The New New Deal

"History will be kind to me for I intend to write it." Winston Churchill

History was kind to Franklin Roosevelt and his New Deal because his allies wrote it. But recently conservative economists like Amity Shlaes have had a second look. And it is not pretty.

The synopsis of the New Deal and Depression era economics reconsidered goes like this:

  1. Hoover and Roosevelt took very similar approaches the economic downturn that followed the 1929 market crash. Both presidents responded poorly.
  2. In and of itself, the market crash had very little to do with the poor economic performance of the 1930's. The Depression resulted from government efforts to respond to what should have been a two or three quarter recession.
  3. By the time Roosevelt took office, a bit more than three years after the market crash, the country was certainly in a full blown Depression. His policies made it a ten year event.
  4. Smoot-Hawley, increasing taxes in a downturn, piling on huge amounts of government debt, not understanding how to handle deflation... all these were key factors in creating the depression. But by far the biggest problem was "Rooseveltian experimentation".
Many economists today believe that Roosevelt's policy of "testing" new solutions contributed mightily to the Depression. FDR sold voters a concept that action, any action, was better than doing nothing. In fact, simply lowering interest rates, bringing down trade tariffs, and lowering taxes would have certainly resolved the crisis within a year or two.

But that was politically very difficult. Roosevelt believed he had been elected to "Do Something!" Action was imperative. Unfortunately, fixing monetary policy and working around the economic margins wasn't considered real "action". Further, many of FDR's "actions" contradicted each other, didn't last long enough, or were simply irrelevant. They caused investors, the only sector of the economy that could truly "solve" the problem, to stay on the sidelines.

World War II was enough to finally pull the country out of the Depression. The problem is that we are still paying the costs of "political" solutions to the original problem. The policy whizzes and bureaucrats who came to Washington in the 1930's would, by today's standards, be considered socialists. Their legacy was a big, inefficient federal government whose main constituency is itself.

Consider Roosevelt's Tennessee Valley Authority. The TVA was set up to distribute electricity to the countryside. In the late 1920's, much of rural America remained without power, a point of which Democrats made great political hay. Those greedy power executives, they said, would never invest enough to get power to the rural poor. Only the beneficent government could address the problem.

So they set up the TVA. Meanwhile, by the end of Roosevelt's first term, virtually the whole country was wired. But never mind that. The TVA is still going strong! (I'm relieved that the Republicans were in charge during he era of the "Digital Divide".)

This is exactly why four or eight years of unchecked Democratic power in Washington is so dangerous. In the short term, an Obama/Pelosi/Reid government will certainly slow growth, make the poor more so, and the rich... well, the rich are always OK (with me). Especially with the cover of the press, Obomanomics will seem fine during his own term(s).

(Remember Carter? It didn't seem so bad when we were in the midst of the "malaise". Looking back now, it seems like an utter disaster. Show a 70's era movie about New York to anyone under 40. Garbage blowing in the streets, notes on cars begging thieves not to smash their way in to steal the radio. It's pathetic.)

Over the longer term, though, the costs will be huge. Larger government and increased federal regulation will tamp down growth and produce a substantially lower standard of living. We know this to be true. Look at Europe.

Since upping government consumption to 40% of GDP, continental European per capita income has drifted down to where it is now almost 40% lower than in the US. Income distribution is more even, but it all comes at the expense of upper income earners. In other words, their poor are no less poor than ours, but their rich are much less so. As a result, the things that rich people fund, like start-up companies and university research, exist to a much lesser extent. (Quick, name a European based global software company. There is one, by the way.)

So what looks like a new New Deal coming down the road is worth defeating for no other reason than it is basically irreversible. Once the government gets its claws into something, it never lets go. As Reagan said, "The nearest thing to eternal life we will ever see on this earth is a government program."

Now that Bush has been rolled by his Democrat at Treasury, bringing in Obama for the second act will likely have similar results as the Hoover-Roosevelt show. No skin off my back. I'm single. But if you have kids, you could be assigning them to a much lower standard of living than they could have had.

That's what our grandparents and great-grandparents did to us.

1 comments:

Terry #3

6:31 PM

a big AMEN, Jake. I, too, have no kids and am getting older and less employed. I have tired of reminding younger and more fertile friends and relatives of the dismal future in store for them as our country voluntarily gives up it's exceptionalism. But we'll all be more equal isn't that nice?....group hug please.