One economist's review of Great Depression cause - a lesson for the future?

With the recession ongoing, there has been an increasing interest in the causes and policies that surround the Great Depression, the longest and deepest economic downturn the US has ever suffered. Many economists are going back to the New Deal and we've seen increasing numbers of economists claiming that FDR managed to extend the downturn with his governmental meddling in the markets.

In general President Hoover merely gets scorn heaped on him for being a free market loving capitalist who fiddled as the economy collapsed. Most historians have accepted this, but recently a number of economists, including UCLA professor Lee Ohanian have begun questioning the theory that Hoover was a free-marketer.

Professor Ohanian examines the economy during the period from 1929 to 1932, in an article titled "What - or - Who started the Great Depression,  This period presided over by Hoover before the election of FDR has always been accepted as the start of the depression and Ohanian examines what might have pushed the economy past a simple recession and into depression.  He noticed that Hoover established several policies to pressure manufacturing companies to keep wages high and avoid the kind of wage cuts we are seeing in the current recession. Ohanian suggests that union pressure helped establish this policy.

The source of the policy however, is not the issue. The results were. Ohanian notes that manufacturing had the worst unemployment rates in the US. By his calculations farming, stayed more successful until the Dust Bowl years created mass homelessness in the Midwest.

There are lessons to be learned in this long (sixty-eight page) report on the Great Depression and its genesis. Ohanian clearly charges the misguided attempt to keep wages high in the middle of a deflationary episode as a key element in driving unemployment so high.

Fortunately, the current recession has not had that level of meddling. The maneuvers made by the government to "rescue" GM and Chrysler definitely have elements of Hoover's wage freeze, but not to the economy destroying extent of Hoover's policies.

We also see this effect in the minimum wage issues. Many economists have been pointing out that raising the minimum wage hurts entry-level workers by creating a disincentive to hiring. And recent reports show that teenage workers experienced one of the worst summers for employment in twenty years.

Obviously no analysis is perfect, but I recommend reviewing Ohanian's report. He clearly establishes that government interference in the markets generated a disincentive to hiring and contributed to the deflationary spiral the economy entered in 1929.