National Industrial Recovery Act - Criticism

Criticism

A key criticism of the Act at the time as well as more recently is that the NIRA endorsed monopolies, with the attendant economic problems associated with that type of market failure. Even the National Recovery Review Board, established by President Roosevelt in March 1934 to review the performance of the NRA, concluded that the Act hindered economic growth by promoting cartels and monopolies. One of the economic effects of monopoly and cartels is higher prices--this was seem as necessary because of the severe deflation of 1929-33 had depressed prices 20% and more. There is anecdotal evidence that these higher prices led to some stability in industry. But were these prices so high that economic recovery was inhibited? A number of scholars answer in the affirmative. But other economists disagree, pointing to far more important monetary, budgetary, and tax policies as contributors to the continuation of the Great Depression. Others point out that the cartels created by the Act were inherently unstable (as all cartels are), and that the effect on prices was minimal because the codes collapsed so quickly.

A second key criticism of the Act is that it lacked support from the business community, and thus was doomed to failure. Business support for national planning and government intervention was very strong in 1933, but had collapsed by mid-1934. Many studies conclude, however, that business support for NIRA was never uniform. Larger, older businesses embraced the legislation while smaller, newer ones (more nimble in a highly competitive market and with less capital investment to lose if they failed) did not. This is a classic problem of cartels, and thus NIRA codes failed as small business abandoned the cartels. Studies of the steel, automobile manufacturing, lumber, textile, and rubber industries and the level and source of support for the NIRA tend to support this conclusion.

A third major criticism of the Act is that it was poorly administered. The Act purposefully brought together competing interests (labor and business, big business and small business, etc.) in a coalition to support passage of the legislation, but these competing interests soon fought one another over the Act's implementation. As a consequence, NRA collapsed due to failure of leadership and confusion about its goals. By end of 1934, NRA leaders had practically abandoned the progressive interventionist policy which motivated the Act's passage, and were supporting free-market philosophies—contributing to the collapse of almost all industry codes.

There are a wide range of additional critiques as well. One is that NIRA's industry codes interfered with capital markets, inhibiting economic recovery. But more recent analyses conclude that NIRA had little effect on capital markets one way or the other. Another is that political uncertainty created by the NRA caused a drop in business confidence, inhibiting recovery. But at least one study has shown no effect whatsoever.

As noted above, Section 7(a) led to significant increases in union organizing, as intended by the Act. But the enforcement of Section 7(a) and its legal limitations led to clear failures. Although Section 7(a) was not affected by the Supreme Court's decision in Schechter Poultry, the failure of the section led directly to passage of the National Labor Relations Act in July 1935.