In assessing the New Deal's contribution to economic recovery, I've naturally tended to draw on fairly recent research. That keeps me from being accused of being out of date. But it makes me vulnerable to the charge of overlooking the testimony of experts who studied the New Deal's consequences at first hand.
To that charge, I plead an emphatic Not Guilty! Those who know me will back me up when I say that I'm actually an antiquarian at heart, who'd much rather read a musty old report than any recent journal article. So I've read plenty of contemporary writings on the course of the depression and recovery, and the New Deal's contribution to them, including those of several of FDR's own advisors. These works often support the critical assessment of subsequent economic historians. If anyone is guilty of exaggerating the New Deal's contribution to the recovery, it's those popular historians who gloss over its failures while declaring that anyone who points to them must be a Hoover Republican!*
Of those failures, none was more glaring than that of the National Recovery Administration, the subject of my previous post in this series. And that failure was no less evident to those who witnessed its consequences as it has been to most economic historians since. I might cite numerous contemporary works to make the point—no other product of New Deal legislation met with more caustic or widespread criticism. But none makes the point more trenchantly than the 1935 Brookings Institution publication, The National Recovery Administration: An Analysis and Appraisal.
A Contemporary and Non-Partisan Assessment
Apart from having been prepared while the NRA was in full sway, the Brookings study is significant in several other ways. For starters, at almost one-thousand pages, it's still the most exacting study of its subject. Its authors—a six-person team led by Leverett Lyon—were highly regarded economists, who enjoyed the NRA's full cooperation in drafting their report. "It would indeed be fortunate," a reviewer of the report wrote in October, 1935, "if all of our government programs could be subjected to some such analysis as is offered in this survey."
Finally, the Brookings study was free of from any partisan taint: as a preface by Edwin Nourse, Brookings' Director and Vice President, notes, several of its authors had been "integral parts of the NRA organization." And although Brookings' President, Harold Moulton, was a fairly orthodox economist who would later become an outspoken critic of the Roosevelt Administration's deficit spending, upon taking office FDR thought highly enough of him and of Brookings to have sought their advice in developing his administration's recovery strategy. "Quite frankly," the President wrote Moulton,
we need help. Because I know of the splendid work that has been done by you and the Institute, and because of my old friendship for Mr. Brookings, I am hoping that you will be able to give us assistance in the preparation of a fairly definite plan between now and early March.
Despite Moulton's role in the discussions that led to it, the NRA didn't score high marks from the Brookings team assigned to assess it. Far from it: like most economists since, the Brookings team concluded that, so far as its contribution to economic recovery was concerned, the NRA was a dismal failure. Their report's explanations for this failure are also essentially the same as those found in recent works. If anything, they're more damning, drawing as they do on hundreds of pages of evidence rivaling anything to be found in later studies.
No matter how much I praise it, few people will be tempted to read a thousand-page tome written by a committee 85 years ago! Fortunately, the report's evaluative portion is contained in 100 pages or so toward its end, so anyone who wants to consult that part of it can do so in a lot less time than it would take to read War and Peace. For those who can't spare even that much time, I offer here a quick survey of the report's main findings and some of the arguments on which they're based.
Reform versus Recovery
The authors of the Brookings report are careful to note that their assessment concerns the NRA's bearing on the recovery, not its longer-run aims. "Our test of whether the NRA has furthered recovery," they continue, "is whether the nation has enjoyed under it a larger production of goods and services than it would have enjoyed without it." Applying this test isn't just a matter of looking at the progress of the recovery: although "recovery under the NRA has been quite disappointing, and it may be hard to believe that we would have made less progress without it, nevertheless the situation is complex," with many factors apart from the NRA's influence that must be taken into account.
Yet, after painstakingly endeavoring to control for those many factors, the Brookings report arrives at a verdict that's more rather than less negative than casual empiricism would suggest. "Not only," it says in summarizing that verdict, "did the program fail to work out as planned, but the plan itself was in our judgment a mistaken one":
Raising the prices either of labor or goods is not the way to get a larger volume purchased. Instead the NRA should have sought the maximum enlargement of spending with the minimum increase in costs and prices, thus securing with the augmented expenditure the greatest gain in the number of units of labor and goods taken off the market.
Increased spending might have been promoted either by removing "the deterrents to the free and prompt utilization of the existing money of the country" or through monetary expansion. But "[t]he NRA accomplished neither of these objectives." Instead of promoting recovery, it had a "substantial" "retarding effect."
