We Don’t Need Another New Deal

Ben Eisen, Commentary, Role of Government, Taxation, Uncategorized

The panic and hyperbole of recent months are reminiscent of the days in and around the Great Depression of 1929-1939. In fact, most senior politicians and policy-makers, including U. S. Federal Reserve Board Chairman Ben Bernanke, have made frequent comparisons between the current economic downturn and the Great Depression.

However, the data show a significant difference between the economic situation today and that of the Great Depression. Additionally, one must keep in mind that, given the social support measures and automatic countercyclical “stabilizers” built in to government spending today (e. g., welfare, unemployment benefits, public pensions, the Federal Deposit Insurance Corporation and numerous other social assistance measures), it is virtually impossible that an economy could shrink and human suffering and dislocation could be experienced to the same degree as during the Great Depression.

While the overall impact of the New Deal programs on the health of the economy during the Depression may be a debatable one, the damage of certain central New Deal programs is not.

Take as an example the National Recovery Administration (NRA) programs. The NRA created cartels in 500 industries to limit competition and it compelled businesses to reduce production and to increase prices and wages during a severe economic downturn when people could not afford to buy the most basic of necessities. Bizarrely, people who lowered prices were arrested and middlemen were deemed criminals. The objectives and methods bore all the hallmarks of a centrally planned industrial economy: Note the comments by Donald Richberg, head of the NRA in 1934:

“A nationally planned economy is the only salvation of our present situation and the only hope for the future …. There is no choice presented to American business between intelligently planned … industrial operations and a return to the gold-plated anarchy that masqueraded as ‘rugged individualism.’ “

The effects of the National Recovery Administration were devastating. According to some economists, the NRA increased the cost of doing business by 40%. The economic impact of the NRA was immediate, powerful — and negative. In the five months leading up to the act’s passage, signs of recovery were evident: factory employment and payrolls had increased by 23% and 35% respectively as the powerful U. S. economy was doing what it does best: efficiently adjusting to new economic circumstances and growing along this adjusted path to economic prosperity. Then came the NRA, which shortened hours of work, arbitrarily raised wages and imposed other new costs on businesses. In the six months after the law took effect, industrial production dropped 25%.

Another New Deal agency, the Agricultural Adjustment Administration (AAA), also implemented a collection of harmful programs. The AAA, in the name of raising prices to battle what Roosevelt perceived to be the country’s biggest economic ill — deflation — forced farmers to cut production by essentially destroying excess crops (mostly cotton) and livestock. In 1933, six million piglets and 220,000 pregnant cows were slaughtered, and many cotton farmers plowed under one-quarter of their acreage.

The mandated destruction of food and the increasing of its prices at a time when many Americans were already hungry due to shortages and lack of affordability was curious economic policy, to say the least. The AAA, under the direction of Henry Wallace, the Secretary of Agriculture, created a system that gave an advantage to landowners with large farms.

The AAA’s policies effectively paid the landowners for not farming certain lands. The lands they chose not to farm were those of the tenant farmers whom they evicted, as the government payments to not farm were in excess of what they received in rent from the tenant farmers. As an interesting aside, Henry Wallace was later labelled a Soviet apologist when running for president as the nominee for the Progressive Party.

Nearing the end of his second term, even FDR’s own Treasury Secretary Henry Morgenthau Jr. was in despair over the effects of the New Deal reforms. He wrote in his diary: “We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot.”

Modern-day equivalents of these types of economy-damaging policies can be found in U. S. President Obama’s recent initiatives. They include taxes on industrial businesses and redistribution to “green” enterprises through a national cap-and-trade regime; new taxes on the “top 5% of income earners” to give additional rebates to lower income earners; an increase in the tax credit for first-time home buyers, helping to feed the beast that got the United States into its current mess in the first place — too many people buying homes who couldn’t afford them. And then there’s the unclear plan for the financial sector which has raised the specter of wide-scale bank nationalizations and has hindered much needed bank restructurings as banks are being “bailed out” by the government rather than acquired and restructured by stable banks and equity funds.

Franklin Roosevelt may have been a heroic wartime president, but the fact is the New Deal did not rescue the United States from the Great Depression. Massive government spending and attempts at demand-side management are where the similarities between current economic policy and the New Deal must stop.