Defending the New Deal, Ridiculing Free Market Nonsense, and Asserting that Paying People to Do Important Jobs Actually WorksPosted: September 14, 2011
The thing that first inspired me to write a blog and start making videos is the pure economic quackery I encountered on the internet generally and Youtube specifically. These free market, usually libertarian, kooks like to argue that the government creating jobs doesn’t really work, or said another way, the government putting people to work doesn’t actually reduce unemployment in the long run. The free marketers generally make two arguments, one of which has a bit of merit while the other is complete nonsense.
The nonsense notion says that when the government creates jobs, it doesn’t really reduce unemployment because it takes capital from the from private enterprise that could do the job oh so much better. If we had cut taxes and reduced regulation, then free market juju would have created lots more jobs than, well, actually creating jobs.
Beware the hawker of unseen, indirect effects. When someone tries to tell you to ignore what is right before your eyes and believe in what you can’t see, you ought to be skeptical, and insist that the burden of proof be upon the purveyor of the less obvious explanation. I love baseball, and the good ol’ boy sportswriters used to a write a lot about the player that does all the things that ‘don’t show up in the boxscore’. This player may not hit home runs, or hit for a high averaage, or do any of the measurable things that a good ballplayer does, but by gum, he’s got the intangibles, the grit, the effort – he does the little things, bunts well, throws to the right base. The truth about baseball is that while there are useful things that don’t show up in the box score, most of the important stuff does. The guy who gets on base and hits home runs is a much better player than the gritty guy who bunts well.
While this sort of nonsense is thankfully less rare in baseball these days, magical thinking is alive and well among free market economists. When the government creates a job, that’s a real job, and it lowers the unemployment rate 100% of the time. There’s no need to rely on any magical secondary effects.
The second argument against government created jobs is that they are temporary – they go away eventually and then you’re left with nothing. I’m half inclined to argue that a temporary job is better than no job at all, but I’ll be charitable and grant that there is a logical point to be made here, which is that a government created job that sticks around, or at least creates something useful, is better than one that doesn’t. And this is at least a somewhat valid criticism of the 2009 stimulus plan, which could have been used towards creating jobs that really positioned our country for the long haul – smart grid jobs, energy R&D, mass transit, etc., as per my previous post.
But the real fair criticism is that the 2009 stimulus wasn’t big enough. It actually stopped the rise in unemployment and the decline in the size of our economy, but it didn’t reverse either of these trends; it just flat-lined them at a mediocre level.
About this time in the conversation a libertarian high on market juju wanders by and says that the magical powers of capitalism would have turned things around on its own, if only, if only, we had cut regulations and cut taxes on ‘job creators’ (code for the rich). Never mind that taxes on the wealthy were cut under Bush to their lowest level in over 80 years, and that cutting regulations got us into this mess by causing the banking crisis in the first place.
Now, to indulge in these kinds of delusions, the free marketers have to deal with history, which brings us to where the Great Depression and the New Deal come in. The New Deal gives us a clear example of where government job creation helped reduce unemployment and mitigate an enormous economic downturn. In order to explain history, the quacks have to try to sell the biggest lie of all: that the New Deal didn’t help end the Great Depression, but rather extended it.
The task of this lie is formidable, given the facts shown in the following chart:
Under Herbert Hoover, unemployment went from 5% in 1929, when the stock market crash occurred and the Great Depression began, to 25% in 1933 when Roosevelt took office. Under Roosevelt and his New Deal policies, unemployment went from 25% down to below 15% in his first term of office, spiked back up to 19% briefly in 1938, and plummeted down again towards 10% as World War II began, at which point it reached levels even lower than during before the Depression.
For those skeptical of the power of the government to create jobs, this kind of stark data is a challenge to their mindset, but never underestimate the human ability to deny the obvious if it doesn’t with one’s preconceptions.
The first challenge is to explain the run-up to 25% unemployment under Hoover. The lie told here by the deluded is that Hoover really sort of began the new deal with a lot of big government policies, which really didn’t work. There is a shred of truth here – Hoover did try a lot of things (though he didn’t try actually creating jobs until his term was almost over). He tried convincing industrial leaders to keep wages up, and he signed the infamous Smoot-Hawley Tariff Act, which imposed huge tariffs on imports, and had the effect of starting a trade war which shrank the world economy and deepened the Great Depression. Free Marketers try to blur these policies with those of the New Deal.
In the last year of his presidency, Hoover did start to enact actual job creation policies, which were too little, too late. All the details of the New Deal and their impact on our economy are far beyond the ability of a single blog post to describe – however, suffice it to say that numerous programs directly created jobs that built the 20th century infrastructure of our economy – highways, roads, bridges, buildings (schools, fire houses, etc.), utilities, including the electrification of rural areas, dams, ships and more. As show by the graph above, unemployment declined until it briefly spiked up in 1937-1938.
While the free marketers like to characterize this brief spike as definitive proof that the New Deal failed, the truth is more simple – in a misguided attempt to balance the budget and wind down some of the bigger government programs, New Deal programs didn’t put as many people to work during this period. Budget balancing and austerity doesn’t work now as a response to a shrinking economy now and it didn’t then. Programs were bumped back up to high levels and unemployment began to shrink again.
World War II ended high unemployment once and for all, which free marketers discount, despite the fact that it was the ultimate government jobs program. War is a bad thing you see, so increases in GDP and declines in unemployment don’t count during a war because they don’t create something of lasting value (I guess our modern industry of steel, cars, and planes which dominated the world for the next 30 years doesn’t count either).
So the free marketers say that Hoover’s decline doesn’t count because it was just like the New Deal, the decline in unemployment doesn’t count because there was a setback in 1937-38, and WW II doesn’t count because war is bad. And for the biggest lie of all, they say that unemployment would have declined on its own from 1933-1941 much faster if free market magic had begun to do its thing. Under this fantasy, it was pure coincidence that unemployment just happened to start going down in 1933 the same time as The New Deal started and had plummeted a decade later.
Remember, beware the hawker of unseen effects.
By the way, the data is more pronounced when one looks at the whole of the economy (GDP) over those years instead:
That grey line is the long term trend line while the green is actual GDP. Again, we can see it plummeting under Hoover from 1929-1933, spiking upwards during the New Deal, having a brief setback in 1938, and taking off again, going into World War II.
So why all this fuss to assert the rather obvious notion that the New Deal actually worked, and that free marketers are deluded in this regard? Why do I care so much?
It’s because this pernicious lie that governments can’t actually create jobs, or there’s something inefficient or ultimately ineffective in them doing so, that has poisoned the political discourse and made an enormous and bold government jobs and infrastructure program politically difficult to sell to the public. So don’t believe the nonsense, and challenge it when you hear it. Print out these graphs and throw them at people if necessary. More on the politics of all this next time around!