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A New, New Deal

Mises Daily: Saturday, October 10, 1998 by

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The Clinton administration and its friends are using global financial problems to push an antiquated agenda. These unreconstructed Keynesians are calling for a "Global New Deal," ostensibly to put an end, once and for all, to the business cycle.

President Clinton championed this view in a speech before a joint meeting of the World Bank and IMF. He advocated internationalized securities regulation, deposit insurance, social security, welfare, unemployment insurance, and environmental regulations to "tame the cycles of boom and bust that today shake the world economy."

The assumption here is that the original New Deal was necessary to combat the depression. In fact, it only prolonged it, and produced an economic debacle of huge proportions. A global New Deal would amplify these failures a hundred times over.

The unemployment rate during the 1933-1940 period averaged about 18% and was as high as 28.3% in March of 1933. By the end of 1938, on the eve of World War II, the U.S. unemployment rate still hovered at just over 18 percent and was higher than it was in 1933, President Franklin D. Roosevelt's first year in office.

This occurred despite (or rather, because of) six years of unprecedented levels of government intervention into the U.S. economy. The American recovery was slower than in most European nations; by 1937 Great Britain's unemployment rate had declined to 10.3 percent.

A principal feature of New Deal economic policy was government-sponsored industrial cartels (the National Recovery Act); agricultural cartels (the Agricultural Adjustment Act); and labor cartels (the Norris-LaGuardia and Wagner Acts). The purpose of any cartel is to restrict output and raise prices. Lower levels of production leads to higher unemployment, which is exactly what the NRA and AAA did.

The NRA was almost identical to the Italian corporatist system that existed at the time. In Italy each trade or industrial group was organized into a government-controlled "corporative" association that had the power to plan production and pricing. In the U.S. the NRA organized each industry into federally-supervised trade associations called "Code Authorities" which could also limit output and set prices. The antitrust laws were explicitly set aside.

Over 700 industrial codes were created and were rigorously enforced by thousands of government code enforcers who, according to Roosevelt biographer John T. Flynn, "could enter a man's factory, send him out, line up his employees, subject them to minute interrogation, take over his books on the instant." A hapless New Jersey tailor named Jack Magid became nationally famous after he was arrested, convicted, and imprisoned by the code police for the "crime" of pressing a suit of clothes for 35 cents when the Tailors' Code fixed the price at 40 cents. The NRA was ruled unconstitutional by the U.S. Supreme Court on May 27, 1935.

The Agricultural Adjustment Act sought to cartelize the agriculture industry by paying farmers huge sums for not growing crops and raising livestock. Farmers benefited for a while from this program, but many poor sharecroppers became destitute because of it. After the U.S. Supreme court ruled this monopolization scheme unconstitutional on January 6, 1936, Roosevelt continued with it any way by disguising the program as a "soil conservation" effort whereby farmers were ostensibly paid to "conserve soil," not to restrict output and raise prices.

The Roosevelt administration also orchestrated various price-fixing schemes in labor markets, principally for the benefit of unions. The 1933 National Industrial Recovery Act first fixed wages at above-market levels, and then required (via the "code authorities") all unionized businesses to fix their prices at higher levels. Work weeks were shortened by law at a time when underproduction was the most serious problem, and unions were given special legislative privileges that allowed them to push wages up far beyond what labor productivity levels could justify—a perfect recipe for unemployment.

Payroll taxes to finance Social Security and Unemployment Insurance programs increased employers' wage bills even further, which also reduced the level of employment. In their book Out of Work, Ohio University economists Richard Vedder and Lowell Galloway provide econometric estimates that government-mandated payroll cost increases added nearly 1.2 million people to the unemployment rolls by 1938.

Combining these labor costs with the higher wages (mostly for unionized labor) that resulted from other NIRA policies, Vedder and Galloway conclude that were it not for these policies, "the Depression would have been completely over (less than 5 percent unemployment) by 1936...the New Deal wage cost-enhancing policies more than doubled the amount of abnormally large unemployment..."

The billions of dollars spent on public works programs also failed to reduce overall unemployment—despite employing some 10 million people—because of the economic law of opportunity cost. Diverting those billions from the private sector (through taxes) to the government sector only rearranged the composition of employment—fewer private-sector jobs and more government jobs.

Roosevelt's public works programs may have been an economic failure, but they were a resounding political success as they provided virtually unlimited opportunities for political patronage. In 1939 a special U.S. Senate Committee on Campaign Expenditures investigated the programs and found that in many states workers were required to sign a pledge to vote Democratic and, in some cases, to make campaign contributions, as a condition of employment. Businesses that sold supplies to the government were in some places required to make campaign contributions to the Democratic party in return for the contracts. The New Deal was largely a legalized shake-down operation.

Herbert Hoover's Reconstruction Finance Corporation was greatly expanded by Roosevelt, but its effect was to make capital markets less efficient, thereby prolonging the Depression even further. As explained by RFC director Jesse Jones in his autobiography, Fifty Billion Dollars, "The law specified that we should lend only where the borrower could not get the money from others on reasonable terms." That is, only to uncreditworthy borrowers.

Guided by this directive, Jones and the RFC redirected billions of dollars in valuable capital to politically-connected but economically-questionable businesses. "We even loaned money to [the owners of] a drove of reindeer in Alaska," Jones boasted. The RFC was abolished in the 1955 under a cloud of corruption and scandal.

The New Deal made the Great Depression worse, not better. It was an unprecedented "success," however, in cementing in place the political dominance of the Democratic party by creating a nationwide system of federally-funded political patronage more extensive than anything the Founding Fathers could have imagined in their worst nightmares.

A global New Deal would only be a vehicle for throwing untold billions of dollars down economic ratholes while plaguing the world economy with many of the same kinds of interventions that are at the heart of today's Asian economic crisis. But then again, it is politics, not economics, that drives policy at this White House.

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Thomas J. DiLorenzo, an adjunct scholar of the Mises Institute at Auburn University, is professor of economics in the Sellinger School of Business and Management at Loyola College in Baltimore.