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Please, Not Another FDR

Mises Daily: Friday, April 11, 2008 by

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Harold Meyerson, writing in the Washington Post, calls for a new New Deal. The old one worked just fine, and current times call for some of the same medicine.

Harold says it, and he's not alone. FDR's nanny-like visage has been showing up on left-liberal and neocon publications — web and print — by folks who don't understand that their favorite New York patrician-president is the reason for this economic season, to the extent that his legacy justifies intervening in market forces.

Just listen to former Labor Secretary Robert Reich exalt Roosevelt on the state-funded radio show Marketplace. Even Floyd Norris, the otherwise sound economics writer for the New York Times, blamed our economic mess on insufficient Depression-era regulation, and called for expanding the New Deal to cover areas neglected.

What's going on here? Why do economic downturns always produce a predictable supply of pundits calling for expansion of government power? Don't these people realize that those who ignore economic history are doomed to repeat it?

Apparently not. And the problem is an ideological outlook that views 1930s-era economic policies as essentially sound, and even heroic. What's more, the extent that they didn't work simply reflects the success of dopey political and business forces at the time that unwittingly opposed them.

Take Meyerson's article. The editor-at-large of American Prospect and L.A. Weekly argues that the economy is simply prone to inflationary periods followed by economic collapse, and that while the private sector demands to be left alone during the former, it demands government bailouts in the latter.

And what causes these inflationary episodes to which the market is addicted? Meyerson doesn't say. For all we know, they reflect some inherent deficiency in the market system. Perhaps they share the same root as the common cold.

But it just ain't so. Inflationary, bubble-like periods don't erupt in a vacuum. They result because the government increases the money supply and sets in place unsustainable economic growth. When this happens, the resulting boom makes a bust inevitable. Meyerson shouldn't blame the market for inflationary booms. The market never creates legal tender laws. Federal Reserve notes have been around for almost 100 years.

But what about when the bust comes? This is when pundits like Meyerson dearly need lessons in economic theory and history. During an economic correction, characterized by a decline in economic activity resulting from the overproduction during the boom, prices, wages, and interest rates must adjust. In fact, the quicker they do, the faster the correction, and the shorter the recession.

Consider the widget manufacturer whose inventories are clogged with widgets no one will buy at going prices. He can't produce more widgets until he sells the ones he has. He might lay off workers until his inventories fall, which happens when he lowers his prices, perhaps selling at cost or even at a loss. Growing inventories are one of the forces creating downward pressures on prices for good reason.

When this happens and inventories are reduced, he may be ready to expand output again. In other words, he recovers. This, in a nutshell, is what happens during any market correction across many industries. These corrections were called panics prior to the 1930s, and they were short-lived affairs, lasting an average of three months.

Today they are called recessions, and they last longer, because of state interventions in the price system. In the 1930s, a run-of-the-mill correction grew into the Depression because the government intervened in massive and unprecedented ways to stop prices from falling. It set prices as much as the Supreme Court would allow. It forced the destruction of new output that would add to the existing downward pressure on prices. And it demonized businesses that didn't cooperate with this lunacy, first with symbols such as the NRA's Blue Eagle, then with Roosevelt and his Brain Trust's attacks on the private sector and private capital.

When prices in the goods market (or wages in the labor market, or interest rates in the money market) aren't allowed to fall, the correction process can be extended indefinitely. This is the central lesson of the economic calamity known as the Great Depression. It is why, first for Hoover, then for Roosevelt, good times were always just around the corner.

Good times did eventually come, but they weren't caused by the introduction of a world war costing tens of millions of lives. Much economic research, including (for instance) some of the important contributions of economic historian Robert Higgs, indicates that the Depression ended when most of the New Deal programs were discontinued by Truman and his discredited Brain Trust was sent packing. It wouldn't be until 1954 that the stock market would recover to its pre-Depression level.

Meyerson no doubt knows this history, but he ignores it to promote an agenda calling for a larger, more activist state. This is why he concludes (in his Washington Post piece) that "two paramount lessons [sic]" stand out in today's economic climate:

Regulate the American financial sector, which is now turning to the government for a bailout. And commit the government to doing all in its power to generate broad-based prosperity, through laws enabling workers to bargain collectively, through a massive public commitment to projects "greening" the economy, and through provision of universal health coverage and affordable college educations.

But these aren't lessons. They are arguments for outsourcing. These are interventions that can only prolong the recession, promoted by misinformed or misanthropic individuals who believe that the economies of 1933 and 2008 have much in common. They don't, but the assumption is crucial for those yearning for a new New Deal.

Ideas have consequences, wrote the great Richard Weaver. It is paramount for a free society to ensure, in the marketplace of ideas, that only good ones, based on sound theory and history, take root.