Wednesday, January 21, 2009


Bad Deal

With all the talk of President B. Hussein Obama and his allies in Congress wishing to lauch a free-spending New New Deal," folks need to take a hard look at the free-spending Original New Deal and investigate whether or not it successfully jump-started the econonomy.

Of course, pundits and leftist politicians - and most U.S. history text books - will tell you that FDR's New Deal ended the Great Depression. In a devastating essay in The American Conservative, Foundation for Economic Education's Sheldon Richman says that's pure bunk. First, Richman quotes historian David Kennedy: "Whatever it was, [the New Deal] was not a recovery program, or at any rate an effective one." Richman goes on from there with a devastating critique of the New Deal and the FDR's-statism-saved-us consensus. (You can read Richman's entire essay here.)

Here's Richman's summation:

What can we learn from all this? That money is too important to be left to the state. One way or another, government mismanagement of the monetary system wrecked the U.S. economy. It’s happening again now. The only permanent way to avoid a repetition is to place the system where it belongs: in the free market.

Second, efforts to prevent liquidation of malinvestment caused by inflation bankrupt companies and only prolong economic agony. Bailouts are counterproductive. Assets must be revalued and rearranged in the light of reality.

Third, government stimulus spending, borrowing, taxation, and public works commandeer scarce private resources and prevent entrepreneurs from shifting them to investments aligned with consumer, not political, preferences. As Price Fishback of the University of Arizona points out, even FDR didn’t try to stimulate the economy with extraordinary budget deficits, something for which Keynes criticized him.

Fourth, individual liberty is the first casualty when bureaucracy expands to manage the economy.

President-elect Obama would do well to take note, but we hardly have grounds for optimism. Obama has declared his intention to spend, New Deal-style, hundreds of billions of dollars—perhaps a trillion—to rebuild infrastructure, modernize schools, retrofit public buildings for energy efficiency, and expand the broadband network. No matter how meritorious these projects, they do not constitute a genuine recovery program. Government cannot escape the fact that it cannot create wealth. It can only transfer wealth from the private sector or create the illusion of wealth through inflation. Jobs created under inherently politicized programs will displace jobs the private sector would create if the burden of government were lifted and investor confidence restored.

It’s about time we learned something from the New Deal.

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