With the economy looking more and more like it may enter a recession and the stock markets around the world crashing. Why is the government not doing more?



Taking a look back in time might give us some insight to what government officials are thinking.

In looking back at the Great Depression and FDR's policies, many economist have believed that the policy's enacted by FDR caused the Great Depression to go on for longer than it should.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian, from UCLA, conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

FDR believed that the newly emerging global economy caused too much competition and was responsible for the Depression by reducing prices and wages.

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.

By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under National Industrial Recovery Act (NIRA)

Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

Collusion had become so widespread that one Department of Interior official complained of receiving identical bids from a protected industry (steel) on 257 different occasions between mid-1935 and mid-1936. The bids were not only identical but also 50 percent higher than foreign steel prices. Without competition, wholesale prices remained inflated, averaging 14 percent higher than they would have been without the troublesome practices, the UCLA economists calculate.

The labor provisions under NIRA were then strengthened in the National Relations Act, signed into law in 1935. Union membership doubled, and so did labor's bargaining power, rising from 14 million strike days in 1936 to about 28 million strike days in 1937. By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been.

This insane act only came after the Department of Justice dramatically stepped up enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.

When we compare the actions of FDR during the Great Depression and the consequences of over reacting, we can see that this is like removing a band aid. Take the pain at once, or try to slowly remove the band aid -which ends up hurting more in the end.