Murphy on US and Canadian Unemployment during the 1930s: A Critique

Updated

Robert Murphy argues in the post below that, given that Canada had a lower unemployment rate than the US did after 1933 (according to the official US BLS unemployment data), this suggests that Canada had a much better recovery without government intervention (until 1935) because the unemployment gap between the US and Canada widened after Roosevelt entered office (the unemployment rates for Canada can be seen in Appendix 1 below):

Robert P. Murphy, “Why U.S. Economists Should Love Canada,” December 8th, 2013.

Murphy argues that “one could fairly argue that Canada was improving much more rapidly than the U.S., until Canadian policymakers tried to copy FDR’s disastrous approach.” This argument appears to be based partly on Murphy’s discussion in his book The Politically Incorrect Guide to the Great Depression and the New Deal (Murphy 2009: 103–104)*.

Unfortunately, Murphy’s unemployment data for the US – the official Bureau of Labor Statistics (BLS) unemployment data – are overestimates of unemployment because they fail to exclude and remove people working in US federal relief programs, such as the Civilian Conservation Corps, the National Youth Administration, the Civil Works Administration, the Emergency Work-Relief Program of the Federal Emergency Relief Administration, and the Works Progress Administration, where most people were actually employed in full-time jobs in construction projects and public works, as shown by Darby (1976: 4).

Why does this matter? The reason is very important: Murphy’s unemployment data for Canada does not include those people who were employed by different levels of the Canadian government on public works relief programs (Zagorsky 1998: 129). These Canadian relief programs are surveyed by Bryce (1985).

The unemployment estimates for Canada were compiled by the Dominion Bureau of Statistics (DBS). As Jay L. Zagorsky (1998) has established through his research work on this very topic,

“Exactly how the Dominion Bureau of Statistics, or DBS, classified relief workers was only found by searching through the original notes that preface the annual employment index reports (DBS, 1932, 1933). These reports contain the data used by Canada in the second step of its unemployment rate calculations. The preface notes reveal that relief workers are counted as employed. For example, the 1932 report (DBS, 1933) states, ‘much work was afforded by the Dominion, Provincial, and local governments in an effort to combat the prevailing depression, and this was reflected (although not wholly) in the monthly record of employment.’

Since, during the Depression, Canada took the opposite classification approach and labeled all workers on relief projects as employed, the unemployment data of one of the two countries must be adjusted before comparing the two series. The simplest reclassification method replaces U.S. unemployment rates from 1929 to 1943 with Darby’s adjusted data (Darby, 1976, Table 3 Column 17).” (Zagorsky 1998: 129).

Therefore, unless Murphy wants to adjust the Canadian figures to include those employed on Canadian relief works programs, a proper comparison between the 1930s unemployment series data for both the US and Canada must use Darby’s figures, not the conventional US BLS unemployment data.

Once we adjust the US figures we get these better estimates:

US Unemployment Rates: Adjusted Figures from Darby (1976)
Year | Unemployment Rate
1929 | 3.2%
1930 | 8.7%
1931 | 15.3%
1932 | 22.5%
1933 | 20.6%
1934 | 16.0%
1935 | 14.2%
1936 | 9.9%
1937 | 9.1%
1938 | 12.5%
1939 | 11.3%
1940 | 9.5%
1941 | 6.0%
1942 | 3.1%
1943 | 1.8%
(Darby 1976: 8).

And now we can plot both the US and Canadian unemployment rates in a table and then the graph below.

As we can see, if we exclude the years after 1939 when Canada entered the Second World War, the US unemployment data is either the same or better and lower than Canada’s for all years after 1933 except 1934 and 1938, and even then the difference is not great.

Moreover, in 1938, US unemployment rose because of Roosevelt’s monetary and fiscal contraction. Roosevelt’s austerity induced another US recession, so the rise in US unemployment in this year does not support Murphy’s case, because it was caused by austerity.

