With victory in sight, Barack Obama's supporters are predicting
that he will give us a new New Deal. To see what that might mean, let's look
back on the original New Deal.
The purpose of New Deal legislation was not, as commonly
thought, to restore economic growth but rather to freeze the economy in
place at a time when it seemed locked in a downward spiral. Its central
program, the National Recovery Administration (NRA), created 700 industry
councils for firms and unions to set minimum prices and wages. The
Agricultural Adjustment Act (AAA), the ancestor of our farm bills, limited
production to hold up prices. Unionization, encouraged by NRA and the 1935
Wagner Act, was meant to keep workers in jobs that the unemployed would have
taken at lower pay.
These policies did break the downward spiral. But, as Amity
Shlaes points out in "The Forgotten Man," they failed to restore growth.
Double-digit unemployment continued throughout the 1930s; despite population
growth, the economy failed to rebound to 1920s production levels. High taxes
on high earners (a Herbert Hoover as well as Franklin Roosevelt policy)
financed welfare payments ("spread the wealth around") but reduced
investment and growth.
The political verdict was negative. New Dealers were whalloped
in the 1938 off-year elections. Polls show that Democrats would have lost
the White House in 1940 if that election had been decided on domestic
issues. But war loomed. France fell in June 1940, just before America's two
national party conventions, and Adolf Hitler and his then-ally Joseph Stalin
controlled most of the landmass of Eurasia. Republicans did not have an
experienced leader in this world crisis -- Democrats did: Franklin
Roosevelt, who cynically engineered his nomination for a third term and then
swept to victory on foreign policy.
Roosevelt had thought that economic expansion was a thing of the
past. But World War II stimulated huge growth in the American economy. New
Deal welfare programs like the Civilian Conservation Corps and the Works
Progress Administration (WPA) arts program were terminated. Wartime domestic
policies were growth stimulators. Veterans Administration home mortgage
loans, building on the FHA mortgage program, encouraged home-buying and
after the war converted a nation of renters to a nation of homeowners. The
G.I. Bill of Rights subsidized higher education for millions of veterans.
These programs stimulated growth partly because they required real effort --
down payments, military service -- from beneficiaries before they received
aid.
The postwar Republican Congress elected in 1946 dismantled some
New Deal anti-growth policies. Labor unions' powers to strike were sharply
restricted. Tax rates were lowered, and wage and price controls were
dismantled. Many hold-the-economy-in-place policies were retained until the
deregulation of the 1970s and 1980s. But the New Deal was transformed
sufficiently to permit buoyant economic growth for two decades after the
war.
Obama seems determined to follow policies better suited to
freezing the economy in place than to promoting economic growth. Higher
taxes on high earners, for one. He told Charlie Gibson he would raise
capital gains taxes even if that reduced revenue: less wealth to spread
around, but at least the rich wouldn't have it -- reminiscent of the Puritan
sumptuary laws that prohibited the wearing of silk. Moves toward
protectionism like Hoover's (Roosevelt had the good sense to promote free
trade). National health insurance that threatens to lead to rationing and to
stifle innovation. Promoting unionization by abolishing secret ballot union
elections.
The impulse to social engineering is unmistakable. Government
officials will allocate resources, redistribute income, and ration good and
services. Use government stakes in banks, insurance companies and Detroit
auto manufacturers to maintain the position of those already in place, at
the cost of preventing the emergence of new enterprises that might have been
spawned by the capital being allocated.
Social engineering of course is far easier when you are dealing
with an economy that is frozen in place. It's harder when you have to deal
with the creative destruction, the emergence of new firms and businesses,
and the decline of old ones, which as Joseph Schumpeter taught is the
inevitable consequence of economic growth.
Roosevelt in the 1930s had some extremely competent social
engineers, like Harry Hopkins, Harold Ickes and Fiorello LaGuardia, who
could enroll 750,000 people on welfare in three weeks and build an airport
in less than a year. But even they could not spur the economic growth
produced by utterly unknown and unconnected people, as Warren Buffett and
Bill Gates were in 1970.
When financial crisis looms, there is an impulse to freeze
everything in place and accept what is as the best there can ever be: Barack
Obama's new New Deal. The history of the old New Deal suggests this is not a
sustainable approach in the long run.