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Associated Press/Photo by Pablo Martinez Monsivais

Deal or no deal?

Economy | As Obama takes office, economics historians warn against reliving past follies

Issue: "'To stay is to be killed'," Nov. 29, 2008

Amid the dark days of a stumbling economy, millions of Americans found light and hope in the soaring promises of a newly elected Democrat. Could this master of rhetoric animate his grand vision in the lives of a hurting populace? Could he make good on the flowery oration that had so inspired voters throughout the campaign?

The year was 1933, the president Franklin Delano Roosevelt, the context America's Great Depression. In his three-plus terms, Roosevelt responded to economic pain with a reinvention of the role of American government. The simple defense of liberty gave way to guarantees of security, and a publicly financed safety net was born.

Three quarters of a century later, the nation has once again laid its financial hardship at the feet of a Democratic visionary. Millions hope that Barack Obama will prove a modern-day FDR-that he will wash away economic challenges with a wave of government programs.

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The country's political left has long celebrated Roosevelt's New Deal as the pinnacle of presidential brilliance, a triumph of government intervention and regulation over the destructive forces of unfettered capitalism. Now, with free markets again playing the villain, the stage is set for yet another liberal hero-so the narrative goes.

But history and nostalgia are rarely friends. In recent years, economics historians have challenged the picture of Roosevelt as financial savior. UCLA economists Harold L. Cole and Lee E. Ohanian believe that New Deal programs of the 1930s prolonged the Great Depression by seven years, helping to explain the historical anomaly of a 15-year sag in a nation so familiar with prosperity.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," Ohanian said upon release of his research in 2004. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

What might qualify as ill-conceived? For Roosevelt, it was the suspension of antitrust laws, the artificial inflation of workers' wages, and massive public works projects meant to create jobs. For Obama, words like bailout, rebate, and infrastructure investment are bouncing around the Democratic Congress, all with potential to mirror New Deal policies in undermining organic market corrections.

Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations and author of The Forgotten Man: A New History of the Great Depression (Harper Perennial, 2008), warns against sentimentalizing FDR's program. "The New Deal didn't work," she told WORLD. "It didn't create a strong recovery. It didn't create enough employment."

Shlaes argues that public sector rescue efforts amid economic hardship are improbable sources for recovery, often providing only a short-term balm: "Generally, the private sector carries the recovery, while the public sector alleviates the pain of the recession. The ideal is to create an environment in which the private sector wants to revive."

A significant cut to the capital gains tax is foremost among Shlaes' suggestions for prompting private sector revival. But tax cuts seem to be the last thing on politicians' minds. This month's lame-duck session of Congress opened with all attention aimed at a potential bailout for the country's big three automakers.

Without government intervention, Ford, Chrysler, and General Motors appear headed for bankruptcy, a prospect that would terminate some 3 million jobs in the first year of its aftermath. The automakers want a significant piece of the $700 billion financial rescue package legislators approved in October. Many Democrats and some Republicans believe they should get it. But the current White House occupant, George W. Bush, appears reluctant to oblige, suggesting the matter may not find resolution until after Obama is sworn into office on Jan. 20.

Critics of the automaker bailout disparage the idea of funneling public money to companies locked in unsustainable union contracts and long embroiled in financial turmoil-even before the rest of the country moved to join them. No amount of federal dollars can fix Ford's overinvestment in trucks and SUVs or GM's excessive number of brands, which foster more competition internally than with other companies.

Left alone, the market is bound to punish such uncompetitive operations and direct capital to other companies. Many fiscal conservatives view the resultant pain of that discipline as a necessary corrective. Columnist George Will calls proposals to rescue the big three from bankruptcy an extension of "the government's business model for the nation-redistributing wealth from the successful to the failed, an implausible formula for prosperity." Will and others consider bankruptcy the preferred path, a chance for failed companies to discard old business models, escape overly burdensome employee compensation standards, and start afresh.

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