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The New New Deal Won’t Fly

John on November 30, 2008 at 10:43 am

George Will has an excellent column this morning:

Intelligent, informed people differ about why the Depression lasted so long. But people whose recipe for recovery today is another New Deal should remember that America’s biggest industrial collapse occurred in 1937, eight years after the 1929 stock market crash and nearly five years into the New Deal. In 1939, after a decade of frantic federal spending — President Herbert Hoover increased it more than 50 percent between 1929 and the inauguration of Franklin Roosevelt — unemployment was 17.2 percent.

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In a 2004 paper, Harold L. Cole of the University of California at Los Angeles and Lee E. Ohanian of UCLA and the Federal Reserve Bank of Minneapolis argued that the Depression would have ended in 1936, rather than in 1943, were it not for policies that magnified the power of labor and encouraged the cartelization of industries. These policies expressed the New Deal premise that the Depression was caused by excessive competition that first reduced prices and wages and then reduced employment and consumer demand. In a forthcoming paper, Ohanian argues that “much of the depth of the Depression” is explained by Hoover’s policy — a precursor of the New Deal mentality — of pressuring businesses to keep nominal wages fixed.

Furthermore, Hoover’s 1932 increase in the top income tax rate, from 25 percent to 63 percent, was unhelpful. And FDR’s hyperkinetic New Deal created uncertainties that paralyzed private-sector decision making. Which sounds familiar.

Bear Stearns? Broker a merger. Lehman Brothers? Death sentence. The $700 billion is for cleaning up toxic assets? Maybe not. Writes Russell Roberts of George Mason University:

“By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next. The frenetic efforts of FDR had the same impact: Net investment was negative through much of the 1930s.”

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Obama’s “rescue plan for the middle class” includes a tax credit for businesses “for each new employee they hire” in America over the next two years. The assumption is that businesses will create jobs that would not have been created without the subsidy. If so, the subsidy will suffuse the economy with inefficiencies — labor costs not justified by value added.

Here we go again? A new New Deal would vindicate pessimists who say that history is not one damn thing after another, it is the same damn thing over and over.

I read once, and I haven’t verified this is true so take it with a grain of salt, that fighter pilots were taught all sorts of maneuvers for getting out of a spin. A spin is a death sentence so getting out of one is important. Sometimes the maneuvers worked, sometimes they didn’t. It was a tricky business. Eventually, pilots discovered that the single most effective way to get out of a spin was to take one’s hands off the stick and let the plane right itself. Turns out that all that frantic “flying” was as likely to make the situation worse as it was better.

The problem with teaching this new method wasn’t in communicating the theory. That was easy. It was that, in a death spiral, very few pilots could resist the urge to grab the stick and manage the crisis. Only the coolest of heads could sit back and wait.

Assuming there’s some truth to this tale, I have the impression this is the very situation we’re in now? As Jonah Goldberg might say, this is a good time to not just do something but stand there.

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Category: Politics |

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