Revisiting The New Deal, Employment & Private Investment

Monday's Wall Street Journal, the last edition of 2007, featured a wonderful editorial by Amity Shlaes entitled "The New Deal Jobs Myth."

She begins her article with these passages,

"Is a public-sector job really as good as a job created in the private sector? I've been wondering about this a lot lately, in part because I just finished a book about the period of the first great American experiment in public job creation, the New Deal. Critics have written that I failed to appreciate the value of New Deal emergency jobs. But the quality of government-paid jobs is also relevant because of the Democratic presidential candidates' interest in that 1930s experiment.

To hear the candidates talk, a repeat of 1930s-scale government job creation is dangerously overdue. John Edwards has proposed that government take the lead in creating types of jobs -- "green collar" and "stepping stone" -- to serve the two goals of protecting the environment and giving lower earners new skills. Dennis Kucinich is calling for a new green version of FDR's Works Progress Administration.

Academics are backing the politicians up. Bruce Katz of the Brookings Institution recently suggested that intelligent planning is the key to success: "smart policies and investments on infrastructure can foster productive growth in our economy, sustainable growth."
Given this Edifice Complex, the actual quality of New Deal spending, job creation and growth are worth a second look. The record is less impressive than the rhetoric implies."

This alone is rather scary. Schlaes documents several Democratic Presidential candidates alluding to the need for government-sourced infrastructure and/or jobs programs. Thus, her focus on whether or not the New Deal efforts were all they are now remembered as being.

I should note that even in my youth, during the mid-1960s, it was often acknowledged that Roosevelt's various New Deal programs didn't pull America out of the Depression- World War II did that. Back in post-Eisenhower America, Democrats were regarded as the party that took our country to war. Seems silly to write that now, but it was true- Wilson, Roosevelt, Truman, Kennedy, Johnson. But, I digress.

Putting her finger on the key aspect which differentiates most public and private sector employment, Schlaes writes,

"What was wrong with those public works jobs? Many created enduring edifices -- New York's Triborough Bridge, for example, the Mountain Theater of Mount Tamalpais State Park outside San Francisco, the Texas Post Office murals, which were funded by Henry Morgenthau's Treasury. But the public jobs did their work inefficiently. That was because the jobs were scripted to serve political ends, not economic ones."

Short term, politically motivated job creation might provide some temporary, albeit inefficient, ways of increasing demand by paying people for 'work.' But it can't, in more than the short term, help but become wasteful of a nation's resources. It's rather like throwing Ricardo's theory of comparative advantage into reverse, and pouring resources into things for all the wrong economic reasons.

But this waste wasn't limited to simply labor resources. Schlaes also points out,

"One could interject that such arguments do not take into account the context -- the paucity of other jobs, the dust storms, the deflations, the homelessness, the incomprehensible real privation of the period. But in the later part of the 1930s, the same model infrastructure projects did their part to prolong that privation. The private sector, desperate, was incredibly productive -- those who did have a job worked hard, just as our grandparents told us. But the government was taking all the air in the room. Utilities are a prime example. In the 1920s electricity was a miracle industry. There was every expectation that growth in utilities might pull the country through hard times in the future.

And the industry might have indeed done that, if the government had not supplanted it. Roosevelt believed in public utilities, not private companies. He created his own highly ambitious infrastructure project -- the Tennessee Valley Authority. The TVA commandeered the utility business in the South, notwithstanding the vehement protests of the private utilities that served that area.

Washington sucked up much of the available capital by selling bonds and collecting taxes to pay for the TVA or municipal power plants in towns. In order to justify their own claim that public utilities were necessary, New Dealers also undermined private utilities directly, through laws -- not only the TVA law but also the infamous Public Utilities Holding Company Act, which legislated many companies out of existence. Other industries saw their work curtailed or pre-empted by government as well.

At many points during the New Deal, net private investment was not merely low, but negative. Companies were using more capital goods than they were investing in.

All this tells us that while some companies were gunning their engines for the moment -- the industrial production -- they had little hope for productivity gains in the years ahead. Business no longer believed in business. Five years into the New Deal, companies across the country were mounting what Roosevelt himself described as a "capital strike.""

This is the socialism for which FDR is justly criticized. He inherently distrusted private enterprise, and granted sweeping powers to public utilities while crowding out the private, investor-owned ones. People in the current era seem to forget how rampantly socialist FDR was considered to be. To illustrate his father's economic conservatism, and the Midwest's distrust of FDR's socialist programs and interference with the market economy, my father has told me many times,

"I was thirteen before I knew Roosevelt's first name wasn't Goddam."

I've written elsewhere in this blog that it's unrealistic to believe that civil servants will ever, on average, be motivated to solve a major economic problem better or more quickly than private enterprise. Further, who among us knows of many intelligent, well-educated people who head for middle management jobs in federal cabinet agencies? I'd never trust career administrators in the federal government to solve economic or social problems better than the private sector.

Yet FDR's failed programs have now become a mis-remembered beacon to today's liberal leaders. Rather than budget for infrastructure projects and let contracts to industry, or allow industry to determine the types of jobs it needs, Kucinich and Edwards are busy planning to have taxpayers fund their own visions of new training programs and public works agencies. The faith that America has placed in its profit-driven, entrepreneurial private sector since World War II would soon be replaced by the American version of Soviet central planning.

Schlaes concludes by writing,

"The relevant points for today are simple. The famous "multiplier effect" of public spending may exist. U.S. cities do indeed need new highways, new buildings and new roads, maybe even from government. But these needs should be weighed against damage that comes when officials create projects and jobs for political reasons.

An emergency such as a Great Depression, a Sept. 11, a Katrina, can serve as a catalyst for an infrastructure project and for job creation too. But the dire moral quality of that emergency does not guarantee that the project undertaken in its name will be more efficient than your standard earmark.

In other words, candidates may want to be careful as they climb onto FDR's shoulders. The New Deal edifice may look solid, but it doesn't form a good basis for the American future."

One wonders how much more FDR could have done, had he used Congress to appropriate funds for his visions, but left industry to organize and implement them.

Let's hope we don't let today's liberal Democratic Presidential candidates attempt to repeat the worst features of FDR's multi-term reign.