Tuesday, December 9, 2008

Everything old is new again

As if the oh-so-delicious scandal enveloping Illinois Governor Rod Blagojevich over the apparent attempt to auction off President-Elect Barack Obama's old U.S. Senate seat weren't enough warning of just what lies at the core of government, the Ludwig Von Mises Institute publishes a review of a new book on the impact of FDR's New Deal, just in time to serve as a warning about the incoming administration's New New Deal. In his balanced but overall positive assessment of New Deal or Raw Deal?: How FDR's Economic Legacy Has Damaged America, by Burton Folsom Jr., David Gordon writes:
One of his best insights is that the New Deal programs were financed in large part by the poor. At Roosevelt's behest, excise taxes were imposed on many popular items of consumption; and these weighed especially heavily on the impoverished. "In the first four years of Roosevelt's presidency, revenue from excise taxes exceeded that of income and corporate taxes combined" (p. 126). (I do not think it right, though, to call excise taxes "regressive," as Folsom does. Everyone paid the same rate; the poor were not charged more.)

This was far from the only way in which New Deal programs hurt the poor. Blacks fared very badly under Roosevelt, the supposed great exemplar of enlightened modern liberalism. Minimum-wage laws proved a stumbling block to efforts by blacks to secure jobs. These laws prevented employers from undercutting unions by offering lower wages to nonunion members. Since blacks faced exclusion from many of the powerful unions, they were in effect frozen out.
Since union empowerment and massive spending are both on the agenda once again, this is an important take on policies that may well be dusted off and reused.

The review comes as part of a handy matching set with a Reason magazine article by Michael T. Flynn on the causes of the financial crisis that is being used to justify the revival of activist government. In "Anatomy of a Breakdown," Flynn writes:
Throughout the 1990s and the early years of this century, both major political parties became intoxicated with the idea of promoting "affordable" housing. By the time the crisis blew up, Congress was mandating that roughly 50 percent of the mortgages issued by Fannie and Freddie go to households making below their area's median income.

Many conservative commentators have blamed the housing mess on the 1977 Community Reinvestment Act (CRA), which essentially required banks to increase lending in low-income areas. While the CRA was a bad law, its role in recent events has been overblown. After all, it was on the books for decades before the bubble began. The law's worst legacy is the permanent network of "affordable housing" advocates that sprang up after it passed. These groups, which were intended to facilitate lending in poor areas, continually called for increased activity by banks and additional government support for affordable housing initiatives. The CRA also helped create a climate in which lending to low-income households was a key metric and condition regulators used in approving bank mergers. ...

It's hard to overstate the role Fannie Mae and Freddie Mac played in creating this crisis. Chartered by Congress, Fannie in 1938 and Freddie in 1970, the two government-sponsored enterprises provided much of the liquidity for the nation's housing market. Because investors believed—correctly, it turns out—that Fannie Mae and Freddie Mac were backed by an implicit guarantee from the federal government, the companies were able to raise money more cheaply than their competitors. They were also exempt from federal, state, and local taxes. ...

But Fannie and Freddie by this point were political powerhouses. When the accounting scandal first emerged, Fannie's chairman was Franklin Raines, former director of the Office of Management and Budget under President Bill Clinton. Its vice chairman was Jamie Gorelick, a former Justice Department official who had served on the 9/11 commission. The two companies provided tens of millions of dollars in annual campaign contributions and spent more than $10 million a year combined on outside lobbyists.
The whole piece is worth a read to discover how government intervention in the market causes the problems that are then used as arguments in favor of more government intervention in the market.

Folsom's book seems to effectively describe the evil impact of the New Deal at the macro level, but it was a brutal thing to endure at the personal level, too. The Schechters, a family of butchers, are often (and correctly) rated as heroes for their ultimately successful battle to overturn some of FDR's more egregious regulations. But they were ultimately victims, too, since the effort destroyed their finances. The roots and victims of the New Deal are documented in Amity Shlaes's The Forgotten Man: A New History of the Great Depression, a book which deserves more recognition right now.

But what was the New Deal like on the enforcement end? John T. Flynn told that tale in The Roosevelt Myth back in 1948:
The NRA was discovering it could not enforce its rules. Black markets grew up. Only the most violent police methods could procure enforcement. In Sidney Hillman’s garment industry the code authority employed enforcement police. They roamed through the garment district like storm troopers. They 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. Night work was forbidden. Flying squadrons of these private coat-and-suit police went through the district at night, battering down doors with axes looking for men who were committing the crime of sewing together a pair of pants at night. But without these harsh methods many code authorities said there could be no compliance because the public was not back of it.
Obama and company seem sincere in their claims that they want to bring back the heady, big-government days of the New Deal. Let's take them out their word and closely analyze their justifications for doing what they intend, and just what it is they plan to visit upon us.



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