Sunday, April 25, 2010

John Maynard Keynes on FDR (and Obama)

In a letter written to the New York Times, published in December 31, 1933, the liberal and generally statist economist John Maynard Keynes presented a critique of Franklin Delano Roosevelt's National Industrial Recovery Act (N.I.R.A) that describes some of the fundamental problems with the Obama Administration:

"I cannot detect any material aid to recovery in N.I.R.A., which heralded vast economic reforms and public works programs), though its social gains have been large. The driving force which has been put behind the vast administrative task set by the Act has seemed to represent a wrong choice in the order of urgencies...That is my first reflection - that N.I.R.A, which is essentially Reform and probably impedes Recovery, has been put across too hastily, in the false guise of being part of the technique of Recovery."

One could argue that the Obama Administration's policies, from the stimulus plan, to health care reform and cap-and-trade may be needed reforms, however they do very little to move the United States closer to true economic recovery. In fact, it could be argued that they, just like FDR's policies, have impeded recovery. By pursuing policies that raised the cost of labor and production, both FDR and Obama decreased the demand for labor, which is incredibly unwise to do in the face of high unemployment. By his own accounts, FDR aggressively pursued policies that increased wages and the rate of unionization, which was highly favorable for those with secure employment, but helped increase the already dangerously high level of unemployment. In addition he established price controls that actually sought to prevent the prices of goods and services from falling, which decreased aggregate demand and the purchasing power of the public, which further slowed recovery. And lastly, he dramatically raised taxes, which limited the ability and incentives of employers to create new jobs via expanded investment and production.

In the case of Obama, mandates for companies to provide health insurance to their workers may be noble, however it raises the cost of and lowers the demand for labor, which will ensure that fewer jobs are created. And although I am sympathetic to cap-and-trade and other environmental policies, they will raise the cost of production and decrease aggregate demand, which will certainly impede economic recovery. And needless to say, the explosion in spending we have witnessed will be followed by increased taxes, which coupled with an increased regulatory burden will impede long term economic health.

The fundamental problem we encounter is one of order. History shows that bold reforms and regulations are almost always pursued during times of economic distress. Such policies place greater burden on businesses and consumers, when economic activity and investments are most badly needed. A wise course of action would be to loosen the economic reigns placed on entrepreneurs during economic downturns and pursue social and economic reforms during economic booms, when businesses can bear their costs. Unfortunately few Americans, including Obama, have drawn the right lessons from the Great Depression and accordingly are pursuing many of the failed policies that deepened and extended it by many years. In the past it took a world war, massive deficit spending and the ensuing devastation of our economic competitors to pull us out of the depression. Unfortunately, we do not have those luxuries: we are already at war, we are already engaged in unsustainable spending and our economic competitors are booming.

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