The Great Deformation (32 page)

PWA AND WPA: STIMULANTS OF THE ELECTION CYCLE, NOT THE BUSINESS CYCLE

The other claim to Keynesian pump-priming under FDR involved two very different programs whose New Deal style acronyms—PWA and WPA—made use of the same three letters. But on the evidence, neither of these programs did much to lift the American economy out of the depression.

The first of these was the Public Works Administration, or PWA, and it was run by a skinflint lawyer named Harold Ickes. At a glacial pace that spanned FDR's entire 13 years in office, Ickes's PWA did build several thousand airports, courthouses, schools, hospitals, rural power plants, local highways, and bridges—even as it pinched pennies and warded off corruption every step along the way.

Ultimately, it pumped $4 billion into the economy, but the PWA was no anti-depression pile-driver. Its total investment amounted to a negligible three-tenths of 1 percent of GDP over the PWA's long period of operation. Some of the projects which bear its plaques would have been built anyway by local governments, and others were pure white elephants like the massively expensive Grand Coulee Dam. Yet whether resulting in folly or productive public infrastructure, the smooth and glacial flow of PWA funds did not even remotely resemble counter-cyclical fiscal policy.

The Works Progress Administration was actually pro-cyclical, at least based on the even numbered years of the calendar. Very nearly the embodiment of political corruption itself, it mainly functioned as an election-time auxiliary of the Democratic Party.

From a cold start upon its enactment in May 1935, its payroll soared to more than 3.0 million by Election Day 1936. Once the votes had been harvested, however, the WPA payroll swiftly plunged to 1.5 million by late 1937. From there it rocketed back to 3.5 million by November 1938, and then collapsed once again toward the one million levels in 1939. So the cycle in question was evidently not the business cycle.

In fact, the WPA was run as the personal fiefdom of the New Deal's veritable anti-Ickes—one Harry Hopkins. His minimum low regard for the integrity of the public purse was made starkly evident when he once told FDR, “I've got 4 million at work but for god's sake don't ask me what they are doing.”

The WPA ended in scandal when it was discovered that Hopkins had run a blatant shakedown in the 1938 campaign and had required employees to contribute their meager salaries to pro–New Deal senators. Moreover, the $11 billion spent over its six year life produced comparatively meager public works—8,000 local parks, 6,000 mobile libraries, 3,000 tennis courts and 800 local landing strips. At bottom, the WPA was a wasteful form of revenue sharing with local communities which delivered a clumsy form of needs tested transfer payments to millions of unemployed farmers, workers, accountants, and musicians, etc.

Under the circumstances, these citizens had a fair claim on the public purse. But the undulations of the WPA's hiring and firing cycle pivoted on
Election Day, not the business cycle. Accordingly, the WPA did not trigger the multiplier effects of Keynesian legend.

THE MODEST 1930S RECOVERY WAS DUE TO THE REGENERATIVE POWERS OF CAPITALISM, NOT THE NEW DEAL

Once the Roosevelt banking panic was over and the Hundred Days emergency session of Congress had been completed without too much damage to the fabric of the American economy, the Hoover recovery resumed. The rebound of business inventories came first, followed by a steady recovery of consumer spending on durable goods and eventually a mild revival of fixed-asset investment.

But the data make clear that the famous spurt of government activity in the first two years of the New Deal did little to revive the private economy. For instance, private nonfarm hours worked in 1934 were flat with the level of 1932. This means the modest rebound within this period was nothing more than the reversal of the post-election slump brought on by the Roosevelt banking panic.

Likewise, nominal GNP reached just $65 billion in 1934, representing only a 6 percent annualized rate of rebound from the 1932 level. Even then, the strongest gains were in consumer durables and fixed investment, the beneficiaries of a natural rebound from their depression lows.

