Monday, February 02, 2009

Social Welfare, Not Economic Regulation

Very good Wall Street Journal editorial by economists Harold Cole and Lee Ohanian on How the government prolonged the Depression.

So what stopped a blockbuster recovery from ever starting [In the 1930's]? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.

The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation's antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression.

These codes distorted the economy by artificially raising wages and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment. Following government approval of each industry code, industry prices and wages increased substantially, while prices and wages in sectors that weren't covered by the NIRA, such as agriculture, did not. We have calculated that manufacturing wages were as much as 25% above the level that would have prevailed without the New Deal. And while the artificially high wages created by the NIRA benefited the few that were fortunate to have a job in those industries, they significantly depressed production and employment, as the growth in wage costs far exceeded productivity growth.

That first paragraph there is key to understanding public perception of the New Deal and the precarious position we find ourselves in today. When liberals look fondly back on the New Deal, they, for the most part, are looking at the creation of social security and other social safety nets. They're not looking to the NIRA or the Agricultrual Adjustment Act (AAA) or other complicated economic regulations, they're looking to the creation of the modern welfare state. And for libertarians, it's important to note that whatever other problems social security and other safety net programs may have, such programs are not economy killers he way direct economic regulations can be.

My point here is that the historical view of the New Deal is much more about social security and the welfare state than it is the regulatory state. The truth about the regulatory state, both yesterday and today, is that few people care and ever fewer people understand it. What we need to do, what I've been arguing for even before this recession started, is to clearly delineate the difference between social welfare and economic regulation- That you don't need one to have the other and that economic regulation specifically is a dangerous game, one that we saw with the New Deal and one that's rearing it's ugly head today. It's one thing to support the government helping those affected by the recession and quite another to support the government attempting to guide the economy.


Anonymous rose said...

Very good points LL. I think conservatives need to make their stands in the areas of regulation and promoting competition, rather than entitlements/social programs.

You can't really perform a conclusive cost/benefit analysis on a redistributive social program and given conservatives complete inability to articulate even basic economic facts, they really need to be on the overwhelmingly correct side of the argument.

But I do think that people understand that the government is really bad at running shit. You can exploit this awareness w/ some pretty conclusive evidence of de-regulation working and regulation/government run monopolies failing.

Show someone a long term chart of education or healthcare spending as a % of GDP and they're gonna understand that funding is not the problem, the entity running it is.

So yeah, great pts LL. We should focus on promoting competition and let them have their social programs. The argument is not only more winnable, but the savings to be had in education and healthcare specifically (i would guess) are greater than anything you could accomplish by reducing entitlements.

9:58 PM  
Blogger lonely libertarian said...

Thanks Rose-

It's sort of interesting the way you point out that people understand the government is really bad at running shit. I think that's true, but only in the sense that people understand that the DMV sucks and the Post Office sucks. Most people's understanding of how government works is very simplistic, which is why complicated regulations of specific industries tend to be over must people's heads. So what we have is a public that likes it's social programs, doesn't really like the way government runs stuff, and doesn't care too much about regulation one way or the other.

Politically, I think this focus is more of a winning argument, but beyond that, like you say, it just makes sense. What people should be made to understand is that you could drastically slash the size of government, cut taxes, yet still increase social welfare spending. This isn't to say our social welfare programs are set up well the way they are, only that you need to pick and chose your battles.

2:30 PM  

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