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Was the new deal a good deal?

August 25, 2011|By GEORGE MICHAEL

The failure of the Obama stimulus plan to help the economy demonstrates once again the failure of Keynesian economics.  How many times must we repeat this lesson?

John Maynard Keynes, British economist of the early 20th century, was the guru of the New Deal. His principles of finance and government were adopted by F.D.R. and the Democrats in the 1930s. Liberals continue to use Keynes and the New Deal under F.D.R. as the rationale for more government spending.

Keynes theorized that during an economic downturn, the government should make more money and credit available by deficit spending in order to create demand. This would get money into the economic system, put people to work and get the economy moving again. The government would underwrite the debt for a time. Then, when things improved, revenues would increase and the debt could be paid back.  

The New Deal did provide a short-term boost to things. Make-work projects did give those with political favor a job. But the positive effect was short lived.  

Unemployment and manufacturing were about as bad in 1937 and 1938 as they had been when the New Deal began in 1933. The most telling damnation of the New Deal comes from the lips of F.D.R.'s  Secretary of the Treasury, Henry Morgenthau. Morgenthau seemed frustrated by the lack of success of the New Deal spending programs.  He stated in 1939, well into F.D.R.'s second term, "We have tried spending money. We are spending more than we have ever spent before and it does not work. ... We have never made good on our promises. I say after eight years of this administration we have just as much unemployment as when we started. ... And an enormous debt to boot."

The tendency for people to think that government stimulus is the answer has been likened to the situation faced by a drug addict. The addict is feeling down. He needs a "fix." If he gets this fix, or stimulus, he will feel better. But when it wears off, the poor fellow will need another fix. And another. In fact, each time, he needs a larger dose to feel better. But, alas, there comes a day when even another stimulus will not help. There is nothing more to be done for him, except perhaps to go "cold turkey."

This is an apt description of what happened in the New Deal and what is happening today.

Proponents of government stimulus spending are forgetting that citizens who pay the taxes will now have less to spend for themselves. What is gained in the public sector (government) is lost in the private sector. And what is worse, there is a huge, very inefficient loss in the transfer. A bloated government bureaucracy siphons off a significant portion of this public sector funding. The result is that only a portion gets to the people who might actually benefit from it.  

If we understand, however, that government cannot create wealth, and that wealth is the result of land, labor and capital being woven together by the choices made by entrepreneurs and consumers based on actual needs and wants, then we will see the value of doing what we can to let the free market solve the current crisis. You either believe in free markets and capitalism or you believe in government regulation and control. The latter represents a significant loss of freedom and opportunity.

There is a one other fallacy in the Keynesian equation that has little to do with economics or finance. It has more to do with human nature.  Once people get a government handout, it becomes difficult to convince them that they don't need it anymore. Some seem content to stay on the receiving end of things, destroying their initiative and the motivation to care for themselves.

Furthermore, after the government hires the bureaucrats to implement these programs, where is the evidence that government then shrinks and economizes when things improve? It just does not happen. Keynes was wrong. Government spending, once begun, rarely shrinks, in good times or bad. How long will it take for more of our citizens to learn this truth?

And what is the president now saying? He believes that we need another "jobs" program, i.e. government program. There is talk of needing a QE3, with more Treasury debt to be bought by our banking system.

In the last three years, federal spending has totaled just less than $11 trillion. Granted, President Bush started it. But President Obama saw what the former president did during his last days in office, judged it to be inadequate and upped the ante by $7 trillion or $8 trillion.

The president is working very hard — on his re-election. His campaign might be his most successful jobs program to this point.  



George Michael, who lives in Williamsport, is a former principal of Grace Academy. His email address is skythorn33@aol.com.

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