The New Deal

Some socialist realism courtesy of the WPA.

Like probably everybody else, I was taught in high school that the Great Depression proved the need for government to intervene in the free market. The free market caused the Depression. Energetic government programs, the New Deal under Roosevelt in the US and similar “slow socialism” under Mackenzie King in Canada, pulled us out.

I'd like to believe it always smelled fishy to me. The surface facts just don't fit that interpretation. Roosevelt came to power in 1932. The Depression continued until 1940-41, when the US entered the war. Had Roosevelt been a usual two-term president, he would have left office with the Depression still in full swing. 

The East is red.

Historically, one does not generally expect a recession, a depression, a business downturn, to last so long—1929 to 1940-41. Twelve years. This is surely unheard of otherwise.

Accordingly, the simple evidence suggests strongly that, whether or not the “free market” caused the depression in the first place, Roosevelt’s “New Deal” policies exacerbated and prolonged the Depression, rather than ending it.

Yonge Street Mission.

And they surely did. The basic problem is that Roosevelt, and King in Canada, kept trying different things, without much of a system behind it, but with the government always changing the rules of the game in one way or another in hopes something would work. This is almost self-evidently bad for the economy. When the rules keep changing, it is not safe to make new investments. What might look profitable today can suddenly be unprofitable tomorrow, due to unpredictable government action. So the only smart thing to do is to sit on your cash until the time of experimentation is over.

This is especially relevant today, because history is repeating itself. We hit a bad bump in 2008. I think there is some real argument whether the “free market” is unambiguously at fault for that crash, but logically, I think a free market is going to involve crashes every now and again, just as, and largely because, it involves business failures, bankruptcies. But such crashes clean out deadwood and economic obstructions, making the economy stronger over the medium to long term. 

A Bennett buggy.

When governments step in and complicate the process, they are almost inevitably going to prolong the pain for no gain. I can see things like protecting depositors; panic-allaying measures. Emergency loans for genuinely viable businesses sideswiped by another's bankruptcy. But there is a limit.

Prime illustration: given that the current long recession began in the US, where is it hurting most now? Even given that the Obama administration has taken an interventionist path, the US government remains on the whole more hand's-off with regard to the economy than the governments of the EU. And the long-term repercussions of the world slowdown seem to be getting worse and worse in Europe, rather than the US, and certainly rather than Canada.

A rugged individualist.

It also seems very likely by this point that the Obama administration's interventions in the US have prolonged the business slowdown in that country. It has now lasted longer than a recession usually lasts. That's the best evidence we have that the present policy is wrong.