DON'T REPEAT ERRORS OF NEW DEAL

By AMITY SHLAES
November 10, 2008

THE historical model that the Democrats are choosing to hold up as they ponder our financial crisis isn't Harry Truman's Fair Deal or Lyndon Johnson's Great Society. It is Franklin D. Roosevelt's New Deal. At least three economic reforms under discussion now were also central in the New Deal package. Trouble is, these reforms didn't necessarily work well when they were first tried - and some failed outright.

Consider, for starters, a stimulus package. President-elect Obama has said that "the one thing I can say with certainty is that we are going to need a stimulus package passed either before or after my inauguration."

The idea, presumably, is that handing consumers a check - pre-Christmas bonus, perhaps - will encourage them to spend. Businesses will in turn benefit and then spend themselves.

Last summer saw the failure of just such a stimulus - President Bush's. University of Michigan economists found that, instead of spending as proposed, consumers saved their money. But the original stimuli of the New Deal also failed. Although Roosevelt got a slow start, he poured billions into the economy in his first term - an unprecedented action for a US leader in peacetime. Federal spending doubled between 1933 and 1936, the year he ran for reelection. The year 1936 saw a deficit of 2.6 percent of the economy, compared with say, a surplus in 1930. The economy did grow in those years. But it never got back to its old 1929 level. As soon as FDR stopped doling out the cash (in 1937, after the election) the economy crashed again. The stock market plummeted. Five years into the New Deal, in the winter of 1937-1938, two in 10 were again unemployed.

Then there is infrastructure, a project Democrats have been talking a lot about lately. With each point that unemployment rises, their proposal to create jobs by building bridges, roads or buildings looks more attractive. Again, the New Deal is the model here. Right here in New York, we think nostalgically about the New Deal when we cross the Triborough Bridge or travel in the Lincoln Tunnel - both New Deal projects.

The states, too, lavished cash to create infrastructure jobs in the '30s. Many structures that were built were solid. But they didn't bring recovery, either. Evidence from that period suggest that government was crowding out the private sector. The Tennessee Valley Authority, for example, dealt mortal blows to a private employer that wanted to electrify the South, Wendell Willkie's Commonwealth & Southern. For every state-relief job created, about half a private-sector job was lost.

Even more than specific New Deal projects, Obama and his fellow Democrats are evoking Roosevelt's leadership style. In school, we learned that it was FDR's personality that pulled the country through the Depression. If only, the suggestion is, we can have a strong enough leader, Americans will also find recovery again. We need some "bold persistent experimentation" of the Roosevelt variety.

There is evidence, however, that FDR's very strength was a negative, because he used it to give himself a license to do true experimenting. In his second inaugural address, FDR said that he sought "an instrument of unimagined power for the establishment of a morally better world."

No one knew what it meant, and markets were terrified. Everyone feared FDR would regulate or prosecute them next. Businesses refused to invest. The 1930s' second half proved frustrating for the country: The economy was always recovering but never quite recovered. The Dow didn't get back to its 1929 level until the mid-'50s.

These facts are important to bear in mind. The New Deal inspired. But it is the wrong deal for the country, even now.

Amity Shlaes, a fellow at the Council on Foreign Relations, is author of "The Forgotten Man: A New History of the Great Depression."