Three months ago, a UCLA study concluded that FDR’s “New Deal” actually prolonged the Depression by seven years. Everyone trying to prevent another deep recession should study that study.
At a time when President-elect Barack Obama and fellow Democrats are talking about borrowing yet another $700 billion to “stimulate” our economy out of its bad-debt-driven stall, it would be wise to review why the Depression lasted an unusually long 15 years.
The studies’ two authors, both UCLA economics professors, warned that protecting big business from competition and pushing too much government stimulation are likely to produce the opposite of the intended boost.
“President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services,” said Harold L. Cole, one of the study’s two authors. “So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies.”
Currently, Obama and Congress are considering a $25 billion bail-out of Detroit’s struggling Big 3 automakers. They aren’t proposing price collusion, but the bail-out itself would interfere with competitive market forces.
The UCLA study found that a federal stimulus can be toxic, more likely to further slow a dormant economy than to revive it.
“We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies,” said Lee E. Ohanian, the study’s other author.
High wages, prices. By pushing wages and prices too high, the New Deal’s National Industrial Recovery Act (NIRA) priced many workers out of the marketplace and made too many products unaffordable, driving up unemployment and adding to widespread misery, the study found.
Most Americans have high respect for Franklin Roosevelt because he gave hope to the unemployed when he took office in 1933 and later led America through World World II.
But FDR’s revered place in history should not prevent us from asking which economic forces dragged out the Depression, from 1929 all the way through 1943. Previously, most American recessions and financial panics lasted one to five years.
Debt on debt. It should give all of us pause to consider that the current financial panic was touched off by high-risk mortgages and soaring energy prices, and yet few federal proposals have anything to do with reducing home-loan risks or reaching real energy independence.
We’re already feeling a real stimulus of temporarily plummeting gasoline prices. It’s hard to imagine how adding $700 billion in “stimulus” debt to the $700 billion in financial “rescue” debt will help us in the short- or long-term. And those debts eventually must be paid back.
Just examine the Depression with an open mind. Learn from the mistakes. We’re a long way from a Depression today. In this panic, let’s avoid the temptation to pretend we’re helping if it’s more likely we’re hurting.
Frank Warner
* * *
Update: Just to clarify my position, I’m not against government stimulus programs in a time of recession. But there has to be a limit to the stimulus or we risk rolling into another recession with even fewer resources to bail us out.
I’m alarmed by the numbers being proposed. Just nine months ago, Congress approved a $168 billion stimulus program to give every adult American $600. That borrowing was nearly half the size of our entire defense budget. It seemed a lot.
Then two months ago, Treasury Secretary Paulson proposed a $700 billion “rescue” of our biggest financial institutions. The unusual action seemed necessary, and it had an “upside”: we’d have the banks’ mortgages or stocks, and the federal government eventually could get all that $700 billion back.
Unfortunately, since Paulson’s plan was approved, Congress has looked at $700 billion as chump change. Now our congressional leaders are talking about a separate $700 billion “stimulus,” no strings attached. That’s far too much, even if it pays for apple pies, American cars, and bridges to somewhere.
Keep in mind, it is estimated the Chinese dictatorship already holds about $700 billion in U.S. debt. It took a long time for China to accumulate that many U.S. loans. Do we want to double that overnight?
As I said, the dramatic drop in gasoline prices is our best stimulus right now. It was the high gas prices of the last three years that turned $1 trillion of risky home loans into $1 trillion in bad home loans.
Some stimulus is appropriate, but we have to recognize there are limits to everything. We have other debts and obligations coming due -- most notably Medicare and Social Security -- and we cannot pretend the U.S. dollar can be leveraged to infinity.
Recent Comments