Tuesday, January 13, 2009

Economist explains why a new New Deal would revive an old bad idea

Incoming President Barack Obama promises that he's going to cure our economic woes with a big-ticket stimulus package that looks to cost in the neighborhood of $775 billion. It's a new New Deal, as many on his team would have it -- hearkening back to the budget-busting spending and heavy (liberty-pinching) regulation of the Depression-era Roosevelt administration.

That spending comes on top of the hundreds of billions already allocated to save banks and automakers from their largely self-inflicted. The details of the stimulus are being hashed out as we speak -- which is another way of saying that the Obama team is sweetening the pot to pull in congressional support for his proposal. Energy tax credits are being doubled to please Senators Boxer and Cantwell, money to subsidize strapped homeowners is being allocated to stroke Senator Dodd, and that's on top of the fact that the whole scheme is pork -- what the Wall Street Journal calls "the largest collection of parochial spending projects in American history."

But before we try a new New Deal, shouldn't we examine the effects of the old one first? The fact is, despite popular mythology, there's strong evidence that the New Deal made the Depression worse than it would have been otherwise. In research published in 2004, UCLA economists Harold L. Cole and Lee E. Ohanian concluded that the New Deal kept the Depression going seven extra years.

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

In the video below, Ohanian explains his findings to Michael Moynihan of Reason.tv

If you want the details, Cole and Ohanian's paper can be found a here (PDF). In particular, they found, the government's efforts to fix prices and wages did terrible economic damage.

From the UCLA announcement of the paper:

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."

As I've pointed out before, Cole and Ohanian aren't alone in their conclusions. A 1995 survey of economists and historians published in the Journal of Economic History found "[h]alf of the economists and a third of historians agreed, in whole or in part, that the New Deal prolonged the Great Depression."

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