American Mugabe, Revisted
Bryan Caplan
Remember last year's blogosphere debate on whether FDR was an "American Mugabe"? I just came across a 1997 piece by Robert Higgs that I should have been quoting in my defense. But late is better than never. His thesis:
In retrospect it seems hyperbolic to put much weight on the fears of investors in the latter half of the 1930s that the regime might soon undergo changes that would seriously jeopardize their private property rights—after all, we know quite well that the U.S. economy
did not fall into outright fascism, socialism, or some other variant of government takeover. Roosevelt, we now know, never became a dictator along the lines of his contemporaries Stalin, Mussolini, and Hitler; the New Dealers were no Brown Shirts. But what seems so obvious to us in retrospect had a quite different appearance to many contemporaries... As I shall demonstrate shortly, the possibility that the United States might undergo an extreme regime shift seemed to many investors in the late 1930s and early 1940s not only possible but likely.
Higgs presents a lot of evidence, but here's the clincher:
In November 1941, just before the Japanese attack on Pearl Harbor propelled the United States into total war, the Fortune pollsters asked a sample of business executives a question that bears quite directly on the regime uncertainty at issue in this article. The question was “Which of the following comes closest to being your prediction of the kind of economic structure with which this country will emerge after the war?” The respondents were presented with four options, as follows (the percentage of respondents selecting that option as the closest to their own prediction is shown in brackets):
(1) A system of free enterprise restored very much along the prewar lines, with modifications to take care of conditions then current. [7.2 percent]
(2) An economic system in which government will take over many public services formerly under private management but still leave many opportunities for private enterprise. [52.4 percent]
(3) A semi-socialized society in which there will be very little room for the profit system to operate. [36.7 percent]
(4) A complete economic dictatorship along fascist or communist lines. [3.7 percent] (Cantril 1951, 175)
...If these poll data are even approximately indicative of the true expectations of American investors, then it is astonishing that the recovery of investment had proceeded as far as it had.
HT: Cafe Hayek
econlog.econlib.org
Was 1938 a US Nadir?
newdealBrad Delong notes that George Will made an aside that "public confidence in markets was at a nadir" in 1938. But that was 3 years into a Democratic regime, so clearly there's something wrong. Delong remarks:
A normal person would not argue that the New Deal prolonged the Great Depression. A normal person would require a case that he or she could point to of a country that (a) relied on market forces alone to generate recovery, and (b) recovered fully from its Great Depression. But George Will is not a normal person.
Well, clearly there have never been any industrialized anarchist states (let alone ones that suffered Great Depressions), so I guess that "proves" the New Deal was a net benefit to Delong. But there have been lots of bad ideas that existed for millennia that everyone did or believed in and we now know don't work (trial by ordeal, bloodletting). Milton Friedman argued that the depth of the Great Depression was mainly from perverse monetary policy that ended in 1933, so the kick back in growth in that view has nothing to do with fiscal policy, or the creation of the SEC or such issues. A 2004 paper at the SSRN by Chari, Kehoe and McGratten argues that increased labor rigidity from the New Deal was primarily responsible for prolonging the Great Depression. Cole and Ohanian wrote a similar piece for the Minneapolis Fed in 1999.
Further, the 1937 recession was most probably due to a tax over-reach by anti-business Democrats. Unemployment rose from 5 million to almost 12 million in early 1938. Manufacturing output fell off by 40% from the 1937 peak; it was back to 1934 levels. What caused the plunge in output was the tax on retained earnings, which seemed like a good idea to economically incompetent Roosevelt because he assumed he was just taxing money, and unused money at that. Plus, taxes on capital are progressive (good), and since supply and demand curves are (perfectly?) inelastic (eg, minimum wage), it's just good old Robin Hood economics. See here for a 1937 rationale, and note it mentions Henry Ford by name.
Unfortunately, retained earnings are key sources of investment funds for companies, and taxing them was like putting rocks in your transmission (new Fed chief Ben Bernanke did a lot of work here). Not that this should have surprised anyone, as Roosevelt was busy trying to change the top marginal tax rate to 100% (he only got it to 90%).
The Great Depression was a calamity and Hoover did his best to raise taxes and decrease money supply to fix it (doh!). Roosevelt benefited from the US leaving the Gold Standard (monetary policy), but his New Deal was a mess, and people knew it. As noted at the Mackinac Center for Public Policy:
But when a nationally representative poll by the American Institute of Public Opinion in the spring of 1939 asked, "Do you think the attitude of the Roosevelt administration toward business is delaying business recovery?" the American people responded "yes" by a margin of more than two-to-one. The business community felt even more strongly so
Delong's assumes that a normal person would not argue the New Deal was counterproductive, the idea being inconceivable to his theory of how the world works. Well, theory is a lens and a blinder, and his theory has some blind spots.
HedgeFundGuy - am 2007-01-05 03:45
mahalanobis.twoday.net
Regime Uncertainty
Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War (PDF)
independent.org
The New Deal and the Great Depression
...The purpose of the NIRA and NLRA was to promote labor and trade practice provisions so as to limit the extent of competition between firms and competition between workers. Among the NIRA codes that Cole and Ohanian highlight include minimum prices below which firms were not allowed to sell their products, restrictions on productive capacity and the amount that could be produced, and limitations on the workweek. Cole and Ohanian concluded on the basis of model simulations that these kinds of New Deal policies might have accounted for 60% of the persistence in the output gap.
Outside of manufacturing, the Agricultural Adjustment Act of 1933 and Soil Conservation and Domestic Allotment Act of 1936 -- paying farmers not to grow wheat-- were designed with the specific goal of reducing agricultural production in order to raise agricultural prices. State regulatory commissions like the Texas Railroad Commission ordered oil producers to cut back production in an effort to increase oil prices.
The notion that if we can just create more monopoly power for every single sector of the economy, encouraging every sector to produce less so they can raise their wages and prices, that we will then somehow make everybody richer, is so spectacularly wrong-headed that I would be just as dumbfounded to find that Brad De Long believes it as he seems to be by those of us who maintain that some aspects of New Deal policy surely did make the recovery from the Great Depression slower.
I openly confess to believing that government policies that were explicitly designed to limit manufacturing, agricultural, and mining output may indeed have had the effect of limiting manufacturing, agricultural, and mining output.
econbrowser.com
Also see
meganmcardle.theatlantic.com
econlog.econlib.org
economist.com
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One comment I would make is that "American Mugabe" is too strong. Even in pure economic terms FDR wasn't as bad as Mugabe, and generally he was not a thug like Mugabe, so while I think the posts with that title are mostly accurate, the title might be considered slander of FDR. |
