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2.7%  Q1 GDP    4.57%  avg. 30-year mortgage     9.5%  Unemployment

Which Crash Is This One Like?

The Post's Paul Farhi writes in today's Style section that even though the October Crash of 1929 (79 years ago today) gets all the headlines as a sort of instant-start to the Great Depression, the real hard times didn't start kicking in until months, if not years, later.

The Great Depression actually reached its nadir in 1933, when U.S. unemployment peaked at 25 percent, which is just a staggering number. (Right now, it stands at 6.1 percent, a five-year high.)

Elsewhere, the Chronicle of Higher Education argues in this piece that comparing today's economic crisis to the Great Depression is wrong. Today's troubles more closely mirror the the Crash of 1873, which holds exactly zero status in the collective cultural memory.

Then there's this academic paper, which we stumbled upon a few weeks ago, which convincingly makes a provocative and counter-intuitive argument: That FDR, popularly hailed as the second savior of the union (after Lincoln), was actually to blame for extending the Great Depression by seven years with his wrong-headed policies.

The chief culprit: FDR's National Industrial Recovery Act, or NIRA, which operated from this premise: Wages and prices are too low. So we will artificially raise wages, to put more money in consumers' pockets, and allow companies to collude(!) to set prices artificially high to put money in their pockets.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said UCLA economics professor Harold L. Cole, one of the paper's authors. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

-- Frank Ahrens

By Frank Ahrens  |  October 29, 2008; 11:09 AM ET
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I'm not sure what is counter-intuitive about the Cole-Ohanian research. Government action following the crash of 1929 and the subsequent banking crisis has always been strongly suspect in explaining the duration and amplitude of the depression. Trade protectionism served to increase import prices during this period as well, and the labor programs (WPA, etc.) served to sequester labor from the private sector, impeding recovery. Search "Great Depression" in the SSRN database and you'll find numerous papers. Economist Robert Higgs ( has spent a career documenting the malign role of government in extending and deepening the depression. To call this insight "counterintuitive" may mean that it is simply unimaginable that a hero such as FDR might bear responsibility, or that it was heretofore uncontemplated by most citizen's that government interventions might have caused markets to underperform, rather than some inherent flaw in capitalism.

Posted by: rboltuck | October 29, 2008 12:16 PM | Report abuse

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