Monday, November 17, 2008

New Dealing

Since the Progressives have somewhat successfully pinned the blame for the recession on "deregulation" of banking, the popular sentiment is that the only thing that can get us out of this mess is a "New New Deal". Roosevelt worship is still prevalent in the modern Democratic Party and especially public schools. Heck, I'm even writing this post from my house on Roosevelt Avenue. The most common quote from public school history books is that New Deal programs "got us out" of the Great Depression. This is despite Milton Friedman changing the economic discussions in this country for 40 years. The fact is, as initially stated by Friedman, and recently confirmed by UCLA economists Howard Cole and Lee Ohanian, the New Deal not only didn't help the economy, but also turned a depression into The Great Depression. Wage fixing sent unemployment from the teens into the twenties, corporate favoritism killed entrepreneurship, and Social Security paid our most productive workers to quit working. The Great Depression lasted until Europe began ordering large amounts of military supplies from American manufacturers. Among economists, this is universally accepted, except by the few for whom ideology trumps facts.

Despite all of the historical evidence against the New Deal, many in and around government are pushing for another New Deal for this. Obama's pick for Chief of Staff, Rahm Emanuel has long been talking about his plan for a "New New Deal". Barney Frank has called for "a new dose of Keynesianism". Paul Krugman has called for a New Deal but bigger. Almost all of these proposals entail a huge investment in infrastructure and alternative energy production. Now there is a bit of logic to this. If there are roads and bridges that need to be built for commerce, they can be built more cheaply during an economic downturn when there is less competition for labor and resources. But Keynesianism is built on the theory that deficit spending increases the economy by some multiplier. That theory is technically correct, but that multiplier is 0.7-0.8. Every $1 Million in government deficit spending increases the GDP by $700,000-$800,000. And at some point in the future, the government will have to tax (and reduce the GDP) to pay for that bridge or road. So while it is a good idea to build necessary infrastructure during a downturn, using public works to provide economic stimulus is based on junk science, dangerously short-sighted, and unlikely to work.

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