The report traces the NRA's failure in part to its attempt to be "all things to all men," and especially to its attempt to kill two birds—promoting recovery and achieving long-run reform—with the same stone. "[A]lthough the immediate concern of the National Recovery Administration was an attack on the business depression," the authors write, its objectives included "both recovery and 'reform.' Indeed, it might even be said that it sought recovery through reform." Organized labor had long lobbied for higher wage rates and shorter worker hours, while industry lobbyists had long sought relief from strict antitrust laws. To gain their support, the NRA offered to meet both groups' demands, while claiming that the reforms they sought happened to be just the things needed to help end the depression. "The possibility that, despite their popularity with the two interest groups, such reforms might retard the emergence of the country from depression" wasn't one that the NRA's leaders were willing to entertain.
The Purchasing Power Theory
Nor was the NRA's recovery plan based on any coherent theory. Like most of the New Deal, the NRA was concocted on the fly. Even the legislation establishing it offered no particulars concerning how it would work. Until it actually took shape after the law passed, the NRA consisted of nothing more than various often-conflicting "public statements emanating from different government officials." For this reason, the Brookings report states, "[i]t would be a serious error to regard the NRA as a studious attempt to give institutional embodiment to an economic theory." Instead, one has to infer the NRA's implicit theory of recovery from statements made by its instigators and leaders and from the actual rules the NRA enforced once it was established.
Regarding those rules, the NRA "could not compel a single producer to turn out one additional unit of product." Instead, its organizers believed that codes governing the setting of prices and wage rates would indirectly stimulate production. In particular, they believed that raising workers' wage rates "would expand the purchasing power of the nation for goods and services, the increased demand for which would enlarge the volume of production and start the upward spiral of recovery."
FDR himself offered a fairly clear statement of this "purchasing power" theory at the time of the NIRA's passage. "The aim of this whole effort," he said, "is to restore our rich domestic market by raising its vast consuming capacity." That aim was to be accomplished by raising wage rates, both absolutely and relative to the price of goods themselves. This meant, the Brookings report observes, that "employers were expected to dig into their pockets to finance the wage increases before recouping through higher prices." Otherwise employers could only pay higher wage rates by reducing workers' hours, leaving their total purchasing power unchanged.
"Was this," the report asks, "a reasonable expectation?" The answer, its authors conclude, is no. First of all, the hoped-for lag of price advances behind wage increases didn't take place in fact. Instead, prices on average rose ahead of wage rates, as "a wave of speculative anticipation" of higher labor costs "swept prices up even before the [NRA] codes were ready for operation." Consequently, "[b]y the time wages were raised by the codes it was a question of catching up with prices, not of leading them up."
Nor, the report continues, was this failure at all surprising. How, it asks, could employers
absorb higher wage costs…except by offsetting price increases? On this point the official NRA literature is rather noncommittal. The reader is left to infer that the wherewithal to pay the higher wages will be obtained from the increased spending of the benefited wage earners. Obviously, this puts the cart before the horse. Before workers can spend more they must receive more.
All this assumes that paying "higher wages" meant not just paying higher wage rates but doing so whilst maintaining worker hours. Employers could of course pay higher hourly wage rates without earning more provided they cut back worker hours. For this reason "compelling employers to absorb higher wage rates is a very different thing from compelling them to increase their aggregate payrolls." It follows that, even if wage rates kept up with or rose independently of prices, both total payrolls and workers' demand for goods might remain unchanged or even decline.
The hope, entertained by some, that employers would satisfy wage codes without cutting labor hours by reducing dividends, was misplaced: dividends were "very small in relation to total payments to labor." Nor was it reasonable to suppose that employers could otherwise afford to reward labor by sacrificing profits. "With most of industry operating in the red, any feasible expansion of payrolls at the expense of profits was slight indeed." Instead of promoting recovery, any "attempt to squeeze blood from the turnip of business earnings would have aggravated the stagnation of business and investor expenditures."
Instead of enlarging payrolls, the higher wage rates called for by the NRA codes tended to reduce total employment—a result precisely opposite the one desperately needed at the time. "The basic difficulty in the spring of 1933," the Brookings report finds, "was not that hourly wage rates were generally too low." Owing in part to the downward "stickiness" of nominal wage rates, real wage rates didn't actually fall all that much during the Great Contraction. More precisely: they did not fall much for those lucky enough to stay employed, while they fell to zero for those who weren't so lucky!
