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February 02, 2009

Beware of Obama's "New Deal" - It Didn't Work the First Time

Most on the Left and much of the media is hailing the Obama prompted stimulus plans heading through Congress at warp speed as the solution to our economic problems - a modern day "New Deal". But the dirty little secret about the New Deal is that it didn't work - it actually prolonged the Great Depression. Shouldn't that give us all pause?

The true story of the failure of the New Deal has been covered recently in two great books, Liberal Fascism by Jonah Goldberg and The Forgotten Man by Amity Shlaes. The both point out that the New Deal was really a case of social engineering by liberal political elites and propaganda rather than an attempt to provide economic relief to the nation as quickly as possible. In fact, had World War II not intervened, the Great Depression might have lasted well into the 40s or beyond, unless many aspects of the New Deal were repealed.

Today in the Wall Street Journal there's an even better brief on the failed economics of the New Deal by two respected economists, Harold L. Cole of the University of Pittsburgh and Lee E. Ohanian of UCLA, How Government Prolonged the Depression. It's a must read, since Obama and the Democrats are attempting to do a similar thing today.

The New Deal is widely perceived to have ended the Great Depression, and this has led many to support a "new" New Deal to address the current crisis. But the facts do not support the perception that FDR's policies shortened the Depression, or that similar policies will pull our nation out of its current economic downturn.

...Why wasn't the Depression followed by a vigorous recovery, like every other cycle? It should have been. The economic fundamentals that drive all expansions were very favorable during the New Deal. Productivity grew very rapidly after 1933, the price level was stable, real interest rates were low, and liquidity was plentiful. We have calculated on the basis of just productivity growth that employment and investment should have been back to normal levels by 1936. Similarly, Nobel Laureate Robert Lucas and Leonard Rapping calculated on the basis of just expansionary Federal Reserve policy that the economy should have been back to normal by 1935.

So what stopped a blockbuster recovery from ever starting? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.

It's a frightening history lesson that none - none - of us learned in school, where we were taught to worship at the altar of FDR. Which is the same altar that we are now being told to worship Barack Obama at.

What's the old quote, those who forget history are doomed to repeat it?


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No problem. Obama can put everybody to work for the federal government.

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