29th December 2010
New Deal: an example of massive government failure
I came across a discussion about Amity Shlaes's 2007 book, The Forgotten Man: A New History of the Great Depression in an article in The Australian today. I am unlikely to be able to find the time to read this book (which is only incidental to my main interests), but this short summary provided in today's Australian confirms the New Deal as one of the most dramatic examples of government failure in US history.
Let me quote:
Risking derision for taking on America's economic sacred cow, Shlaes has argued the New Deal was a tragic mistake in social engineering.
She argues that presidents Herbert Hoover and Franklin D. Roosevelt should have allowed the market to recover rather than spend billions on government schemes. FDR's New Deal was the prime offender. Throughout the 1930s, the US stayed deep in economic depression. By 1937 it had developed a depression within a depression.
For Roosevelt, there seemed few limits. Such was the power and financial might of the US, allies such as France and Britain bent before him.
But prices continued to stagnate. Shlaes writes that what FDR was doing was like "pouring glasses of water into the ocean in the hope of raising the sea level". Buyers also determine prices. Even as the US government was offering low interest loans to farmers at the rate of $US1m a day, it was also paying farmers not to farm. As gold hit a new high, Roosevelt put the US back on the gold standard. The depression remained, with unemployment at 23 per cent.
Roosevelt began massive projects under the Tennessee Valley Authority, constructing dams for hydro-electricity. Power to the people, literally, in a nation where private companies owned the utilities. Farmers and locals were resettled at great cost and much protest, and private utilities companies pursued until they could be bought up by the federal government.
The New Deal in the US during the 30s was America's flirtation with a command economy. It failed, and was saved only by the industrial expansion of war in the early 40s.
What became known as Keynesian economics is seen as the theory behind the New Deal. However, as the US unemployment figures remained stuck in the teens by 1937, Keynes wrote to Roosevelt saying he should abandon his war against private utilities companies: "It is a mistake to think businessmen are more immoral than politicians."
The New Deal forced income taxes on high earners to 79 per cent, introduced death duties and lowered tax-rate thresholds. It even delivered an undistributed profit tax as capital retreated in the face of unfair competition from government monopolies and over-regulated markets.
By 1937, taxing the "middleman" had become an FDR sport while new laws to tighten rules around monetary policy forced banks to keep more cash and cut back on loans. Business became expensive. Wages were forced up – in the first six months of 1936 by 11 per cent. August 1937 witnessed the greatest drop in industrial production ever recorded.