The thing most desperately needed wasn't higher wage rates but more hours of employment, precisely the opposite of what the NRA codes accomplished. "It did not seem to occur to the NRA," the report caustically observes, "that a high price for labor might restrict the amount used." Because NRA wage codes applied only to about half of all workers, and mainly to those employed at relatively high-paying mining and manufacturing firms, and because these gains often overcompensated for concurrent changes in the cost of living, the NRA chiefly rewarded workers who "were already making more income per hour than they made before the depression," and did so almost entirely at other workers' expense.
Farmers, farmworkers, and their families, who made up more than a quarter of the population, were among those made worse off by the NRA codes. That outcome was bitterly ironic, because one of the New Deal's chief concerns was the plight of farmers, who suffered disproportionately from fallen crop prices. FDR made restoring those prices to their level during the mid-1920s, whilst keeping a lid on farmer's cost of living, one of his administration's top priorities, which the Agricultural Adjustment Act, passed on May 12th, 1933, was supposed to achieve.
The AAA ultimately failed to achieve its chief aim; and whatever that program's own shortcomings, the NRA also contributed to its failure. "The price-raising activities of the NRA," the Brookings report observes, "have run flatly counter to the efforts of the AAA to restore 'price parity' for agriculture," boosting farmers' costs more than enough to offset the AAA's attempt to boost the prices of farm products by restricting farm output.
A Misleading Boomlet
Students of the NRA's influence upon output have sometimes been misled by the sharp but short-lived spike in output, or "boomlet," that occurred during the early summer of 1933, as plans for it were taking shape. That boomlet can be seen very clearly near the middle of the following FRED chart, showing the course of industrial production from 1929 to 1937.
While some economic historians see the boomlet as evidence of the Roosevelt administration's success at reviving inflationary expectations, and others have suggested that U.S. economic recovery would have continued at that rapid pace had it not been for the NRA, the Brookings study suggests that neither view is quite correct. Instead, it suggests that, had there been no NRA, and no plans for such, output would not have risen quite so steeply during those early summer months, though it would also have kept rising afterwards at a more rapid clip than the NRA itself allowed.
The Brookings report makes the reasons for this perfectly clear. "[T]he certainty and imminence of impending cost and price increases," it says, "offered a well-nigh unprecedented incentive to speed up, to 'beat the gun,' and industry responded with an acceleration of activity that perhaps has no parallel in the history of the country." Anticipating rising unit production costs, businesses rushed to build-up their inventories while they could still do so relatively cheaply. So while the NRA did inspire the boomlet, it was also to blame for the decline of output that set in once the codes began to take effect: once "the spurt in spending subsided," the Brookings report relates, higher prices became "a continuing hindrance to the expansion of the physical volume of activity."
Fewer Hours, Less Unemployment
Conventional unemployment statistics seem to suggest that, whatever its shortcomings, the NRA did not stand in the way of a substantial reduction in unemployment. According to the standard unemployment measure, which includes those working in New Deal relief programs as "unemployed," and is therefore really a measure of the lack of private-sector jobs, from the time of the NRAs establishment until it was declared unconstitutional in May, 1935, the unemployment rate fell from its peak of over 25 percent to about 18 percent.
NRA representatives were quick to credit it for this improvement. "As early as November 1933," the Brookings report observes, Hugh Johnson, the NRA's head, claimed that it "had put 4 million men to work." But that figure, the report adds, was a "shot in the dark" that "probably exceeded the total increase in employment up to that time from all causes." Indeed, according to the BLS, 10,610,000 workers were unemployed in 1935, compared to 12,830,000 in 1933—a difference of just 2,220,000. What's more, the Brookings' study estimates that only 1.5 million or so of this total were actually employed in industries "materially affected by the NRA."
But exaggeration was the least of it: a closer examination of the evidence suggests that while the NRA may have put more people to work, its effect on total employment was actually negative.
How was that possible? As the Brookings report explains, the NRA influenced employment both "by changing the total amount of work done" and by "work spreading," meaning the cutting individual workers' weekly working hours so as to divide available work among more workers. According to Brookings' estimates, through its work spreading provisions alone, the NRA ought to have created 1.75 million more jobs! In fact, according to a relatively recent econometric study by Jason Taylor, it created only 80,000 jobs.
It follows that the NRA had a decidedly negative effect on "the total amount of work done." That workers whose hours were cut were often given the same total pay as before would have guaranteed this outcome even if the NRA had had no other adverse effects. By substantially reducing total hours worked, the NRA almost certainly had a corresponding, negative effect on total output, though here again raw statistics obscure the truth, by conflating the effects of the NRA with those of concurrent "great gains in the man-hour productivity of labor."
