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The reality about the New Deal November 23, 2008

Posted by neoavatara in Politics.
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http://www.nytimes.com/2008/11/23/business/23view.html?_r=1&ref=business

An excellent piece by Professor Tyler Cowan regarding the truths about FDR’s New Deal.

A synopsis:

  1. Monetary policy was at the heart of the great depression.  The Federal Reserve’s non action resulted in the decrease of the monetary supply by 1/3, resulting in severe deflation.  To compound this, banks were allowed to fail freely, causing an increasing credit crisis (sound familiar?).  That is the fundamental logic behind Paulson and Bernanke’s current plan; halt the credit crisis, and ensure that money is free flowing to the economy.
  2. FDR gave enormous powers to domestic industries like agriculture, including subsidies.  These backfired, and worsened the recession…food for thought on Obama’s thoughts on trade policy and unions.
  3. Tax policy.  The irony of the New Deal was that as for monetary policy, it probably was a wash; taxes went up significantly, and so did government expenditure. 

Ultimately, the argument is that good policies are good in good and bad economies, and vice versa.  We should not jump toward bad economic polices just because the economy has taken a turn for the worse.  So far, Mr. Obama’s decisions point to a very moderate and intelligent course on the matter.

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