There’s been a lot of recent debate about Cole and Ohanian’s claim that FDR’s New Deal slowed the recovery. Here I’ll focus on his high wage policies, which Krugman argues could have actually increased output (as the AD curve may slope upward in a liquidity trap.) While there are lots of sophisticated econometric studies (often using highly misleading annual data), I don’t know of anyone else who has simply looked at the monthly industrial production data around each wage shock.
There were actually five wage shocks, four of which are easily dated. As part of the National Industrial Recovery Act, FDR ordered an across the board 20% hourly wage increase in late July 1933, and then further increases in the spring of 1934. At the same time the workweek was reduced about 20%. The NIRA was declared unconstitutional in 1935, but a minimum wage was instituted in November 1938, and raised a year later. To say the IP data is bad for the Krugman interpretation would be an understatement. These numbers are horrendous:
Table 12.2: Four month (nonannualized!) growth rates for industrial production
July 1933 wage shock +57.4% -18.8%
May 1934 wage shock +11.9% -15.0%
Nov. 1938 wage shock +15.8% +2.5%
Nov. 1939 wage shock +16.0% -6.5%
You’ll notice that I left out the fifth wage shock, but its no better for Krugman’s view, just messier. Historians argue that the huge union drives of late 1936 and 1937 were due to both the Wagner Act and FDR’s massive election victory. Whatever the cause of the union gains, they led to rapid wage increases in late 1936 and much of 1937. This time, monthly industrial production did not fall immediately, as prices were also rising fast in late 1936 and early 1937. But when prices stopped rising, industrial production began falling sharply under the burden of high wages.
Progressives like to portray opponents of the New Deal as reactionaries. Parts of the New Deal (such as dollar devaluation) were very helpful. But FDR’s high wage policy was a disaster. As James Hamilton said (in defending his criticism of programs like the NIRA and the AAA):
I openly confess to believing that government policies that were explicitly designed to limit manufacturing, agricultural, and mining output may indeed have had the effect of limiting manufacturing, agricultural, and mining output.