Normal Criticism of the New Deal
Brad DeLong’s of course right that I’m not normal. At the same time, he’s backed off enough that I wonder if he’d put himself in the same boat as two normal guys with negative things to say about the New Deal (and policies in France that they see as similar): Bernanke and Eichengreen. From my paper “The Idea Trap” (European Journal of Political Economy 19(2), June 2003, pp.183-203):
Bernanke observes that throughout the world, the depression “increased pressure on governments to intervene in the economy in ways that inhibit adjustment.” (1995, p.24) An array of counter-productive policies won new popularity: labor market regulations to keep nominal wages from falling, pro-union legislation to push real wages up, and industrial and agricultural policy to raise the price level by restricting production. Sensing political opportunities, politicians rapidly responded to the public’s new ideas about effective economic policy. This began on a moderate scale during the Hoover administration, then rapidly expanded under Roosevelt. “The National Recovery Act, the cornerstone of Roosevelt’s First New Deal, also contributed, perversely, to the slow recovery of American output and employment,” explains Eichengreen. “By January 1934, 80 percent of American industry was covered. All of these codes established minimum wages of 40 cents an hour, and many revised upward the entire structure of industry wages.” (1992, p.344) Thus, it appears that sharply negative growth reduced the quality of ideas, policies worsened because politicians competitively responded to voter demand, and bad policies in turn retarded the recovery.
Similar developments may be found in France. As Eichengreen notes, many expected voter-driven policy change would be for the worse. “According to the opposition, investors feared that removal of the gold standard constraints, rather than permitting the adoption of sensible reflationary measures, opened the door for the Popular Front Government to pursue all manner of irresponsible fiscal and financial policies.” (1992, p.383) Even though France finally adopted reflationary policies to reverse the earlier monetary contraction, other new measures roughly offset their benefits. Bernanke provides an incomplete enumeration:
Examples of interventionist measures by the French government included tough agricultural import restrictions and minimum grain prices, intended to support the nominal incomes of farmers (a political powerful group of debtors); government-supported cartelization of industry, as well as import protection, with the goal of increasing prices and profits; and measures to reduce labor supply, including repatriation of foreign workers and the shortening of workweeks. These measures (comparable to New Deal-era actions in the United States) tended to block the downward adjustment of wages and prices. (1995, pp.24-25)
My first goal in any argument is to accurately draw the border between agreement and disagreement. Will Brad at least agree with the position I ascribe to Bernanke and Eichengreen?