Amity Shlaes

Amity Shlaes: The Forgotten Man

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Lee Ohanian on Rauchway….

by Amity Shlaes
November 12, 2008

For some reason the debate around the top levels of unemployment in the 1930s has been particularly hot. The question has been whether you take the official data, as John Kenneth Galbraith did in his Great Crash book and the federal government has (“Lebergott”) or whether you also count the part-time make work jobs of the New Deal. Even if you include those you get unemployment rates we would find incomprehensible — over ten percent, lots of the time. It’s hard to see therefore why many observers have therefore spent so much energy on that. Eric Rauchway, whose own book is pretty good, for some reason feels very defensive about all this. Rauchway’s book I’ve listed in my NYU Stern School course. He’s even criticizing Jon Stewart.
I’ve had my hesitations about fooling around with the make-work New Deal jobs. One reason is that they were often jobs for just a few months. We are not talking about jobs teaching school, but rather true project-to-project tasks.
On the question of the reason for the unemployment, as opposed to the precise datum, I recommend Richard Vedder . Vedder early on, in Out of Work explained that unemployment of the 1930s was probably due to unusually high wages. Read: Wagner Act. NRA. Boosterism. Fordism.
But the big issue: was the unemployment under Hoover and FDR truly severe? Maybe it is time for another measure. Lee Ohanian of UCLA looks at the whole problem by different data and finds the answer is truly clear.

2 Comments

  • Posted by glory

    heh, looks like you have some fans! :P

    but, yea, the big issue isn’t unemployment; it’s (lots and lots of) debt

  • Posted by Amity Shlaes

    Lee Ohanian sent in this, which he asked me to post:
    Professor Eric Rauchway argues that the New Deal promoted economic recovery in the labor market, citing a declining unemployment rate. The view that the New Deal promoted employment growth is wrong, and a declining rate of unemployment simply masks the fact that hours worked during the New Deal changed relatively little, certainly much less than it should have. In 1939, total hours worked per working age person – including the hours of those on government payrolls – were 21 percent below its 1929 level. This is little recovery compared to hours at the trough of the Depression in 1933, when total hours per adult were 27 percent below its 1929 level. My recent work with Harold Cole indicates that hours worked should have been above normal during the mid-1930s, not 20 percent or more below normal.

    Why was there so little recovery in employment? Because wages in many sectors of the economy were far too high. For example, manufacturing wages relative to trend were about 16 percent above trend in 1939. Wages above normal during a Depression is pathological; the normal forces of supply and demand should have reduced wages, increased employment, and generated a much faster recovery.

    So what kept wages so far above normal during a period of Depression? The National Industrial Recovery Act and the National Labor Relations Act, both of which were specifically designed to increase wages, and they did. Following the adoption of the Codes of Fair Competition under the NIRA, wages rose substantially in industries covered by the NIRA, and wages rose even further after the NLRA. There was no meaningful employment recovery until the 1940s, when New Deal Labor policies were gradually eroded, as the National War Labor Board restricted wage increases to cost of living, and the Taft Hartley Act significantly weakened the NLRA.

    New Deal labor policies illustrate the most basic of economic principles – setting the wage too high means that there will be less employment, and with less employment, the recovery was much slower than it should have been. Indeed, this is perhaps the saddest story – and one that could have been avoided.