Tuesday, March 24, 2009

Confusion about the New Deal

Steven Colbert interviews Jonathan Chait of the New Republic about the New Deal:

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The New Deal - Jonathan Chait
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People tend to talk about the "New Deal" as if it were one policy, when in reality it was a hodgepodge policies, regulations, and spending - some of which worked, some of which didn't. Many of the regulations did create serious market distortions, which impeded recovery, as Harold Cole and Lee Ohanian note:
"The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation's antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression.

These codes distorted the economy by artificially raising wages and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment. Following government approval of each industry code, industry prices and wages increased substantially, while prices and wages in sectors that weren't covered by the NIRA, such as agriculture, did not. We have calculated that manufacturing wages were as much as 25% above the level that would have prevailed without the New Deal. And while the artificially high wages created by the NIRA benefited the few that were fortunate to have a job in those industries, they significantly depressed production and employment, as the growth in wage costs far exceeded productivity growth."
Further, economist Robert Higgs provides evidence that the uncertainty created by the Roosevelt administration spooked businessmen, stifling investment.

Of course, that's not what the commentators in the clip are harping on. Their concern is the spending in the new stimulus plan; and on that, they have things mixed up. Both George Will and Sean Hannity are shown arguing that it was World War II, not the New Deal, that brought us out of the Depression. But how could a war bring the country out of the Depression? Through large-scale expansion of government spending! Bruce Bartlett explains:
"The [Great Depression] didn't really end until both monetary and fiscal policy became expansive with the onset of World War II. At that point, no one worried any more about budget deficits, and the Fed pegged interest rates to ensure that they stayed low, increasing the money supply as necessary to achieve this goal.

It was then and only then that the Great Depression truly ended. As a consequence, economists concluded that an expansive monetary and fiscal policy, which had been advocated by economist John Maynard Keynes throughout the 1930s, was the key to getting out of a depression."
So if you're arguing against the stimulus, you don't want to say that the War got us out of the Depression; if you do, you'll kind of undermine your entire argument.

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