There has been a lot of talk about a new New Deal and that has me and a lot of other people worried. As numerous others have pointed out, the New Deal was not exactly a roaring success. Amity Shlaes, who authored The Forgotten Man, has been writing regularly about the things Obama and the new administration need to avoid (via Bloomberg where Shlaes writes regularly).
Nov. 12 (Bloomberg) — President-elect Barack Obama is using the New Deal as his model for how to deal with economic crisis. He might want to distinguish between what worked and what didn’t.
One reason the Depression lasted until World War II, as Paul Krugman argued this week in the New York Times, is that the New Dealers sabotaged their own plan.
With one hand the New Dealers gave, spending to stimulate the economy. In fact, they put through the same kinds of infrastructure projects that Obama and congressional Democrats are considering today.
With the other hand the New Dealers took away, by raising tax rates — just as the new president and Congress are likely to do in 2009.
Another similarity is Obama’s emphasis on increasing union power by passing the card check bill that was defeated last year. This bill would allow unions to organize a workplace by merely convincing a majority of the workers to sign a card saying they favor a union. It would do away with the right of workers to a secret ballot to make that decision. Obviously, peer pressure will be huge for workers to sign the card. Unions will gain members and power.
FDR signed the Wagner Act and union membership soared during the depression. In a deflationary environment such as we faced in the Great Depression, the worst possible response, at least if you want to create jobs, was to raise wages. I don’t think the risk of an extended deflation are that great in this episode, but unions can still cause long term harm. If you doubt that, take a look at GM where total labor costs are 50% higher than their competitors such as Toyota and Honda.
The economic similarities are disturbing, but what really worries me is the potential for political emulation. FDR was not shy about using any power he thought he could get away with. Several of his signature programs were ruled unconstitutional and his answer was an attempt to expand the size of the court. FDR was also an unabashed admirer of Mussolini (as were many of the partners at JP Morgan) and the similarity between FDRs economic program and fascism is not easy to dismiss. From a review of Three New Deals at Mises:
“‘I don’t mind telling you in confidence,’ FDR remarked to a White House correspondent, ‘that I am keeping in fairly close touch with that admirable Italian gentleman'” (p. 31). Rexford Tugwell, a leading adviser to the president, had difficulty containing his enthusiasm for Mussolini’s program to modernize Italy: “It’s the cleanest … most efficiently operating piece of social machinery I’ve ever seen. It makes me envious” (p. 32, quoting Tugwell).
It is usually those on the left calling conservatives fascist, but the fact is that fascism was socialism. It married the state and big business much as FDR did in the Depression. I’m not saying that Obama is a closet fascist but with the cult of personality that has sprung up around him, I worry about the potential for an expansion of executive power. Socialism usually kills itself because it just doesn’t work, but if combined with a powerful personality, it can be very dangerous.
I am still reserving judgment on President elect Obama until I see what he actually proposes, but he said nothing in the campaign to give a free market advocate comfort. Let’s hope he doesn’t take the FDR admiration too far.