No economist is suggesting it will take East Asia 10 years to recover from the Crash of ’97. Our own Depression. however, lasted for a full decade, and economists have never agreed why.

A new view is offered by economists Harold Cole and Lee Ohanian in the Quarterly Review of the Federal Reserve Bank of Minneapolis (available at

They ask: Given how deep the U.S. economy fell by 1933, how fast should it have bounced back? Their model, called neoclassical growth theory, says the Depression should have been over by 1936. Actually, it lasted until about 1940, when America began arming for war.

What held things back? It wasn’t the decline in foreign trade, because trade didn’t amount to that much. It wasn’t bank failures, which had stopped by then. Nor was it credit; bank loan rates had fallen below 3 percent in 1936 and stayed low for the rest of the decade.

One culprit: Marginal tax rates went up in the 1930s, from 3.5 percent to 8.3 percent on labor income and from 29.5 percent to 42.9 percent on capital. But these changes explain only about one-fifth of the weak recovery, Cole and Ohanian say.

Digging through statistics, they find a more likely candidate: a rise in factory wages. To an economist, wages should have fallen. Profits were down, investment was way down and a reserve army of the unemployed stood to take any job. In South Korea, average manufacturing wages have fallen 20 percent in the past year and a half. In the United States from 1929 to l939, real factory wages went up 16 percent. Explain that, Cole and Ohanian write, and you might explain why the Depression lasted 10 years.

Professor Edward Prescott of the University of Chicago reviews their paper and comments, “There must have been a fundamental change in labor market institutions and industrial policies.”

Readers are surely fidgeting. Can these economists be ignorant of what that was? No, but they are economists, bound by statistics.

History, which tells more colorful tales, records that America fought the Depression with policies to keep prices and wages up. President Hoover did it by jawboning; President Roosevelt did it by regulation and law.

From 1934 to 1935, under the banner of the Blue Eagle, the federal government allowed industries to set minimum prices. In New Jersey, a tailor was arrested for pressing a suit for 35 cents, a nickel under the tailors’ code. On the farm, Agriculture Secretary Henry Wallace was ordering the staughter of little pigs, to raise the price of pork. In the factories, unions were being given the power to organize by majority vote, strengthening their power to raise wages.

The Blue Eagle was declared unconstitutional. However, its labor provisions were re-enacted in the National Labor Relations Act. Millions of Americans joined unions. They staged the famous sit-down strikes and organized General Motors, U.S. Steel and thousands of other employers.

These were real gains for union workers, and are celebrated still. But they must have been jarring for owners, and not only in terms of new projects that didn’t pencil out. Businessmen complained of a “lack of confidence.” What they meant, says [The Independent Institute] historian Robert Higgs, author of Crisis and Leviathan, is that the rules of business were shifting against them, and owners and managers feared the new regime.

“They were scared,” he says.

This story, that the New Deal prolonged the Depression, is the opposite of the story I learned in school, which was that it saved the nation. A lot of Americans believe that. But the economists writing for the Minneapolis Fed don’t, nor do most of those working for the international development agencies or, I’d bet, those advising our Democratic president.

That’s clear from their advice to Asia. Except for financial disclosure, their recommendations to Asia are nothing like the New Deal. They told Korea to weaken the protection for workers so that companies could lay them off. They told China, Korea and Indonesia to adopt bankruptry laws that allow companies to fail. Everywhere they have recommended competitive markets and the separation of commerce from politics.

They did grant Asia’s central banks large loans. But for Asia’s commercial banks and industry, our advice has been that if it can’t survive on its own, let it die. If it’s inflated, mark it down. Let prices and wages sink to their natural levels, where they can be sustained.

It’s not a particularly compassionate policy, and may have little value in winning elections. But then again, it might actually work