During the middle 1930s, the natural rebound of the nation's capitalist economy continued, but the real truth was that the numbers looked strong on an annual basis only because the export, investment, and durables collapse had been so severe. Still, as of 1939, after which the tides of war preparation took over the economic numbers, the recovery had been slow and halting. Nominal GDP that year totaled $90 billion, a figure that was still 12 percent below its 1929 peak.

Likewise, fixed business investment was still 40 percent below the 1929 level, and private nonfarm hours worked told the same story. The US Bureau of Labor Statistics (BLS) recorded 75 billion man-hours in 1939—an astounding 15 percent below the 90 billion recorded for 1929. Similarly, steel production was still at 55 million tons compared to 62 million tons in 1929, and value added by all manufactures was $24.5 billion, a figure 20 percent below its $31 billion peak prior to the stock market crash.

In short, the New Deal historiography has relied on a trick; namely, the assumption that the US economy would have remained mired in depression without the New Deal, and that the moderate recovery which did occur was entirely attributable to it. That is pure sophistry.

What actually happened is that as the whirling dervish of experimentation that comprised the New Deal stumbled forward, it modestly increased the girth of the state. Government spending amounted to about 5 percent of GDP when FDR took office and was still under 10 percent as of 1939.

For all the Republican arm-waving about Rooseveltian Big Government, that was really the least of the New Deal's evils. Compared to the $33 billion recovery of total GNP between 1932 and 1939, only about $5 billion—just 16 percent—was accounted for by the government-spending component of the national accounts.

In truth, the acronyms which caused this fiscal expansion—NRA, TVA, AAA, WPA, PWA, CCC, etc.—did not constitute a coherent countercyclical fiscal policy and did not cause the US economy to be any larger by 1939 than it would have been had the Hoover recovery continued with Mr. Hoover in the White House.

THE WRONG LEGEND TAKEN

In early spring of 2008, an unschooled treasury secretary and politically craven White House enacted a giant $150 billion proto-Keynesian stimulus in the form of one-time tax rebates to bolster a faltering economy. Hard on the heels of its November 2008 election victory, the Obama administration instantly pushed through a sight-unseen $800 billion stimulus measure that was a true Keynesian dispensation, or so it was certified by the great thinker's current vicar on earth, Professor Larry Summers.

Together these measures, along with the $700 billion TARP and sundry other measures of fiscal largesse, caused $2 trillion in fiscal stimulus to be authorized inside the span of one year to fight an alleged impending economic collapse. The historical significance of this wanton raid on the US Treasury cannot be gainsaid.

For a flickering moment early in the Reagan administration the essential Keynesian predicate had been in headlong retreat; namely, the notion that downturns in the business cycle are avoidable and that the public purse should be aggressively used to counteract them. Now, twenty-seven years later, that predicate was again in full bloom, and with bipartisan enthusiasm.

Ironically, the proximate cause of the economic downdraft that brought the Keynesian project roaring back to life was that the banking monster had escaped its New Deal shackles (see
chapter 9
) and wreaked havoc on the American economy. In response, desperate politicians began conjuring the ghost of the New Deal, believing that it had been an efficacious shock therapy for a deep economic slump. That was a double irony because the
New Deal had not resuscitated anything. Among its many legacies had been a serviceable banking law (Glass-Steagall) and a feckless assault on sound money. The latter eventually morphed into Greenspan-Bernanke bubble finance. It was the catalyst that caused the unshackled banking system to go over the bend.

Yet outside of banking and money, the New Deal amounted to little more than a politically driven spasm of Washington activism. It did not address the causes of the Great Depression, did not cure or even relieve its pall on the American economy, and amounted to little that was economically coherent or purposeful.

Most especially, the notion that the New Deal had pioneered a road map to recovery by means of countercyclical fiscal policy is mostly a postwar academic legend. It is readily contradicted by the historical record, starting with the fact that, as shown above, the corner had been turned on a natural business cycle recovery before Roosevelt was even elected.

