Shlaes on the New Deal

After my post on the Great Depression and the New Deal-- and then excerpts from an op-ed from Amity Shlaes-- now excerpts from two interviews with her about her book, The Forgotten Man: A New History of the Great Depression...

First, from Marvin Olasky in World...

SHLAES: The thesis of this book is not especially controversial for economists, but it is controversial for historians who have not kept up with the economic findings. The argument is that the government made the Great Depression worse, both under Hoover and Roosevelt. That is a relatively new argument for historians....

Hoover is berated for not spending and for being too laissez-faire, but both those attacks on him are poorly thought-out. When Herbert Hoover was president, the government was really tiny, 3-4 percent of GDP, whereas now the federal government alone is about 20. So, even if Herbert would have spent the whole government budget, it wouldn't have been the whole stimulus that could have changed things.

WORLD: But he wasn't laissez-faire anyway.

SHLAES: He was not. He loved to intervene....

WORLD: Did Roosevelt save America from revolution?

SHLAES: The standard story is that America would have gone communist or fascist, had FDR not been there. But I had no sense that Americans wanted revolution. The Democratic platform in 1932 was as placid and moderate as could be. Americans didn't really want revolution; they just wanted to have growth back.

And then, with Nick Gillespie in Reason...

With the possible exception of the Civil War, no event has transformed American politics more fully than the Great Depression. From the stock market crash of 1929 through U.S. entry into World War II, the country’s economy floundered tragically, with the unemployment rate typically in the high teens. First under the misguided and generally ineffective policies of President Herbert Hoover and later under those of Franklin Delano Roosevelt, the federal government became increasingly interventionist, at times attempting to dictate all aspects of economic production....

Shlaes shows how both Hoover and Roosevelt “overestimated the value of government planning” and intensified and prolonged the very problems they were seeking to fix.

In terms of the book's style...

Told in a rich narrative style, The Forgotten Man follows dozens of historical figures through the Depression, weaving the stories of people as varied as American Civil Liberties Union co-founder Roger Baldwin, Alcoholics Anonymous creator Bill Wilson, power utility magnate (and failed presidential candidate) Wendell Willkie, and African-American evangelist Father Divine into a rich human tapestry....

Now to the substance of the interview, with Shlaes on the importance of government-induced uncertainty to hamstringing the economy...

Amity Shlaes: One of the important things about the existing argument is that it’s all about Keynesianism, about whether government spending can cure the economy when it’s ill. Scholars have overlooked the cost of uncertainty in an economy, what we would now call the “unknown unknowns.” Both the Hoover and Roo­sevelt administrations (but especially the Roosevelt administration) were so unpredictable. That hurt the economy very much, and when I went back and saw the extent I was astounded....

During the Depression, you heard the phrase “bold, persistent experimentation” all the time. We’ve been taught that was good. Somebody had to do something, was what we learned. But what I saw was this enormous cost, especially during the second half of the 1930s....

Great point!

I learned the point of the next paragraph through Henry Hazlitt's wonderful book, Economics in One Lesson.

In the late 19th century, there was a book, a collection of essays, called The Forgotten Man and a famous lecture called “The Forgotten Man.” The author was a Yale professor called William Graham Sumner, who had quite a different forgotten man in mind. He put it algebraically. Sumner said a wants to help x, with x being the man at the bottom. And b wants to help x too. That’s our philanthropic impulse, we want to help. There’s nothing wrong with that. We all have that impulse to provide charity. It becomes a problem when a and b get together and pass a perhaps-dubious law that coerces c into funding their maybe-good project for x. In Sumner’s original version, c is the forgotten man, the man who pays, the man who prays, the man who is not thought of.

Now, to the Fed (in that day)...

The Fed was young. It had only been founded in the 1910s. They didn’t really know what they were doing. Neither Roosevelt nor Hoover understood that the country was in a deflation...Some towns realized this. They made their own money. They manufactured it....The Fed should have made money easier to obtain. The concept that we have today—much of this book is history, not economics—of open market economics, where the government buys bonds or sells bonds to soak up money from the economy, was not especially developed at that time. And the gold standard functioned differently anyhow. If you want to make an argument against the gold standard, this is the example....

Now, to a point I hadn't heard before-- that FDR purposefully copied Stalin on matters economic...

Roosevelt’s advisers didn’t know Stalin was a monster, or at least not so much, and very naively they copied him. In the book I trace how some of the characters go to the Soviet Union in 1927 and are bowled over by Stalin. They get six hours with him and they come back and you see them, especially [former Columbia University professor] Rex Tugwell, implementing things they learned from fascist Italy or from the world of Stalin. The influence of these European entities from Russia to Italy was not parenthetical. These people were not working for Moscow, but they were influenced by Moscow.

One of the members of the junket was a very well-known writer named Stuart Chase, an accountant who wrote about economics. He wrote a book called The New Deal, and it appeared in 1932, and that’s where Roosevelt got the phrase. The last sentence of Chase’s book is, “Why should Russians have all the fun remaking a world?” So you see the continuity.

There was a romance with the economy of scale, and not just in America. FDR’s advisers said that having so many different states and so many different ways of doing things was inefficient. If you had 50 flowers blooming, as federalists would have, they bloom differently and it makes for a messy garden. There was this sense that the economy couldn’t grow further unless there was rationalization, standardization....

Finally, on the applicability of this to today...

reason: ...Isn’t there a strange paradox at work in American politics? We have a much better understanding of economics and of how government interventions often have unintended, and usually negative, consequences. Free market ideas really triumphed in the second half of the 20th century. Yet as a percentage of the economy, government spending is far greater than it was during the Depression.

Shlaes: Hoover does get blamed for something that he doesn’t deserve. People today say, “Oh, he ought to have spent as a Keynesian would, and the government would have made the economy grow.” We want to remember that the government was very small when he was president. The federal government was smaller than state and local governments at the time. It spent something like the equivalent of 2 percent or 3 percent of gross domestic product. Now it’s 18 percent to 20 percent....

That challenge of two opposing ideas is one reason I wrote the book. The most important thing for our generation is that the New Deal will come back to bite our children when they pay yet higher payroll taxes because we did not dare to reform Social Security and other entitlements. There are not enough people to pay for Social Security, and Social Security is set up so that you can’t fix it just by growing the economy.

This is a moment of choice for us, our generation and the younger people. We have to look again at Roosevelt. Roosevelt was inspiring. He was right on World War II, but we do not have to have false nostalgia for his wrongheaded policies in the ’30s. We should warn our children and help to change Social Security, but you don’t see that in the presidential candidates. You don’t see daring on Social Security.