What The Depression Era Teaches About Government "Help"

In An Economy In Trouble, Amity Shlaes, author of "The Forgotten Man: A New History of the Great Depression," reviews the new book "The New Deal: A Modern History" by Michael Hiltzik.

{If you're choosing between the two books, I recommend "The Forgotten Man" by Shlaes. It's both entertaining and well researched, and it also teaches the unconventional and counter-intuitive lesson about what government can do to "help" during economic hard times.}

In any event, I agree with the conclusions set forth in "The Forgotten Man." Therefore, I wouldn't agree with much of the analysis set forth in Hiltzik's "The New Deal."

Here's part of the straightforward criticism Ms. Shlaes delivers concerning Hiltzik's new book:

"Notwithstanding the billions of dollars spent and the thousands of regulations enacted, the economy did not get back to its 1929 level in Roosevelt's first two terms. The Dow Jones Industrial Average likewise did not return to its pre-Crash level. Ten years into the Depression, total hours worked by the American labor force were a full 20% below the 1929 level. When it came to job creation overall, the New Dealers lost the battle: The unemployment data gathered so meticulously by Perkins and those who followed her averaged well into the double digits for Roosevelt's first decade. Even when temporary make-work jobs are counted, New Deal unemployment only occasionally moved into the single digits before World War II.

Mr. Hiltzik scarcely addresses this failure. He even more or less denies it by providing snapshots of year-over-year growth that seem impressive until you recall the low base from which they start. He also seems to mock efforts to understand why the New Deal failed. The scholar Robert Higgs has shown that Roosevelt's aggressive antibusiness policies caused companies to hunker down rather than start hiring, but when Mr. Hiltzik discusses business confidence he adds scoffing quotation marks around the phrase, as if business confidence is of little importance in economic matters.

The author also neglects the Wagner Act of 1935, which gave unprecedented clout to labor, inaugurating the era of the sit-down strike and the closed shop. The act drove up labor costs, spooking employers and discouraging them from hiring. This effect "The New Deal" obliviously marches past, banner waving. Mr. Hiltzik's chronicle would have been more effective if cast in a less triumphal mode, acknowledging the many ways in which the New Deal failed the economy it was trying to save."

Here's the short version of the story about the "helpfulness" of the effects of much of government spending during hard times. The Depression lasted throughout the entire decade of the 1930s and only ended when World War II began, regardless of what the Roosevelt administration tried.

In fact, President Roosevelt's popular and populist based vote getting attacks on business and anti-business policies and regulations caused companies to sit tight and lose confidence about making investments for the future (sound familiar?). Roosevelt attacked, and businesses lost confidence and hunkered down.

The conclusion by Shlaes, and with which I agree, is that most of the well intentioned 1930s New Deal efforts went for naught, and government spending begot more spending, but not better economic results.

Accordingly, the New Deal and Roosevelt's programs in no way demonstrate that government stimulus spending programs are helpful to economic recovery. They point toward just the opposite result, in fact.

Of course, that doesn't mean that individual and family assistance efforts regarding paying unemployment benefits, social security benefits, food stamps and the like aren't necessary. Of course, these payments help blameless individuals and families endure the painful effects of the economic downturn.

But neither does it mean that business is to blame nor that government can come to the rescue. Apparently the real cure is time. This simply means that the time to do the right thing is before the event. Once it's occurred, it's too late for quick remedies. I guess that's what "an ounce of prevention is worth a pound of cure" really means.

All this simply argues that there is no evidence that Keynesianism and demand stimulus is effective with respect to aiding or abetting the resumption of economic growth once a downturn occurs.

In fact, the additional debt resulting from this ineffective deficit spending is harmful to the long term prospects of the economy, since somebody someday will have to pay it off. But that's another story for another time.

Thanks. Bob.