In today’s Wall Street Journal, Harold Cole and Lee Ohanian provide evidence that the New Deal should not be anybody’s model of how to recover from an economic downturn:

Why wasn’t the Depression followed by a vigorous recovery, like every other cycle? It should have been. The economic fundamentals that drive all expansions were very favorable during the New Deal. Productivity grew very rapidly after 1933, the price level was stable, real interest rates were low, and liquidity was plentiful. We have calculated on the basis of just productivity growth that employment and investment should have been back to normal levels by 1936. Similarly, Nobel Laureate Robert Lucas and Leonard Rapping calculated on the basis of just expansionary Federal Reserve policy that the economy should have been back to normal by 1935.

The National Industrial Recovery Act was one of the main pillars of the New Deal. Cole and Ohanian identify it as one of the main sources of drag on the economy. The Act allowed over 500 industries to collude in setting prices and wages as much as 25 percent higher than the level that would have prevailed otherwise. With higher prices came lower production and lower employment. Those lucky enough to have jobs in an organized industry benefited, but everyone else suffered.

Cole and Ohanian further observe that the “recession within a depression” of 1937-1938 followed the Supreme Court’s 1937 decision upholding the constitutionality of the National Labor Relations Act which pushed wages up even further.

So what ended the Great Depression? Cole and Ohanian point out that the economy improved in the late 1930s when the government reversed course and resumed prosecuting cartels under antitrust laws. Also helping bring wages back in line was the erosion of union bargaining power that occurred when the Supreme Court ruled that the sit-down strike was illegal and later when the National War Labor Board limited large union wage settlements to cost-of-living increases.

According to Cole and Ohanian, “New Deal labor and industrial policies prolonged the Depression by seven years.”