Working Paper 597

New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis

Lee E. Ohanian | Consultant
Harold L. Cole

Revised May 1, 2001

There are two striking aspects of the recovery from the Great Depression in the United States: the recovery was very weak and real wages in several sectors rose significantly above trend. These data contrast sharply with neoclassical theory, which predicts a strong recovery with low real wages. We evaluate the contribution of New Deal cartelization policies designed to limit competition and increase labor bargaining power to the persistence of the Depression. We develop a model of the bargaining process between labor and firms that occurred with these policies, and embed that model within a multi-sector dynamic general equilibrium model. We find that New Deal cartelization policies are an important factor in accounting for the post-1933 Depression. We also find that the key depressing element of New Deal policies was not collusion per se, but rather the link between paying high wages and collusion.

Published In: Journal of Political Economy (Vol. 112, No. 4, 2004, pp. 779-816)

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