The Effect of Cost Heterogeneity in the Success and Failure of the New Deal's Agricultural and Industrial Programs

Abstract

The Agricultural Adjustment Act and the National Industrial Recovery Act (NIRA) were cornerstones of the early New Deal, designed to cartelize agriculture and industry. When the Supreme Court annulled both acts, agricultural regulation was reinstalled within 6 weeks, following organized lobbying by farming interests, but broad industrial regulation was not reinstated. There was no corresponding lobby effort by industry to return the NIRA. To explain these differences we analyze the effect of farm/firm cost heterogeneities within commodity programs and industries on the ability of the parties to agree to and adhere to collusive regulations. We find that in the case of agriculture, because agricultural pricing and production policies were designed and implemented by low-cost producers, they were relatively self-enforcing and long-lasting. In contrast, high-cost firms in industry played a major role in setting prices and output within many of the NRA industrial codes. Consequently, these collusive policies were not self-enforcing and failed to create an effective lobby for their reinstatement.