Fausta's Blog

American and Latin American Politics, Society, and Culture

November 29, 2008 By Fausta

Are we depressed yet?

Depressed as in the economy, not the holiday blues:

The Krugman Recipe for Depression
Massive government spending is no solution to unemployment.

The New Deal is Mr. Obama’s context for the giant infrastructure plan his new team is developing. If he proposes FDR-style recovery programs, then it is useful to establish whether those original programs actually brought recovery. The answer is, they didn’t. New Deal spending provided jobs but did not get the country back to where it was before.

This reality shows most clearly in the data — everyone’s data. During the Depression the federal government did not survey unemployment routinely as it does today. But a young economist named Stanley Lebergott helped the Bureau of Labor Statistics in Washington compile systematic unemployment data for that key period. He counted up what he called “regular work” such as a job as a school teacher or a job in the private sector. He intentionally did not include temporary jobs in emergency programs — because to count a short-term, make-work project as a real job was to mask the anxiety of one who really didn’t have regular work with long-term prospects.

The result is what we today call the Lebergott/Bureau of Labor Statistics series. They show one man in four was unemployed when Roosevelt took office. They show joblessness overall always above the 14% line from 1931 to 1940. Six years into the New Deal and its programs to create jobs or help organized labor, two in 10 men were unemployed. Mr. Lebergott went on to become one of America’s premier economic historians at Wesleyan University. His data are what I cite. So do others, including our president-elect in the “60 Minutes” interview.

And here’s why things got bad,

What kept the picture so dark so long? Deflation for one, but also the notion that government could engineer economic recovery by favoring the public sector at the expense of the private sector. New Dealers raised taxes again and again to fund spending. The New Dealers also insisted on higher wages when businesses could ill afford them. Roosevelt, for example, signed into law first his National Recovery Administration, whose codes forced businesses to pay an above-market minimum wage, and then the Wagner Act, which gave union workers more power.

As a result of such policy, pay for workers in the later 1930s was well above trend. Mr. Ohanian’s research documents this. High wages hurt corporate profits and therefore hiring. The unemployed stayed unemployed. “If you had a job you were all right” — the phrase we all heard as children about the Depression — really does capture the period.

Government can’t create wealth, but it can certainly hinder it. New Deal-type spending won’t be the way out of the current financial crisis: public works spending requires a lot of tax increases, card-check implementation will strengthen union size and demands, and the environment those actions will generate will be hostile to business, which will continue fleeing to more agreeable locations overseas.

Cafe Hayek explains aggregate demand. Too bad Krugman isn’t reading.

To answer the question in the post title, going by Krugman recommendations, if we aren’t yet, we soon will be.

UPDATE

Capital investment is the secret of creating new jobs, and the secret of promoting capital investment is a business environment that offers the opportunity for . . . (wait for it) . . . profit.

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