesses would not lower wages and actually raise them when they could. This policy went forward and was a disaster:"Hoover's wage ideas sounded good to some. And they were indeed the opposite of federal policies in the last downturn. But they did not really make sense: to force business to go on spending when it did not want to was to hurt business. And in some areas - wages, especially - the president's policy was dramatically counterproductive. As the crash continued, profits began to drop. Yet businesses could not adjust: if they wanted to be good citizens, they had to keep their pledge to Hoover and sustain employment and wages. The president was, essentially, requiring that companies take the hit in profits instead of employment." [1]Hoover also raised taxes on incomes and trade:"Then, in 1929, the stock market crashed the day after some hurdles were declared in Congress that made the Smoot-Hawley tariffs likely. This was a massive tax increase on international trade, quadrupling the tax to 60 percent on 3,200 imported goods. The economy, along with the stock market, started to go into free fall. Amazingly, Congress decided to double-down on what the money masters at the Fed were coing and threw in mammoth tax increases. In 1932, tax rates were increased across the board, with the top personal income tax rate jumping to 63 percent from 25 percent." [2]Increased government intervention, high tariffs, high taxes, as well as policy mismanagement by the Fed all contributed to a worsening crisis. Hoover lost the 1932 election and was replaced by Democrat FDR, but he hardly made a difference.C2: Franklin D. RooseveltFranklin Roosevelt, although campaigning that Hoover was spending too much, went on his own spending binge and launched greater intervention than Hoover. The New Deal had many parts to it. The most significant of his policies was the highly regulatory National Industrial Recovery Act:"The centerpiece of the New Deal was the National Industrial Recovery Act of 1933. It created “codes” or cartels in more than 500 industries in order to limit competition. Businesses were told to cut output and maintain high prices and wages. Businessmen who cut prices were cajoled, fined, and sometimes arrested. Fortunately, NIRA was struck down by the Supreme Court in 1935." [3]The NIRA was a massive disaster. Businessmen were very concerned about expanding as Woods explains:"Businessmen and investors, unsure of what the federal government would do next and what additional punitive members would be imposed on them, simply stopped investing.....long-term investment was particularly hard hit in the 1930s." [4]Higher controls on wages caused even less job growth:"Minimum-wage laws proved a stumbling block to efforts by blacks to secure jobs. These laws prevented employers from undercutting unions by offering lower wages to nonunion members. Since blacks faced exclusion from many of the powerful unions, they were in effect frozen out." [5] And further from Cole and Ohanian:"We have calculated that manufacturing wages were as much as 25% above the level that would have prevailed without the New Deal. And while the artificially high wages created by the NIRA 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." [6]Then there was the Agricultural Adustment Act, which was basically the NIRA for farming. The AAA required farmers to dump their surpluses in order to create inflation and keep prices up while getting heavy subsidies in exchange. However, the subsidies meant that now big farming businesses had a stronger advantage to small ones:"To larger farmers, the new AAA payments were welcome. Food and cash from another New Deal agency, the Federal Emergency Relief Administration, reached many of the poorest farmers. Small-farm owners, however, found the AAA regimen challenging. And tenant farmers were stunned. Landowners had historically hired sharecroppers because they themselves made profits from their share of the crop that the tenants planted and harvested. That relationship had become more tenuous as crop prices came down, and there was less for landlord and tenant to share." [1]While millions of Americans were starving, farmers were cutting their surpluses in a very detrimental and despicable policy that helped consumers less and reduced competition:"Shortly after the Agricultural Adjustment Act (AAA) was passed, the Department of Agriculture released the findings of its study of the American diet during these difficult years......It found that America was not producing enough food to sustain its population at the minimum (subsistence) diet. It took a special kind of mind to conclude that the best approach to this disaster would be to make more food expensive." [4] What about the unemployment rate during this period? In this graph, I compiled together two countries on the same continent with similar economies that are closely tied together: the USA and Canada. What we see is that while Canada's recovery gets better and better the United States is largely stagnant:"During the Hoover years (1930 to 1933), American unemployment was, on average, 3.9 points higher than Canada's unemployment. Yet during the (peacetime) heyday of the New Deal from 1934 to 1941, U.S. unemployment, on average, was 5.9 points higher than Canada's." [7]The New Deal didn't help end the Great Depression, it prolonged it. Finally, I want to establish just how different the Great Depression could have been had Hoover decided to similar fiscal policies to that of Warren G. Harding in 1921. Economist Scott Sumner writes:"With the same monetary policy and the path of NGDP that actually occurred during the period after 1929, but the Harding-era laissez-faire attitude toward labor markets, the Great Depression would have ended around late 1935. That's a six year depression if we count both the contraction and recovery to near full employment. Using the same method, the actual Great Depression was almost 12 years long (with full recovery in late 1941), but the 1921 depression was only about 2 1/2 years long (say mid-1920 to late-1922)." [8]In 1921 taxes were lowered and the government barely intervened at all in the economy, sticking to a balanced budget rather than more Keynesian deficit spending conducted by Hoover and FDR.C3: World War 2 Typically people always say that World War 2 ended the Great Depression, but looking closer at evidence shows that it does not. If we look at GDP during World War 2, it might appear at first glance that it did lift the country out of the Great Depression, but there is a problem here that Robert P. Murphy writes:"When government massively expands its own spending - as happened from 1940 to 1945 - it boost official GDP, because government spending is one component of its official measure. The problem though is that extra million dollard in goods and services as determined by a Pentagon contract is not as productive as when consumers spend one million dollars on goods and services produced in the private sector." [7]Doug Casey adds:"An economy can’t prosper when markets are being overruled by command-and-control rationing. During the war, companies found it easier and more profitable to produce for government than to produce for consumers. Even companies such as Eastman Kodak, the film and camera company, began manufacturing rifle scopes and hand grenades for the military. GM stopped making cars for civilians and made military vehicles instead. Tires, gasoline, shoes, beef, sugar, coffee and much else were rationed. The standard of living in the U.S. during the war collapsed; conditions for consumers were much worse than in the ‘30s. Remember that the best definition of a depression is: A period of time when most people’s standard of living falls significantly." [9]If we look at private investment, what we see is that it actually got worse as the government massively inflated the market: Sources1. Shlaes, Amity. The Forgotten Man: A New History of the Great Depression. New York: HarperCollins Publishers, 2007. Print.2. Cain, Herman, and Rich Lowrie. 9-9-9: An Army of Davids. Herndon, VA: Velocity; Mascot, 2012. Print.3. Edwards, Chris. "The Government and the Great Depression." Cato.org. Cato Institute, 1 Sept. 2005. Web. 4. Woods, Thomas E., Jr. The Politically Incorrect Guide to American History. Washington, D.C.: Regnery Pub., 2004. Print. 5. Higgs, Robert. "How FDR Made the Depression Worse." Mises.org. Ludwig Von Mises Institute, Feb. 1995. Web. 6. Cole, Harold L., and Lee E. Ohanian. "How Government Prolonged the Depression." Online.WSJ.com. The Wall Street Journal, 2 Feb. 2009. Web. 7. Murphy, Robert P. The Politically Incorrect Guide to the Great Depression and the New Deal. Washington, DC: Regnery Pub., 2009. Print. 8. Sumner, Scott. "What (if Anything) Can We Learn from 1921?" Econlog. Library of Economics and Liberty, 05 Dec. 2014. Web. 06 Jan. 2015.9. Casey, Doug. "Escaping the Great Depression - and Extending the Greater Depression." CaseyResearch.com. The Casey Report, n.d. Web.