Now this data by itself is enough to utterly damn and destroy Murphy’s original thesis, but there are other serious holes in his argument.

If we assume that from 1929 Canada “did not see an expansion in its government comparable to the US New Deal, and what analogous programs it did have, were not implemented until 1935,” then why did the Canadian economy collapse so badly from 1929–1933?

We can see the real GDP data here:

Real GDP in Canada
millions 1990 international Geary-Khamis $
Year | GDP | Growth Rate
1928 | 52 269 |
1929 | 52 199 | -0.13%
1930 | 50 454 | -3.34%
1931 | 42 667 | -15.43%
1932 | 39 630 | -7.11%
1933 | 36 801 | -7.13%
1934 | 40 712 | 10.62%
1935 | 43 994 | 8.06%
1936 | 46 368 | 5.39%
1937 | 50 733 | 9.41%
1938 | 52 060 | 2.61%
1939 | 55 167 | 5.96%
1940 | 62 744 | 13.73%
1941 | 71 508 | 13.96%
1942 | 84 182 | 17.72%
1943 | 87 988 | 4.52%
1944 | 91 305 | 3.76%
1945 | 88 477 | -3.09%
1946 | 87 569 | -1.02%.

Canada suffered a severe depression with a real GDP loss of 29.59% from 1929 to 1933.

Despite Murphy’s argument, the alleged Canadian non-intervention did not lead to rapid self-equilibrating markets and recovery in Canada. When recovery came, it did not quickly restore real GDP to its 1928 level. That did not happen until 1939.

In fact, of all Western nations ranked by the scale of GDP collapse from 1929 onwards during the contractionary phase of the Great Depression, Canada actually comes out as the worst by a small margin:

Nation | Real GDP loss | Years of Contraction
(1) Canada | -29.59% | 1929–1933
(2) US | -28.52% | 1929–1933
(3) Austria | -22.45% | 1929–1933
(4) Poland | -20.70% | 1930–1933
(5) Czechoslovakia | -18.19% | 1930–1935
(6) Germany | -16.11% | 1929–1932
(7) France | -14.65% | 1930–1932
(8) New Zealand | -14.63% | 1930–1932
(9) Yugoslavia | -13.69% | 1930–1932
(10) Bulgaria | -12.72% | 1934–1935

Canada’s real GDP loss was marginally worse than that of the US. This does not fit Murphy’s argument.

Murphy also claims that Canada did not have programs “comparable to the US New Deal” until 1935. But that is highly debatable.

In 1930, the laissez-faire Canadian prime minister was thrown out of office precisely because of his unwillingness to do anything about the depression. He was replaced with a Conservative government under Richard B. Bennett who switched to federal funding of the relief programs of Canadian municipalities. About $200 million was spent over the next 5 years on public works and relief programs (Finkel 2006: 110), but by 1932 Bennett decided he could no longer afford the cost of public works projects, and they were curtailed and the emphasis was shifted to direct relief (Finkel 2006: 110), with Canadian provincial and municipal governments following suit.

I suppose libertarians might seize upon this and argue that it was a major cause of the depression, but that is equally unconvincing.

The relief programs – which were characterised by remarkably harsh and punitive measures (Finkel 2006: 110–111) – were not a Keynesian stimulus designed to close the output gap in Canada. They were highly inadequate even for the relief of poverty and distress, and they paid mere subsistence wages or relief (Finkel 2006: 110–111). Only if one wants to argue that the market clearing wage in Canada in the 1930s was a starvation wage could these programs possibly have prevented some people from taking private sector employment.

But, fundamentally, Amaral and MacGee (2002: 50, citing Amaral and MacGee 2001) show that the United States used public works programs much more heavily than Canada did. About 7% of US employed workers in the late 1930s were in relief projects, but in Canada such relief projects never employed more than 1.5% of the employed (Amaral and MacGee 2002: 50; Amaral and MacGee 2001) – a small percentage indeed which shows how minimal the Canadian projects were, but a drop in the ocean compared to the US efforts.

