What the New Deal did wrong

Happy new year, and just 20 days until we have a President with the political capital to actually get things done.

People on the right like to say that the success of the New Deal is largely exaggerated, many arguing that it prolonged the great depression. The is an element of truth to that, but I don't think it's for the reasons they argue.

The New Republic has a nice, short opinion piece on it that I think is worth the read

Here's the part that struck me:

The more important failure of the New Deal, however, was what it did not do. The only way to break the deadlock that paralyzed the U.S. economy in the 1930s was to enormously expand economic activity--quickly and decisively. Instead, the New Deal wavered and equivocated--spending large sums of money with one hand while reducing spending with the other. One of the first acts Congress passed for Roosevelt in 1933 was the Economy Act, which slashed government spending in ways that reduced economic activity. It cut the salaries (and, in some cases, the jobs) of government employees and dramatically reduced payments to World War I veterans, taking $500 million from the economy in a single stroke. The Social Security system, so valuable over the long term, was in the short term a drag on the economy. It began collecting taxes in 1936 but paid out few benefits until the 1940s. In 1937, deluded by a weak economic recovery, Roosevelt (urged on by his Treasury secretary) set out to balance the budget through severe spending cuts. The result was a sudden and dramatic economic downturn--a recession within the Depression that produced some of the highest levels of unemployment and lowest levels of production of the decade.

The reason that stands out is, while I don't think the federal government is going to fall into that same trap, state governments are often constrained by balanced budget laws that prevent them from dealing with economic downturns. My state of California is really hurting because of that.

Between the requirement that our budgets be balanced and the 2/3 voting requirement to pass a budget, California's state government is gradually becoming non-functional. We're going to be laying off state workers, cutting benefits, and stopping infrastructure improvements. All things that are going to work to reduce economic activity in the state, increasing the problem.

Balanced budgets are important in better times, but mostly so the state will have the flexibility to spend during down times to keep the economic engine pumping. But I'm hoping Obama doesn't make the mistake of trying to balance the budget until economic growth returns. Because state governments are effectively useless.