Wednesday, October 29, 2008

Obama's New Deal No Better Than Old One


Michael Barone

With victory in sight, Barack Obama's supporters are predicting
that he will give us a new New Deal. To see what that might mean, let's
look back on the original New Deal.

The purpose of New Deal legislation was not, as commonly thought,
to restore economic growth but rather to freeze the economy in place at

a time when it seemed locked in a downward spiral. Its central program,
the National Recovery Administration (NRA), created 700 industry
councils for firms and unions to set minimum prices and wages. The
Agricultural Adjustment Act (AAA), the ancestor of our farm bills,
limited production to hold up prices. Unionization, encouraged by NRA
and the 1935 Wagner Act, was meant to keep workers in jobs that the
unemployed would have taken at lower pay.

These policies did break the downward spiral. But, as Amity Shlaes
points out in "The Forgotten Man," they failed to restore growth.

Double-digit unemployment continued throughout the 1930s; despite

population growth, the economy failed to rebound to 1920s production
levels. High taxes on high earners (a Herbert Hoover as well as
Franklin Roosevelt policy) financed welfare payments ("spread the
wealth around") but reduced investment and growth.

The political verdict was negative. New Dealers were whalloped in

the 1938 off-year elections. Polls show that Democrats would have lost
the White House in 1940 if that election had been decided on domestic
issues. But war loomed. France fell in June 1940, just before America's
two national party conventions, and Adolf Hitler and his then-ally
Joseph Stalin controlled most of the landmass of Eurasia. Republicans
did not have an experienced leader in this world crisis -- Democrats
did: Franklin Roosevelt, who cynically engineered his nomination for a
third term and then swept to victory on foreign policy.

Roosevelt had thought that economic expansion was a thing of the

past. But World War II stimulated huge growth in the American economy.
New Deal welfare programs like the Civilian Conservation Corps and the
Works Progress Administration (WPA) arts program were terminated.
Wartime domestic policies were growth stimulators. Veterans
Administration home mortgage loans, building on the FHA mortgage
program, encouraged home-buying and after the war converted a nation of
renters to a nation of homeowners. The G.I. Bill of Rights subsidized
higher education for millions of veterans.

These programs stimulated growth partly because they required real

effort -- down payments, military service -- from beneficiaries before
they received aid.

The postwar Republican Congress elected in 1946 dismantled some New

Deal anti-growth policies. Labor unions' powers to strike were sharply
restricted. Tax rates were lowered, and wage and price controls were
dismantled. Many hold-the-economy-in-place policies were retained until
the deregulation of the 1970s and 1980s. But the New Deal was
transformed sufficiently to permit buoyant economic growth for two
decades after the war.

Obama seems determined to follow policies better suited to freezing

the economy in place than to promoting economic growth. Higher taxes on
high earners, for one. He told Charlie Gibson he would raise capital
gains taxes even if that reduced revenue: less wealth to spread around,
but at least the rich wouldn't have it -- reminiscent of the Puritan
sumptuary laws that prohibited the wearing of silk. Moves toward
protectionism like Hoover's (Roosevelt had the good sense to promote
free trade). National health insurance that threatens to lead to
rationing and to stifle innovation. Promoting unionization by
abolishing secret ballot union elections.

The impulse to social engineering is unmistakable. Government

officials will allocate resources, redistribute income, and ration good
and services. Use government stakes in banks, insurance companies and
Detroit auto manufacturers to maintain the position of those already in
place, at the cost of preventing the emergence of new enterprises that
might have been spawned by the capital being allocated.

Social engineering of course is far easier when you are dealing

with an economy that is frozen in place. It's harder when you have to
deal with the creative destruction, the emergence of new firms and
businesses, and the decline of old ones, which as Joseph Schumpeter
taught is the inevitable consequence of economic growth.

Roosevelt in the 1930s had some extremely competent social

engineers, like Harry Hopkins, Harold Ickes and Fiorello LaGuardia, who
could enroll 750,000 people on welfare in three weeks and build an
airport in less than a year. But even they could not spur the economic
growth produced by utterly unknown and unconnected people, as Warren
Buffett and Bill Gates were in 1970.

When financial crisis looms, there is an impulse to freeze

everything in place and accept what is as the best there can ever be:
Barack Obama's new New Deal. The history of the old New Deal suggests
this is not a sustainable approach in the long run. (source)


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