Saturday, June 22, 2013

Why we don't need a new New NEW Deal - Part 2

(Click here for Part 1.)
Franklin Delano Roosevelt took office in March 1933. He would create hundreds of new interventionist agencies and embark on unprecedented projects, transforming American society on a massive scale. The following is only a representative sample of the alphabet soup of interventions, projects and agencies initiated by the Roosevelt Administration known in the aggregate as the New Deal:
• United States Bank Holiday / Emergency Banking Act: FDR ordered every bank in the country closed on the first week of his term. No one could make deposits or withdrawals, that is, have access to their own property.
• “Relief, Recovery and Reform”: slogan of the early FDR administration
• Tennessee Valley Authority (TVA)
• Works Progress Administration (WPA)
• Wagner Act: Boosted privileges of unions and approved collective bargaining rights.
• Federal Deposit Insurance Corporation (FDIC)
• Federal Housing Administration (FHA)
• Securities and Exchange Commission (SEC)
• Agricultural Adjustment Association (AAA)
• National Recovery Administration (NRA)
• Works Progress Administration (WPA)
• Executive Order 6102, a.k.a. gold confiscation
• Farm Credit Act
• National Industrial Recovery Act / National Recovery Administration
• Public Works Administration
• Civilian Conservation Corps
• Federal Emergency Relief Administration (FERA)
• Reconstruction Finance Corporation
• Civil Works Administration
• Emergency Relief Appropriation Act
• National Labor Relations Act / National Labor Relations Board (the people who tell Boeing they can’t open a new plant in a non-union state.)
• Fair Labor Standards Act
• Fair Employment Practices Commission
• Federal Project Number One (sponsoring artists, artistic works and productions)
• Committee on Economic Security
• Social Security Act

Finally, toward the end of his reign, FDR attempted to implement what he called the
• Second Bill of Rights

Many of these agencies and institutions are with us to this day and are likely to continue for generations. What these acts, agencies and institutions DIDN’T do is end the Depression.
The Depression lasted seven more years beyond Hoover, with a second, ‘double-dip’ recession in 1937-38. It didn’t end definitively, with the return of full employment, until World War II production and mobilizations were well under way. World War II’s destruction and death per se didn’t fix the Depression. It was the return of relatively free-market policies and the END of the most aggressive interventions and the demonization of businessmen which permitted the economy to return to a more rational basis for functioning.

So what would you have done, smarty-pants?
Crises always look a lot simpler from a distance in space and time. But the response of Hoover and Roosevelt to the Crash and Depression were not those of panicked, surprised men with no clue what to do. They were the premeditated strategies of calculating men, carried out in their moment of opportunity. Hoover and FDR were interventionists who didn’t believe in free-market, laissez-faire capitalism and exploited every crisis for the purposes of implementing their own vision of governance, fully formed years earlier.
It’s not that these were bad men; we can assume they sincerely believed, as many of our politicians to this day believe, that it is the appropriate role of the federal government, its hundreds of agencies and tens of thousands of bureaucrats, to micro-manage every aspect of our economic lives ‘for the greater good’. To a degree they can be forgiven for being, as all mortal men are, imperfect and in this case, mistaken.
The same is difficult to say for the politicians who, 80 years later, insist upon leading us down the same path to government expansion, micromanagement and high taxation above and beyond the New Deal (and later, Lyndon Baines Johnson’s Great Society) with the excuse that it’s necessary in order to resolve or prevent the crisis and bring prosperity, security and health care to all. The evidence is overwhelming that regardless of political party, such intervention only amplifies and prolongs the crisis. Politicians and government, even ‘good’ ones, do not create wealth, produce high wages and low prices for workers, high revenue and low costs for businesses, or innovative and environmentally friendly products and services. They can’t guarantee no one will fail and shouldn’t guarantee that anyone succeed at the expense of anyone else. Only the market – entrepreneurs, business people, private firms big and small, investors, speculators, insurers and individual consumers – cooperating voluntarily, acting in their own interest within the rule of law, can accomplish the best production and distribution of wealth possible in an imperfect, physical world (as opposed to celestial paradise).

As a matter of economic principle, it was futile for Hoover or FDR to:
• Attempt to prop up wages. If the total amount of wealth and activity in an economy has diminished for whatever reason (natural disaster, war, contraction of trade due to protectionism – Smoot Hawley – and retaliation by partners, or other destruction of wealth), then someone’s wages will have to fall in real terms. If one politically favored group’s wages are artificially maintained above what they would be under un-coerced voluntary cooperation, then someone else’s wages have to fall proportionately (and unjustly, including to zero – unemployment) to balance the aggregate accounts.
• Attempt to prop up commodity prices for farmers. If corn is too cheap, marginal corn farmers need to grow soybeans or take a higher-paying job in industry. This is how it has always been. When our nation was born, 97% of the population worked the land; now that proportion is reversed, with only 3% in agriculture feeding the entire US and much of the rest of the world. Low prices benefit the consumer and as such are not inherently bad.

