Amity Shlaes, author of an excellent economic history of the New Deal (The Forgotten Man), explains how President Roosevelt made the economy worse – somewhat akin to the erratic policy of the Bush Administration. The key question now is whether President-Elect Obama makes the same mistakes:
The United States has entered the era of the experiment. President-elect Barack Obama is putting forward an infrastructure program whose plans and price tag are unclear. Treasury Secretary Henry Paulson whipped up the Troubled Asset Relief Program to buy up bad mortgage instruments, and, expanding on that experiment, President Bush wants to try extending TARP to autoworkers. The idea that experiments are warranted in current circumstances comes from the New Deal. …there is significant evidence that the very arbitrariness of the New Deal made the Depression worse. In 1932, stunned market players and citizens wanted to know what the new rules were. They voted for a party with a platform so moderate it could have been written by today’s Concord Coalition: stability, sound money, balanced budgets. That was the Democratic Party, led by Roosevelt. …Using emergency powers, FDR yanked the country off the gold standard. …Some of the worst destruction came with FDR’s gold experiment. …Roosevelt was right to want to introduce more money into the economy (the United States was deflating). But his method was like trying to raise an ocean level by adding water by the thimbleful. What horrified markets even more was that FDR managed the operation personally, day by day, over a breakfast tray. No one ever knew what the increase would be. One Friday in November 1933, for example, Roosevelt told Treasury Secretary Henry Morgenthau that he thought the gold price ought to be raised 21 cents. Why that amount, Morgenthau asked. “Because it’s three times seven,” FDR replied. ….The arbitrary quality of other initiatives reinforced concerns. The New Deal centerpiece, the National Recovery Administration, helped some businesses compete and criminalized others for the same behavior. Sometimes Roosevelt goaded federal prosecutors into harassing corporate executives. Other times, he schmoozed the same execs at the White House. …Uncertain, markets froze. Businesses refused to hire or invest in equipment. Unemployment stayed stuck in the teens. The ‘deal’ part of the New Deal phrase was problematic; businesses didn’t want individual favors, they wanted clear laws for all. ….Today, uncertainty also chills. Questions abound over the future regulation of stocks and derivatives, over tax policy, over bailouts. All this makes it hard for the market to settle on equity or home prices.