Another New Deal

Froggiger writes:

Since Obama is intent on acting like FDR, Jr., we should revisit the reasons the Great Depression was so harsh and why it lasted so long. I'll spoil the ending. It was FDR's fault.

In 1929, the stock market was overinflated and crashed. This was not new or unusual news. Throughout history, credit bubbles popped, resources were reallocated to match the reality of the market, the economy recovered, and time marched on. So what was different about the New Deal? Government. Or more precisely, government intervention. Hoover got the ball rolling with jobs programs, spending programs, attempts to bail out banks, and attempts to inflate the money supply. The Depression deepened and FDR raked Hoover over the coals for his big government policies that had not worked. The people bought it and FDR won the Presidency. Then, he began a central planning program that would make any socialist proud.

It was an experiment in big government that utterly failed. That is the reality, but historical revisionism has distorted reality beyond recognition. FDR tried foolish program after foolish program. Higher wages when they needed to fall. Trying to save banks that needed to collapse. Resources were destroyed when they were most needed. Instead of advocating savings, spending was encouraged. The dollar needed to be reinforced but they instead smashed it. Competition was critical and absolutely necessary but the FDR plan cartelized business.

The results of the first major intervention by government to an economic crisis were stunning. Real GDP per adult was 27% below trend from 1933-1939. Per capita GDP was lower in 1939 than in 1929. Unemployment in 1939 was still over 17%. This despite a 100% increase in monetary expansion and taxes that were 3X higher. It was more expensive to hire workers than ever before thanks to unions and wage guarantees.

Every time recovery actually began, FDR's policies would kick it back to the curb. The free market was replaced with regimentation. Business couldn't compete, livestock and crops were destroyed by government edict, dissidents were rounded up. When all was said and done, the government "fix" was a disaster. What would have been a short downturn if the market had been allowed to correct itself turned into over a decade of calamity. Freedom was the biggest loser.

Then came the war. It served as a cover-up for the calamity. The unemployed finally found jobs that cost many their life. The economy shifted to wartime nationalization and price controls. A new Deal by other means.

It was nothing more than a power grab. The mess today clearly illustrates how this is allowed to happen. Start with a group of elites who wouldn't recognize reality if it slapped their jaw. They play the system for themselves and their friends in the short term and forget, or ignore, long-term consequences. People who see through the smoke and try to bring out the truth are pushed aside. The idea that government could prop up the economy with inflation and spending had become very pervasive. The elites who controlled government, the media, and the higher education system had already written off laissez-faire long before Keynes came up with his glossy, flawed economic theories.

History does repeat. What happened in the 1930's is again before us. Bush followed the Hoover model even though the model didn't work then and it isn't working now. Obama wants to recreate FDR's New Deal despite the fact that it also didn't work then and it won't work now.

“Those who don't know history are destined to repeat it.” --Edmund Burke

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