The futility of the intervention was brought to light when the Federal Farm Board’s policy of price supports encouraged overproduction of wheat, cotton, wool and other products, resulting in even worse collapsing market prices and devastating losses. At that point Hoover intervened in another direction, to order acreage to be plowed under, taken out of production, and to destroy ‘excessive’ livestock.
• Attempt to prop up prices for the benefit of big industrial producers. If oil or lumber is too cheap, marginal oil/lumber companies have to get into a different business where they have a relative advantage and/or where the consumers are clamoring for the product. No subsidy or privilege is required, let alone justified, to bring the economy back into balance.
• Attempt to ‘protect’ domestic industries from foreign competition via protective tariffs such as the Smoot-Hawley bill. Such actions always hurt domestic consumers and invite retaliation from foreign governments and their favored industries. The Smoot-Hawley bill was arguably the single most important trigger of the October 1929 crash, as investors and economists correctly re-estimated the value of their investments under a reduced-trade market.
• Herd workers into unions that they would not join under conditions of voluntary cooperation. Favoring unions at the expense of free labor is a violation of liberty; it raises wages for some at the expense of others who receive less (or nothing) and undermines the ability of workers to develop as independent entrepreneurs. Independent-minded Americans have always resisted unionization compared to other western nations, for good reason.
• Manipulate money and credit prices / interest rates. Monetary manipulation by private individuals is prosecutable as counterfeiting and/or fraud, and is no less evil or destructive when practiced by government. Forcing interest rates too high chokes economic activity; forcing them too low makes longer production cycles – and with them higher investment returns – appear like mirages in the desert, deceiving investors to make bets that are destined to fail.
• Embark on public works projects for the purpose of ‘putting America back to work’. If a road or bridge needs to be built, let the agency most impacted by it (municipal, country or state government, or private firms) build it. If an electric company sees a business opportunity in building a dam, let them buy the property, indemnify 3rd parties and other stakeholders, carry plenty of insurance, clean up their messes, reimburse anyone they harm, and finance the project with their own investor’s resources (and reap whatever profits the market may bear without having it taxed away). But spending capital for the sake of busy activity does not increase wealth; it sucks wealth away from where it is more desperately needed. The 1930’s Autobahn in Germany was a glamorous showcase, but an economic and social disaster.
• Weaken protection for creditors in bankruptcy proceedings. This is a classic case of attempting to make a balloon smaller by squeezing it at one end; it always bulges out at the other. What person with money to lend wants to risk their capital in an environment in which the government has signaled its willingness to arbitrarily change the terms of any loan contract? Such uncertainty leads to a contraction of credit. How does that help future borrowers/debtors?
• Threaten and demonize innocent people. In different times and places, this has meant Christians, blacks, Jews, merchants, bankers, gypsies, homosexuals, whites, Hutus, the mentally deficient, the culturally undesirable, browns, union workers, strike breakers (‘scabs’), foreigners, rich people, poor people, good people, bad people and ugly people. Corrupt and despotic politicians have employed this base technique for millennia, but it is unworthy of an enlightened leader of a free people today to do so. The only justification for any accusation is specific allegations of criminal wrongdoing targeted at the specific individuals (not groups) who committed them. Investing and/or speculating against the market outcomes desired by a political party or government program does not qualify as justification for group persecution.
• Increase government spending in time of diminished tax revenue.
• Micromanage business.

As a solution to the economic crisis, Roosevelt’s interventions and the alphabet soup of angencies created to implement them were equally or more futile than those of Hoover. The Social Security Act and system will require its own in-depth discussion. But make no mistake, Bernie Madoff could not have done worse in the long term.

• The Great Depression was a crisis of government intervention, not one of free-market capitalism. Government intervention is the problem; free-market capitalism under the rule of law is the solution.
• The Hoover-Roosevelt administrations constituted a continuum, not a fundamental change of policy direction. Herbert Hoover was not a free-market, laissez-faire capitalist, limited-government president.
• As long as the interventionist philosophy prevails in our nation’s capital and in state capitals, we can expect more economic crises, as bad or worse. It doesn’t matter that the interventions are ‘for the greater good’ or that the people leading the intervention are good, well-intentioned, virtuous, upstanding citizens. An impossible task is still impossible when undertaken by a mortal saint.

It is remarkable that the myth of the ‘success’ of the New Deal lives on to this day. The Depression lasted seven more years beyond Hoover, with a second, deep recession in 1937-38. The depression didn’t end definitively, with the return of full employment, until World War II production and mobilizations were well under way. In other words, a calamitous event in which tens of millions of people worldwide were killed and hundreds of cities, with all of their wealth and assets, were completely destroyed, was by one measure less damaging to the economy – perhaps even beneficial – than the policies of Hoover, FDR and the New Deal.
It is dangerous to hold the thought that war is an antidote to economic depression, just as is it is to consider war and conquest a solution to economic challenges such as securing reliable supplies of materials that your country lacks (from Caesar’s conquests to Hitler’s ‘lebensraum’).

World War II’s destruction and death didn’t fix the Depression. What happened was that many government interventions of the New Deal, including the demonization of businessmen, were abandoned and not reinstated after the war was over. The end of the Hoover-FDR New Deal ended the Depression. It would have ended 10 years sooner if this tragic blunder had never been attempted. Moreover, some of the worst tragedies of the War might have been avoided if not for the worldwide ripple effects of the economic malaise. May we never again be tempted to repeat such a disaster.
That depends on YOU, citizen economist.