The Free Market 17, no. 1 (January 1999)
Unreconstructed Keynesians the world over are now calling for a “Global New Deal” ostensibly to put an end to the business cycle once and for all. President Clinton championed this view in a recent speech before a joint meeting of the World Bank and IMF in which he repeatedly cited President Franklin D. Roosevelt as he urged foreign governments to “create mechanisms” that can “tame the cycles of boom and bust that today shake the world economy.”
The problem with this is that the original New Deal was an economic debacle that only prolonged the Great Depression; a global New Deal would amplify these failures a hundred times over.
The unemployment rate during the 1933-1940 period averaged about 18 percent and was as high as 28.3 percent in March of 1933. By the end of 1938, on the eve of World War II, the U.S. unemployment rate still hovered at 18 percent, as high as it was in 1933, FDR’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 antitrust laws were set aside.
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.
Over 700 NRA 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 Jacob Maged 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 benefitted 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 anyway by disguising the program as a “soil conservation” effort.
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.
In their book Out of Work, Ohio University economists Richard Vedder and Lowell Gallaway provide econometric estimates 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.
But the programs were a resounding political success as they provided virtually unlimited opportunities for political patronage. In 1939 a special U.S. Senate Commit-tee 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.
The Reconstruction Finance Corporation made 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. The RFC was abolished in 1955 under a cloud of corruption and scandal.
The New Deal made the Great Depression worse, not better. A new 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 the causes of today’s Asian economic crisis—and of the Great Depression of the 1930s.
Thomas J. DiLorenzo is professor of economics at Loyola College and an adjunct scholar of the Mises Institute. Further Reading: Richard Vedder and Lowell Gallaway, Out of Work (New York: New York University Press, 1997).
