64. NEW DEAL

At the height of the Great Depression, with unemployment rates exceeding 25 percent, a broken banking system, and rampant business failures, the newly elected President Franklin D. Roosevelt and his staff developed a complex set of economic programs to deal with these problems. In fact, he called the set of new programs and laws the “New Deal,” and the name stuck. Until 2008, anyway, the New Deal was by far the largest coordinated government effort to deal with the effects of an economic bust; the New Deal was broader in reach, if not as expensive as the economic stimulus and bank bailout programs recently undertaken.

What You Should Know

The programs and laws, largely initiated between 1933 and 1935, were aimed at providing economic relief for citizens, and particularly the unemployed, and with the reform of the business practices that gave rise to the bust in the first place. It was really a deal, as it traded off certain kinds of government spending in favor of other programs to revitalize the economy. A balanced budget was a goal, although many economists, particularly from the Keynesian school, maintain that it was a mistake to balance the budget in the depths of a depression.

Roosevelt, his Treasury secretary Henry Morgenthau Jr., and Congress started the New Deal by cutting government spending on military, the post office, general government salaries, and veterans’ payments by a total of about $500 million (the total U.S. budget in 1933 was about $5 billion).

Employment relief came in the form of the Works Progress Administration (WPA) and similar agencies created to provide jobs building public buildings, parks, schools, and roads, which added numerous cultural assets to our landscape. Laws standardizing collective bargaining, providing minimum wages, and eliminating child labor were passed. Social Security (see #50) was part of the New Deal, as were other prominent economic institutions still in place today, such as the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Administration (FHA), the Securities Acts of 1933 and 1934, the Securities and Exchange Commission (SEC), and government-sponsored lending enterprises like Fannie Mae.

The whole point was not just to stimulate the economy but also to provide a fair and predictable base within which it could move forward with a degree of confidence—public confidence as well as confidence between businesses, labor, and government. Many deride the New Deal as tending toward socialism, believing it has left too strong a legacy of government intervention and regulation. Others say the New Deal didn’t go far enough, that it was too conservative, and that we were only bailed out of the Depression by the advent of World War II. What is certain is that the New Deal was enormous in scale and creatively constructed to solve a lot of problems and serve a lot of interests at once. Seldom if ever have we seen a government action or program with this much effect or historical significance.

Why You Should Care

Not only was the New Deal historically significant as a remedy for the Great Depression—it has also left a legacy of programs that are just as important to today’s economy, if not more so, than they were at the time. The New Deal is also a model for economic remedies being attempted or discussed today, although today’s remedies are larger in scale and less constrained by budgetary considerations.

65. PLANNED ECONOMY/SOCIALISM

Mention the idea of a planned economy to almost anyone and you’re likely to get a look of concern in return. Yet during the Great Recession the federal government clearly got more involved in the day-to-day fortunes and operations of the economy—by necessity, some say, or by choice, as others complain.

So, what is a “planned economy,” anyway? And do recent government interventions represent a brush with socialism?

What You Should Know

The various levels of “planned economy” that may occur in practice go from “least to most” in terms of planning and control:

In a planned market economy, the state influences the economy through laws, taxes, subsidies, and outright infusions of cash, but does not force or compel economic outcomes. It is the “invisible hand” we all learned about in high school economics and has been more or less the state of American economics over the centuries.

A planned economy is an economy in which the government, by edict, controls production, distribution, and prices. Governments don’t own private entities, but they must comply with the plan and report all activity. While the U.S. government took control of the railroads briefly in World War I, this model has been more common in other countries, particularly in the Eastern Bloc, but also in places like China and India before relatively recent reforms.

In a command economy, the government not only controls but also has substantial ownership of commerce and industry. One thinks of the current and former communist countries, but the model is common in Latin America; Venezuela and Cuba are examples.

Socialism does not fit neatly in this continuum but is regarded as having the broader political and socioeconomic objective of equalizing the distribution of wealth and income. That is accomplished through the means of direct income redistribution policies, central economic planning, and ownership or the formation of cooperatives. The state plans or controls the means of production toward achieving the egalitarian objective.

The interesting debate today is to what degree government actions in the wake of the Great Recession represent a move toward more of a planned economy. Economist and investment company manager Axel Merk, in his book Sustainable Wealth (Wiley, 2009), put it thus:

More than most other world nations, the United States has “walked the walk” of capitalist freedom and self-determinism, although policy at its highest levels has acted as an “invisible hand” and to “lean against the wind” to move toward politically acceptable economic outcomes. But in the aftermath of the credit crisis that hand has started to become more visible. The fear is, of course, that once that process gets started, once trust is replaced by government intervention, it can spin out of control; the world has ample experience with the iron hands of socialism and communism.

As the credit crisis was dealt with, major sectors of the economy—the financial industry, the auto industry—effectively became wards of the state. They became dependent on the U.S. government for financial sustenance and even for leadership through the crisis. The state went further into the private economy by granting credit to specific industries and businesses, something which had almost never happened before, certainly not on such a large scale, in U.S. history. It was, in short, a brush with a planned economy.

Merk goes on to argue that a severe recession “ought to be the lesser evil than a planned economy,” and while we are still a far cry from communism, we “must keep our eyes open and not be blinded by the perceived ‘help’ of money printed by the Fed.”

Why You Should Care

It’s important to understand today’s economic actions and reactions, and those observed before, during, and after the Great Recession, in the context of government influence and control. Whatever your philosophy and acceptance or rejection of this intervention, you should understand how it fits into the greater context.

CHAPTER 7

Finance and Financial Markets

Most of what we’ve talked about is the “macro” sector of the economy, the big picture, the government and its role, the greater economy in which we all participate. While these macro pieces provide the economic framework to produce the goods and services—the food, cars, and wine—you choose to consume, our capitalist system also requires private enterprise.