Friday, January 20, 2012

The New Deal revisited

Burton Folsom Jr. is the author of New Deal or Raw Deal, a fascinating history of the New Deal economic program of the 1930s. Some highlights from the first five chapters:

National Recovery Administration

The National Recovery Administration, implemented shortly after Franklin Roosevelt took office in 1933, was, in the words of wikipedia, the president's "primary New Deal agency." The mission of the NRA was to fix prices, reduce working hours (think France here) and tamp down on competition. Folsom explains the rationale:
As part of their faith in the underconsumption theory, [the New Dealers] believed that artificially higher wages [resulting from less competition, fixed prices and fewer working hours] meant greater purchasing power, which they believed would help Americans out of the Great Depression. If people earned more, they could buy more, and that would stimulate industrial and economic recovery.

In this "high wage" theory, the efficient businessman, the innovator and the price cutter, was evil because he was believed to contribute to lower wages, and therefore diminishing purchasing power. He was a violator of "fair competition." His gain was not just the loss of his competitors, but of the whole country. The NRA, by encouraging codes of "fair competition," was giving all existing businesses a chance to make profits, to pay high wages, and to survive the price cutter and innovator.

As Roosevelt said, the NRA "was passed to put people back to work (emphasis in original), to let them buy more of the products of farms and factories and start our business at a living rate again."
This dovetails with wikipedia's description, which states:
[NRA Director Hugh Samuel] Johnson called on every business establishment in the nation to accept a stopgap "blanket code": a minimum wage of between 20 and 45 cents per hour, a maximum workweek of 35 to 45 hours, and the abolition of child labor. Johnson and Roosevelt contended that the "blanket code" would raise consumer purchasing power and increase employment.
Folsom explains that such laws punished those who sold and produced goods at cheap prices. He highlights the example of a tire company that had traditionally undersold the competition being forced to raise its prices, thus eliminating its competitive advantage against more established players. Not only were such rules economically harmful, but they also posed a safety risk. In the face of higher prices, people are less apt to replace their tires in a timely fashion or rely on rebuilt ones, thus placing them at higher risk of a blowout.

Other notes from wikipedia regarding the NRA:
In early 1935 the new chairman, Samuel Williams announced that the NRA would stop setting prices, but businessmen complained. Chairman Williams told them plainly that, unless they could prove it would damage business, NRA was going to put an end to price control. Williams said, "Greater productivity and employment would result if greater price flexibility were attained." Of the 2,000 businessmen on hand probably 90% opposed Mr. Williams' aim, reported Time magazine: "To them a guaranteed price for their products looks like a royal road to profits. A fixed price above cost has proved a lifesaver to more than one inefficient producer."
...The National Recovery Review Board, headed by noted criminal lawyer Clarence Darrow, a prominent liberal, was set up by President Roosevelt in March 1934 and abolished by him that same June. The board issued three reports highly critical of the NRA from the perspective of small business, charging the NRA with fostering monopolies. 
...The NRA was famous for its bureaucracy. Journalist Raymond Clapper reported that between 4,000 and 5,000 business practices were prohibited by NRA orders that carried the force of law, which were contained in some 3,000 administrative orders running to over 10 million pages, and supplemented by what Clapper said were "innumerable opinions and directions from national, regional and code boards interpreting and enforcing provisions of the act."
In 1935, the U.S. Supreme Court unanimously declared that the National Industrial Recovery Act law which created the NRA was unconstitutional, with the NRA halting operations shortly thereafter. It was, of course, rulings such as this that led to Roosevelt's attempted court-packing scheme

Lest anyone think that economic lunacy such as government price-setting was only a passing fad among Democrats, recall that just this week it was revealed that no less than six House Democrats proposed legislation to set up a "Reasonable Profits Board" to control gas profits. 

Agricultural Adjustment Act

Folsom sums up another New Deal program, the Agricultural Adjustment Act:
The AAA was very complicated, but in a nutshell here is how it worked. First, some farmers would be paid not to produce on part of their land; second, farm prices would be pegged to the purchasing power of farm prices in 1910; third, millers and processors would pay for much of the cost of the program. What's more, power would be centralized through the secretary of agriculture, who would set the processing taxes, target the price of many commodities, and tell farmers how much land to remove.
Wikipedia offers basically the same take:
The Agricultural Adjustment Act...was a United States federal law of the New Deal era which restricted agricultural production by paying farmers subsidies not to plant part of their land (that is, to let a portion of their fields lie fallow) and to kill off excess livestock. Its purpose was to reduce crop surplus and therefore effectively raise the value of crops, The money for these subsidies was generated through an exclusive tax on companies which processed farm products.
Think about that: the government was paying farmers not to grow crops in order to boost prices at the very same time that people were literally struggling to put food on the table and avert hunger. Like the NRA, the AAA was found by the Supreme Court to be unconstitutional

More New Deal blogging to come.

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