Dec 29 2008

We don’t need another FDR, and can’t afford one

Category: economy,Obamaharmonicminer @ 10:00 am

In The Forgotten Man, Amity Shlaes makes it clear that Franklin Delano Roosevelt’s policies did not reduce the Great Depression’s unemployment rate, despite FDR’s success at convincing the public that he had made their lives better, master of politico-speak that he was.  Quite the reverse is true; the more the government intervened, the worse things got, and there seemed a direct connection between trade-strangling tariffs, high taxes, the diversion of economic power out of market driven activity into government programs, and unemployment.  Now, Thomas Sowell makes similar points, with a nice concise statement about the history of unemployment rates after the 1929 stock market crash, and asks if we’re headed for Another Great Depression. The entire article is worth reading, and it’s a quick read. The key graphs:

The rise in unemployment after the stock market crash of 1929 was a blip on the screen compared to the soaring unemployment rates reached later, after a series of government interventions.

For nearly three consecutive years, beginning in February 1932, the unemployment rate never fell below 20 percent for any month before January 1935, when it fell to 19.3 percent, according to the Vedder and Gallaway statistics.

In other words, the evidence suggests that it was not the “problem” of the financial crisis in 1929 that caused massive unemployment but politicians’ attempted “solutions.” Is that the history that we seem to be ready to repeat?

The stock market crash, which has been blamed for the widespread suffering during the Great Depression of the 1930s, created no unemployment rate that was even half of what was created in the wake of the government interventions of Hoover and FDR. [emphasis mine]

Politically, however, Franklin D. Roosevelt could not have been more successful. After all, he was the only President of the United States elected four times in a row. He was a master of political rhetoric.

If Barack Obama wants political success, following in the footsteps of FDR looks like the way to go. But people who are concerned about the economy need to take a closer look at history. We deserve something better than repeating the 1930s disasters.

There is yet another factor that provides a parallel to what happened during the Great Depression. No matter how much worse things got after government intervention under Roosevelt’s New Deal policies, the party line was that he had to “do something” to get us out of the disaster created by the failure of the unregulated market and Hoover’s “do nothing” policies.

Today, increasing numbers of scholars recognize that FDR’s own policies were a further extension of interventions begun under Hoover. Moreover, the temporary rise in unemployment after the stock market crash was nowhere near the massive and long-lasting unemployment after government interventions.

Barack Obama already has his Herbert Hoover to blame for any and all disasters that his policies create: George W. Bush.

The take away:  the unemployment rate did not take off UNTIL the government programs designed to create employment using market interventions of various kinds.  We are now in the same “zone” as the economy a year after the 1929 crash, with very similar unemployment rates.  If the government tries to use sledgehammer economic interventions to “fix” it, things are likely to get worse, not better.

The American public seems to be looking for an economic savior, having lost faith in itself and in markets (as if the current crisis was caused by markets, rather than government meddling in them). If President-elect Obama continues to position himself as another FDR, and acts like it in his policies after he’s in office, better tighten your belt. We’ll be in for a hard, long slog.

Will the decades distant result be another entitlement program started with good intentions, based on economic assumptions that no longer apply (if they ever did), and now requiring larger and larger slices of the GDP?  (Think Social Security.)

Tags: ,