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The Rothbard/Higgs/Vedder and Gallaway Thesis Part II


Tags Booms and BustsCalculation and Knowledge


Thomas J. DiLorenzo in this 2004 Mises Daily, “The New Deal Debunked (again)”, provides detail on the work by Cole and Ohanian behind the Ohanian video highlighted on Mark Thornton’s Circle Bastiat post “The Rothbard/Higgs/Vedder and Gallaway Thesis. Highlights from DiLorenzo:

Macroeconomic model builders have finally realized what Henry Hazlitt and John T. Flynn (among others) knew in the 1930s: FDR's New Deal made the Great Depression longer and deeper. It is a myth that Franklin D. Roosevelt "got us out of the Depression" and "saved capitalism from itself," as generations of Americans have been taught by the state's educational establishment. This realization on the part of macroeconomists comes in the form of an article in the August 2004 Journal of Political Economy entitled "New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis," by UCLA economists Harold L. Cole and Lee E. Ohanian. This is a big deal, since the JPE is arguably the top academic economics journal in the world.


On top of that, virtually every single one of FDR's "New Deal" policies made things even worse and prolonged the Depression. Austrian economists have known this for decades, but at least the neoclassical model builders have finally caught on—we can hope. In this regard the most disappointing thing about the Cole-Ohanian article is that they do not even cite the pioneering work of Richard Vedder and Lowell Gallaway—Out of Work: Unemployment and Government in Twentieth Century America—first published in 1993. Indeed, it is somewhat scandalous that they do not cite this well-known work while making essentially the same arguments that Vedder and Gallaway do.


This last conclusion—that the abandonment of FDR's policies "coincided" with the recovery of the 1940s is very well documented by another author who is also ignored by Cole and Ohanian, Robert Higgs. In "Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War" (Independent Review, Spring 1997), Higgs showed that it was the relative neutering of New Deal policies, along with a reduction (in absolute dollars) of the federal budget from $98.4 billion in 1945 to $33 billion in 1948, that brought forth the economic recovery. Private-sector production increased by almost one-third in 1946 alone, as private capital investment increased for the first time in eighteen years.

  Too bad the true lesson has not been learned. DiLorenzo’s lesson:

In short, it was capitalism that finally ended the Great Depression, not FDR's hair-brained cartel, wage-increasing, unionizing, and welfare state expanding policies.

Free market capitalism is what is needed to generate real recovery from the current Great Recession.  Slow recovery or a double dip recession will be the future with the continuation of the Fed-supported Bush-Obama hare-brained Keynesian stimulus spending, accompanied by war and welfare state expanding policies which are again generating significant regime uncertainty,

Mark Thornton is a Senior Fellow at the Mises Institute and the book review editor of the Quarterly Journal of Austrian Economics. He has authored seven books and is a frequent guest on national radio shows.

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