"In the last analysis," this part of the Brookings report concludes, "the NRA must be judged chiefly by what its program has done to increase the total amount of work available. Merely dividing a smaller amount of work among more workers is neither recovery nor a good substitute for it."
Reviving Nominal Income
The Brookings report's understanding of the real key to recovery is no less in agreement with modern research than its account of the NRA's shortcomings. "A full utilization of the country's productive capacities," it says, "could be achieved only by getting the national income high enough, in relation to the [prevailing] price level for finished goods and services, to take off the market a capacity output." Somehow, "[m]ore money had to flow into the markets for current output." Instead of being something that could be achieved by arbitrarily raising the prices of goods and services, a "revival of spending and of money income was a precondition of the payment of higher prices."
"A program of income expansion," the report goes on to say, calls for one or both of the following: (1) "the activation of idle and redundant [sic] cash balances through a revival of business confidence [and] (2) monetary expansion." The NRA appears to have done neither of these things: although money income grew, it did so mainly thanks to "the reopening of banks, gold imports, and the financing by banks of the federal deficit." Instead, by raising prices, the NRA increased the amount of money income needed to clear markets, hampering recovery.
Of course, output did recover somewhat between the passage of the NIRA and the start of the Roosevelt recession. But that recovery took place despite, rather than because of, the NRA. As I explained in my last post, its causes were monetary expansion, driven chiefly by gold imports, and concurrent gains in total factor productivity. As the Brookings report makes clear, had there been no NRA, that expansion "would probably have done more than it did to expand the physical volume of production."
No Help to Debtors
The Roosevelt administration hoped that, by getting prices closer to their pre-depression levels, the NRA would assist those who'd contracted long-term debts before the depression started. But the Brooking's report claims that this was yet another promise on which the NRA failed to deliver. "Debt charges are paid from income, not from prices," the report notes. As we've seen, the NRA itself did nothing to boost nominal incomes. What it did do was to raise living costs; thereby harming those debtors whose incomes grew less than their cost of living. That included farmers, whose long-term debts consisted mainly of mortgages and real estate, who gained nothing from the NRA's codes but instead suffered from the codes' effect on the cost of consumer goods and farm supplies.
Nor were farmers the only debtors made worse off by the NRA. "[I]t seems reasonably certain," the Brookings report concluded, "that the cost- and price-raising campaign of the NRA has, on the whole, increased rather than diminished the burden of private funded debt."
A Vast Fallacy of Composition
Frederic Bastiat famously defined the government as "the great fictitious entity by which everyone seeks to live at the expense of everyone else." According to that definition, the NRA was a government institution par excellence.
In assenting "to the desires of labor on the one hand and industry on the other," the NRA overlooked
the fact that these interests usually get their ideas in reaction to limited individual situations, not from a consideration of the economy as a whole. One group of workers may improve its relative position by higher wage rates and one industry may benefit itself by higher prices, but this is merely because wages and prices are not similarly raised elsewhere. When the game is played universally it is self-defeating.
In fact it was worse than that, for the NRA's price and wage codes ultimately served "to promote scarcity all around," when what the nation as a whole desperately needed was "abundance, not scarcity."
The New Deal was, of course, much more than the NRA. So the fact that the NRA impeded recovery from the Great Depression doesn't mean that the New Deal taken as a whole did so.
Still, the importance of the NRA's failure shouldn't be underestimated. To characterize it as a mere "misstep" in a generally successful New Deal recovery program, as Noah Smith does, for example, is quite misleading: the NRA wasn't just one of many New Deal "steps": it was, as its name suggests, the centerpiece of FDR's recovery plan—the principal device by which the U.S. economy was to be helped back on its feet. The NRA's failure therefore meant, not just that FDR would have to rely on other parts of the first New Deal to achieve recovery, but that he and his advisers would have to go back to the drawing board to concoct new recovery plans.
Alas, those new plans were no more successful than the NRA. On the contrary: they were even less successful, for instead of merely slowing the recovery, they included new "missteps" that undid most of the gains achieved beforehand. I'll address those missteps in upcoming posts.
Continue Reading The New Deal and Recovery:
- Part 1: The Record
- Part 2: Inventing the New Deal
- Part 3: The Fiscal Stimulus Myth
- Part 4: FDR's Fed
- Part 5: The Banking Crises
- Part 6: The National Banking Holiday
- Part 7: FDR and Gold
- Part 8: The NRA
- Part 8 (Supplement): The Brookings Report
- Part 9: The AAA
*For the record: I'm not a Republican of any sort, and I know for a fact that many of the economic historians whose work I draw upon aren't Republicans either.