Same old New Deal?

It is little surprise that recent increased talk about an economic depression has also produced renewed calls for a New Deal type response. After all, in popular lore the massive government intervention that was the New Deal economic program solved the Great Depression. But is that true? George Will had a wonderful column on the topic this weekend:

The assumption is that the New Deal vanquished the Depression. Intelligent, informed people differ about why the Depression lasted so long. But people whose recipe for recovery today is another New Deal should remember that America's biggest industrial collapse occurred in 1937, eight years after the 1929 stock market crash and nearly five years into the New Deal. In 1939, after a decade of frantic federal spending -- President Herbert Hoover increased it more than 50 percent between 1929 and the inauguration of Franklin Roosevelt -- unemployment was 17.2 percent. "I say after eight years of this administration we have just as much unemployment as when we started," lamented Henry Morgenthau, FDR's Treasury secretary. Unemployment declined when America began selling materials to nations engaged in a war America would soon join.

The sentence that Will uses is taken from this Morgenthau statement, which is worth quoting at length:

We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong ... somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises ... I say after eight years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!

That's not much of a surprise. After all, the government can only engage in wealth transfer, shifting the allocation of resources around. What it cannot do is increase wealth. Massive government intervention only makes sense if you think that the politicians have a better idea of how to allocate resources than the collective knowledge of the marketplace, which I find absurd.

Indeed, as Will notes, recent research suggests that the government actually prolonged the Depression:

In a 2004 paper, Harold L. Cole of the University of California at Los Angeles and Lee E. Ohanian of UCLA and the Federal Reserve Bank of Minneapolis argued that the Depression would have ended in 1936, rather than in 1943, were it not for policies that magnified the power of labor and encouraged the cartelization of industries. These policies expressed the New Deal premise that the Depression was caused by excessive competition that first reduced prices and wages and then reduced employment and consumer demand. In a forthcoming paper, Ohanian argues that "much of the depth of the Depression" is explained by Hoover's policy -- a precursor of the New Deal mentality -- of pressuring businesses to keep nominal wages fixed.

Really, read the entire column.

The last thing I would like to leave the reader with is the following graph that I stumbled upon (click to enlarge):

Source: housingbubblebust.com

Assuming that this graph is accurate, it tells an interesting story. While many people would look at this and think that it is further evidence that FDR ended the Depression, look a bit more closely. According to the graph the Depression actually reached its nadir in about the third quarter of 1932. Roosevelt, however, didn't even take office until March 1933, at which time the economy had already begun to recover before he had lifted a finger.

Massive government spending didn't work then and it won't work now.