CHAPTER 9

 

T
HE NEW DEAL DID NOT ADDRESS THE CAUSES OF THE DEPRESSION,
even if its work relief and other humanitarian measures did ameliorate for millions of citizens the terrible costs of its unnecessary prolongation. Still, most of this safety net consisted of ad hoc programs, such as the WPA, which were never institutionalized and did not survive the 1930s.

What did survive is a destructive legacy of fiscal profligacy and crony capitalist abuse of state power. Policy measures like Fannie Mae, deposit insurance, social insurance, the Wagner Act, the farm programs, and monetary activism share a common disability. They fail to recognize that the state bears an inherent flaw that dwarfs the imperfections purported to afflict the free market; namely, that policies undertaken in the name of the public good inexorably become captured by special interests and crony capitalists who appropriate resources from society's commons for their own private ends.

Roosevelt's unprincipled and unbridled activism is a powerful case in point. Orthodox historians have positioned FDR as the scourge of “economic royalists” and the champion of the common man. He was neither. In fact, he was the patron saint of crony capitalism.

As a power-driven politician he recognized no rules or standards for public policy or any particular limits on the role of the state. Indeed, FDR has been nearly defied for being a “pragmatist” who experimented until he found something that “worked.” Accordingly, it was only a matter of time before the very capitalists that FDR professed to despise captured for their own ends the programs he legitimized in the name of the public good.

THE NEW DEAL ORIGINS OF FANNIE MAE AND THE HOUSING COMPLEX

Fannie Mae is a classic crony capitalist progeny of the New Deal that began life in 1938, quite innocently, as still another ad hoc New Deal program to
boost the depression-weakened housing market. It grew into something quite different: a monster that deeply deformed and corrupted the nation's entire financial system seventy years later.

The policy aim of Fannie Mae was “forcing water to flow uphill” in the residential mortgage market so that low-rate thirty-year home mortgages became available to wage-earning households of modest means. Such mortgages did not then exist for a good reason: they were not economic. No prudent local bank or thrift would take the underwriting risk.

Fannie Mae would thus override the market's veto by turning local banks and thrifts into government contractors or agents, rather than mortgage debt underwriters. Accordingly, they would be relieved of their aversion to the risk of default loss by means of a Washington-funded “secondary market.” The latter would purchase these commercially unappealing mortgage loans for cash, enabling local bankers to reloan this cash again and again in a government-supported rinse and repeat cycle.

Meanwhile, the default losses that the market refused to underwrite would be shifted to taxpayers, since Fannie Mae's funding would implicitly depend on the public credit of the United States. The slowly recovering residential housing sector would thus receive the kind of booster shot much favored by the New Dealers.

What Fannie Mae also did, unfortunately, was to start the home mortgage market down a slippery slope. This included separating the loan origination process from the long-term servicing and ownership of the resulting mortgage, in an alleged financing “innovation” that would give rise to predatory mortgage-broker boiler rooms a few generations down the road.

Likewise, it opened the door to the funding of home loans in the global markets for U. S. sovereign debt, rather than out of the savings deposits of local bank customers. This became possible because Fannie Mae took on quasi-sovereign status, meaning that investors were funding the general credit of the United States, not the specific risk of local mortgage borrowers and separate residential markets.

There were several crucial upgrades in ensuing decades to the original New Deal scheme before it reached its stunning dénouement in Washington's panicky $6 trillion nationalization and bailout in September 2008. Among these milestones were LBJ's maneuver to put Fannie “off-budget” in 1968 in order to hide its exploding use of Uncle Sam's credit card.

LBJ's so-called privatization plan, in turn, paved the way for Fannie to morph into a hybrid entity called a GSE (government-sponsored enterprise) in which ownership was private but its debt issues were implicitly government guaranteed. Politicians and policy makers who inherited
FDR's “anything that works” mantle were pleased to describe the GSEs as creative “/files/14/40/49/f144049/public/private partnerships.”