Sunday, October 26, 2008

Care required in new regulation

Some UCLA economists have quantified what many conservatives and libertarians have thought for quite a while, that several of FDR's New Deal policies prolonged the Depression. (Via Don Luskin)

Prolonged by as much as seven years.

While I think it's extremely unlikely that an Obama, Pelosi, and Reid would enact anything as damaging as FDR did, some rhetorical similarities are apparent. The mistakes (and a few successes) of the New Deal should provide food for thought as we determine the exact nature of our future regulatory regime.

Quoting extensively, but please go read the original...
"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

First, it should be pointed out that FDR's plan was thought to be pro-business as well as pro-labor. Republicans too now fall into the intellectual trap that by creating favorable conditions for a few businesses that one is helping business and the economy generally. Consequently, Democrats can claim to be centrist, pro-business folk for engaging in corporate welfare tactics. I'm reminded of the late George Carlin when he said "The word bipartisan means some larger-than-usual deception is being carried out."

We probably won't get another Smoot-Hawley, but we have seen a lot of static about NAFTA, and some ridiculously asinine opposition to the Colombia Free Trade agreement. We are starting to see irresponsibly pro-union legislation in the form of the so-called "Employee Free Choice Act". And we are seeing increased support for increasing the minimum wage and pegging it to inflation.

(Aside: What happens when we get deflation? Can the minimum wage go down then?)

We're told this is no time for "ideology" - meaning of course, free-market ideology. (No such prohibition on socialist ideology is to be found.) But it is a time when one should marry theory with empiricism. And empirically, several policy proposals out there in the aether are known losers.

Let's learn from our mistakes, and exercise care in our attempts to right the economy.

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