New New Deal a dangerous (and expensive) idea

What's the price for ending the recession? How about trillion-dollar-plus deficits -- and a longer recession? Add in a bigger government and less freedom, and the incoming president's grand economic plans start sounding a little ... frightening.

President-Elect Barack Obama cautions that his economic plans will probably have the United States running "trillion-dollar deficits for years to come." Before the ink has dried on news reports of his mind-boggling concession, the Congressional Budget Office raises a red flag (PDF) and warns that the next resident of the White House is being unreasonably optimistic -- the tidal wave of red ink about to engulf the federal budget is bigger than anticipated even before taking into account Obama's plans for a "new New Deal."

It's all right, the president-to-be's partisans tell us. That vast new spending is necessary and will pull us out of recession just the way the FDR-era programs on which it's modeled saved us from the Great Depression.

Don't count on it. Plenty of experts think emulating the New Deal is a recipe for economic disaster.

Recently, Salon's David Sirota declared doubt about the wisdom of the New Deal to be "abject insanity." If it's insane to criticize 1930s-era economic policies, then it's a madness shared by a good many scholars. As Jonathan Bean, a historian at Southern Illinois University, points out at The Independent Institute's blog, The Beacon, 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."

Credible economists continue to research the issue and conclude that Franklin Delano Roosevelt's policies did, in fact, prolong the Great Depression and deepen the misery of the era. Two UCLA economists, Harold L. Cole and Lee E. Ohanian, studied FDR's economic policies for a 2004 paper (PDF) published by the Federal Reserve Bank of Minneapolis. They concluded that "New Deal policies are an important contributing factor to the persistence of the Great Depression." Labor and industrial policy, in particular, "accounts for about half of the continuation of the Great Depression between 1934 and 1939."

Among FDR's mistakes, The Beacon's Bean points out, was demonizing everybody who disagreed with him so they hunkered down and held off making investments until he was out of office. Even John Maynard Keynes "repeatedly criticized FDR for discouraging private business investment with his taxes, regulations and overheated rhetoric (the White House charged that opponents were 'Big Business Fascists')."

FDR's rhetoric was a bit rich, considering that his own National Recovery Administration boasted "The Fascist Principles are very similar to those we have been evolving here in America."

So there is good reason to be skeptical of claims that a new New Deal is just the medicine that America needs. That's especially true since this particular prescription may be the most expensive one ever written for the country. President-Elect Obama talks of trillion-dollar deficits, but the CBO says (PDF) the deficit for 2009 is already on track to be $1.2 trillion, before the new chief executive's "stimulus" package is even considered.

CBO projects that the deficit this year will total $1.2 trillion, or 8.3 percent of GDP. Enactment of an economic stimulus package would add to that deficit. In CBO’s baseline, the deficit for 2010 falls to 4.9 percent of GDP, still high by historical standards.

A deficit that's 8.3 percent of the economy? That's simply unthinkable. That money has to come from somewhere, and the only source is the private sector, since that's where wealth is created. The money can be taxed, it can be borrowed or it can come from inflating the money supply and devaluing existing dollars -- in all cases, wealth is taken from the hands of private citizens so it can be spent by politicians and bureaucrats. The end result is a public flurry of checks cut by government officials, but nobody sees the checks that aren't being cut by millions of businesses and consumers who now have less to spend.

We're talking about a huge transfer of wealth and power. The New Deal made government much more powerful than it had ever been before, with terrible consequences for personal freedom. I'm not talking about the abstract value of free enterprise; I mean people thrown in jail because they had the nerve to set their own prices for their products.

Even if we don't get such intrusive regulation under a new New Deal, federal budgets so vast that the government is borrowing over eight percent of the economy inevitably means that individual decision-making will be displaced by state planning. While running up a national credit card that you and I will ultimately have to pay off, the government will purchase enormous power and influence over our lives.

The hangover from this spending spree won't just mean huge bills, it will mean huge changes in the balance of power between the people and the state. Bankrupt though the goverrnment will be, it will own things we never thought it would own, and it will have inserted itself into areas that we never thought appropriate.

That's what happened during the first New Deal, and it will happen again if those policies are repeated in any significant way.

If history is any guide, Barack Obama's proposed economic policies may actually prolong our economic woes. And they'll leave us with an unacceptably high tab in terms of both money and liberty.