What, then, was the cause of Canada’s Great Depression? Canada was a small open economy. Exports accounted for about 25% of real output (Amaral and MacGee 2002: 66). When trade with the US and other nations collapsed, Canada had a severe fall in export industry output and domestic investment and consumption as well. The shock to business expectations further reduced investment and demand for credit, and price deflation and debt deflation would have done their familiar disastrous work.

The government response to this depression was grossly inadequate. Some implicit promises by the government seem to have prevented a banking sector collapse in Canada (perhaps aided by a stronger banking system with branch banking too), but government fiscal and monetary policy was insufficient to induce a return to high employment. It was, in actual fact, not even until 1938 that government fiscal policy under William Lyon Mackenzie King shifted to an overtly Keynesian stimulus (Neatby 2003: 85–86), and even then the level of that stimulus was not necessarily very high.


Note
* Note that Murphy’s assertion in his book The Politically Incorrect Guide to the Great Depression and the New Deal that “Canadians did not institute a ‘Northern New Deal’ during the 1930s” (Murphy 2009: 104) is wrong. The Canadian conservative government under R. B. Bennett established a central bank in 1935 and adopted price fixing policies, social insurance and other interventions after 1935 modelled on Roosevelt’s New Deal (Gough 2011: 283–284; Finkel 2006: 110–114), and public works projects had been funded since 1930 (although admittedly they appear to have been reduced after 1932). Even though the conservatives under Bennett lost office in 1935, the new Liberal Prime Minister William Lyon Mackenzie King, after a constitutional amendment, passed a similar host of “New Deal”-style legislation in the late 1930s (Gough 2011: 284).

Appendix 1

Canadian Unemployment Rates
Year | Unemployment Rate
1929 |
1930 | 9.1%
1931 | 11.6%
1932 | 17.6%
1933 | 19.3%
1934 | 14.5%
1935 | 14.2%
1936 | 12.8%
1937 | 9.1%
1938 | 11.4%
1939 | 11.4%
1940 | 9.2%
1941 | 4.4%

Further Reading
“The Great Depression in Western Offshoots: Real GDP Data for 4 Nations,” March 1, 2013.

“The Great Depression in 22 Western Nations: Real GDP Data,” March 1, 2013.

“US Unemployment in the 1930s,” July 3, 2013.

“Why Did Canada Have no Mass Banking Failures in the Great Depression?,” September 12, 2012.

BIBLIOGRAPHY
Amaral, P. and J. MacGee. 2001. “Canadian Government Policy during the Great Depression,” University of Minnesota, mimeo.

Amaral, P. and J. MacGee. 2002. “The Great Depression in Canada and the United States: A Neoclassical Perspective,” Review of Economic Dynamics 5.1: 45–72.

Bryce, R. B. 1985. “The Canadian Economy in the 1930s: Unemployment Relief under Bennett and McKenzie King,” in D. Cameron (ed.), Explorations in Canadian Economic History. University of Ottawa Press, Ottawa. 7–26.

Darby, M. R. 1976. “Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934–1941,” Journal of Political Economy 84.1: 1–16.

Finkel, Alvin. 2006. Social Policy and Practice in Canada: A History. Wilfrid Laurier University Press, Waterloo, Ont.

Gough, Barry M. 2011. Historical Dictionary of Canada (2nd edn.). Scarecrow Press, Lanham, Md.

Murphy, Robert. 2009. The Politically Incorrect Guide to the Great Depression and the New Deal. Regnery Publishing, Inc. Washington, DC.

Neatby, H. Blair. 2003. The Politics of Chaos: Canada in the Thirties. Golden Dog Press, Kemptville, Ontario, Canada.

Zagorsky, Jay L. 1998. “Was Depression Era Unemployment Really Less in Canada than the U.S.?,” Economics Letters 61.1: 125–131.