New Deal Orgy No Model For Current Binge

New Deal Orgy No Model For Current Binge 
September 21, 2009
Robert Higgs
Investor's Business Daily

From a political standpoint it makes little difference whether the trillions of dollars in “stimulus” spending and big-business bailouts approved by Washington in the past year have a significant effect on the economy.

When the economy starts growing again and creating jobs, as it will eventually, the White House will claim credit. That’s politics.

Even now the White House is claiming that stimulus spending created or “saved” as many as 1.1 million jobs and added 2.3% to the U.S. gross domestic product (GDP). By these measures, with another $40 trillion to $50 trillion in stimulus spending, we might double America’s $14 trillion GDP.

Many are arguing that even more government spending is needed. The same arguments were made repeatedly during the Great Depression, and to this day many otherwise intelligent people refuse to recognize that the New Deal recovery program failed.

No serious student of the Depression denies that a partial recovery took place between 1933 and 1937. Yet, just because Washington had unleashed a torrent of spending doesn’t mean that the government’s spending caused the expansion.

Even today, supporters of the New Deal recovery program claim it would have been more successful if the government had poured more money into it. The Roosevelt administration, they complain, was too timid, too obsessed with outmoded ideas about balancing the budget. Indeed, some still argue that Keynesian stimulus spending didn’t fail during the New Deal because it was never really tried.

In truth, however, the government did try to spend us out of the Depression, as it has tried to spend us out of downturns several times since. But careful analysis shows that hyperactive government policies complicate and prolong recovery, rather than trigger it.

After an economic bust, bad investments must be liquidated, so salvageable assets can be reallocated to their most valuable uses. If the government props up failed endeavors through bailouts and other programs, necessary readjustments of the economy’s capital structure are slowed or halted, and the toxic mistakes of the past become locked in place, obstructing recovery and hindering the creation of future wealth. The New Deal recovery efforts had exactly these effects, as do current government policies.

It was bad enough that Roosevelt’s recovery program expended billions of dollars willy-nilly with no sound economic logic. But the president and his subordinates made matters worse when, especially from 1935 on, they threatened private property rights by attacking private investors, calling them “economic royalists,” and pushing through policies attacking the very foundations of private enterprise.

As late as 1939, President Roosevelt’s seventh year in office, the official unemployment rate was still 17.2% (11.3% if workers enrolled in emergency work-relief programs are counted as employed).

The reason the Depression lingered long after the Roosevelt administration launched its hydra-headed recovery effort was because businesspeople in general, and investors in particular, feared the president’s assault on private property rights posed a potentially fatal threat to the market system.

The assaults were many. In 1935, 1936, and 1937, for example, the Roosevelt administration requested tax legislation aimed at punishing the wealthy. The so-called Wealth Tax of 1935 (part of the Revenue Act) included a graduated corporate income tax, a tax on inter-corporate dividends, increases in estate and gift taxes, and increases in surtaxes on incomes greater than $50,000 that ranged up to a top rate of 75%.

These and other soak-the-rich efforts left little doubt that the president and his administration planned to extract every penny possible from the very people who made the most important decisions about private investment. The result was that gross private investment, which stood at 16% of GDP in 1929 and fell to 2% of GDP in 1932, never fully recovered until after World War II.

If pushed, most supporters of the New Deal now admit that it never produced full recovery during the 1930s. But they, along with almost everyone else, believe that massive wartime spending finally turned the trick, vindicating the simple Keynesian model. This alleged “wartime prosperity,” however, also is a myth.

To be sure, the unemployment rate dropped almost to zero by 1944. But if you begin with five million unemployed and draft 10 million prime-age men into the armed forces, you are virtually certain to wipe out unemployment.

Discarding popular myths, we see that neither the New Deal nor the war economy offers a defensible model for the spending spree Washington has unleashed. No good purpose can be served by throwing money at make-work projects, mounting another full-scale assault on private property rights, or creating a war-type command economy.

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Robert Higgs
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Robert Higgs is Senior Fellow in Political Economy for The Independent Institute and Editor of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War. 

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