The Calculus of Frustration

The basic economic argument of the new U.S. administration is that a public sector job is as good as a private sector job. The new stimulus just signed into law by President Obama creates some public sector construction work, but also much other government-related work.

Overall the U.S. seems to have made a collective decision that public sector work is more than merely a pastime during recovery. From New York to California, lawmakers seem to believe that the public sector represents the future of sustained growth. The U.S. needs more government offices, it is said, and more government funded building.

We are developing what might be called an edifice complex. The proof of the necessity for the shift is said to lie in the past, in America's New Deal. But the actual quality of New Deal spending, job creation and growth are worth a second look. The record is less impressive than the rhetoric implies.

Doubling the budget. What actually happened in the 1930s after the Great Depression came? The New Deal government indeed spent a lot for the time. President Franklin Roosevelt nearly doubled the federal budget in his first term. The Works Progress Administration spent several billion all by itself. The idea, as the „New York Times“ put it, was for Washington to do work that could „not be undertaken by private industry“. A second multibillion-dollar project, the Public Works Administration (PWA), was headed by Harold Ickes, the father of the Clinton adviser. PWA schools, swimming pools or town halls went up in nearly every county of the U.S. This was the first peacetime period when our national government in Washington outspent states and towns. The balance of American federalism tipped under President Roosevelt.

Today America is having what could be called an „illions“ moment. We are moving from spending in billions to spending in trillions and we are shocked. Then, too, there was an illions moment, as the country moved to billions from millions. Then, too, we were in shock at the shift. Wrote Ickes of his own state of mind: „It helped me to estimate its size by figuring that if we had it all in currency and should load it into trucks, we could set out with it from Washington for the Pacific Coast, shovel off one million dollars at every milepost and still have enough left to build a fleet of battleships.“

The unprecedented activity of America's alphabet agencies did indeed create jobs by the millions. The New Deal generally did cause significant business activity. Industrial production– factory activity, basically – came back to 1929 levels around the time of Roosevelt's re-election. All of these outcomes are taken as evidence of public spending's success. But what really stands out when you step back from the 1930s picture is not how much the public works achieved. It is how little.

Notwithstanding the largest peacetime appropriation in the history of the world, the New Deal recovery remained incomplete. From 1934 on – the period when the spending ramped up – monetary troubles were subsiding, and could no longer be blamed alone for the Depression. The story of the mid-1930s is the story of a heroic economy struggling to recuperate, but failing to do so because lawmakers' preoccupation with public works rather got in the way of allowing productive businesses to expand and pull the rest forward.

What was wrong with those public works jobs? Many created enduring edifices – New York's Triborough Bridge, for example, the Mountain Theater of Mount Tamalpais State Park outside San Francisco, the Texas Post Office murals, which were funded by Henry Morgenthau's Treasury. But the public jobs did their work inefficiently. That was because the jobs were scripted to serve political ends, not economic ones.

The sad story of the milkmen. One of the saddest accounts of the public works job culture I came across in writing my book, „The Forgotten Man,“ involved a model government farm in Casa Grande, Ariz. The men were poor – close to „Grapes of Wrath“ poor – but sophisticated. They knew that the government wanted them to share jobs. But they saw that the only way for the farm to get profits was to increase output and to stop milking by hand. Five dairy crew men approached the manager to propose purchasing milking machines to increase output. They even documented their plea with a shorthand memo:

„Milking machine would save two men's labor at five dollars per day... Beginning in September would save three men's wages or $7.50 on account of new heifers coming in.“

The men were willing to strike if they didn't get the machines, though they feared they might lose their precious places on the farm if they did strike. Their fears proved justified. „You're fired,“ the workers later recalled the manager replying when he saw their careful plan.

The government man was in a fit of rage, horrified at the idea of killing the jobs he was supposed to create. „You're jeopardizing a loan of the U.S. government, and it's my job to protect that loan. You're through, everyone of you, get out.“

A related problem was that the New Deal's emergency jobs were short term, lasting months, not years, so people could not settle into them. This led to further disruption. In the very best years of Roosevelt's first two terms, by the most charitable math, unemployment still stood above 9 percent. Nine percent is better than horrendous, but it hardly is a figure that induces hope.

One could interject that such arguments do not take into account the context – the paucity of other jobs, the dust storms, the deflations, the homelessness, the incomprehensible real privation of the period.

But in the later part of the 1930s, the same model infrastructure projects did their part to prolong that privation. The private sector, desperate, was incredibly productive – those who did have a job worked hard, just as our grandparents told us. But the government was taking all the air in the room. Utilities are a prime example. In the 1920s electricity was a miracle industry. There was every expectation that growth in utilities might pull the country through hard times in the future.

And the industry might have indeed done that, if the government had not supplanted it. Roosevelt believed in public utilities, not private companies. He created his own highly ambitious infrastructure project – the Tennessee Valley Authority. The TVA commandeered the utility business in the South, notwithstanding the vehement protests of the private utilities that served that area.

Washington sucked up much of the available capital by selling bonds and collecting taxes to pay for the TVA or municipal power plants in towns. In order to justify their own claim that public utilities were necessary, New Dealers also undermined private utilities directly, through laws – not only the TVA law, but also the infamous Public Utilities Holding Company Act, which legislated many companies out of existence. Other industries saw their work curtailed or pre-empted by government as well.

A boondoggle. The inefficiency was well recognized at the time. Today we have a word in English for a ridiculous public project – a „boondoggle.“ A Bridge to Nowhere, for example, is a „boondoggle.“ The phrase is part of the history of the public relief 1930s, when crafts classes funded by governments had the unemployed making leather lanyard necklaces called „boon doggles.“ Congressmen laughed when they learned about it and the word entered the language.

What about that oft-cited strength in industrial production? The boom in industrial production of the 1930s did signal growth, but not necessarily growth of a higher quality than that, say, of a Soviet factory running three shifts. Another datum that we hear about less than industrial production was actually more important: net private investment, the number that captures how many capital goods companies were buying relative to what they already had. At many points during the New Deal, net private investment was not merely low, but negative.

Companies were using more capital goods than they were investing in.

All this tells us that while some companies were gunning their engines for the moment – the industrial production – they had little hope for productivity gains in the years ahead. Business no longer believed in business. Five years into the New Deal, companies across the country were mounting what Roosevelt himself described as a „capital strike.“

People became accustomed to a sort of calculus of frustration. The closer the country got to the prosperity of 1929, the more impossible reaching such prosperity seemed. The 1930s came to be known as the always recovering but never recovered decade. This calculus of frustration was also expressed in GDP. Nominal GDP per capita did not return. Real GDP per capita finally made it back to the 1929 level, but only around 1939 or 1940. The Dow Jones Industrial Average itself confirmed this pessimistic assessment by stubbornly remaining below 1929 levels through World War II and into the 1950s.

The New Dealers recognized their own failure. Henry Morgenthau, Roosevelt's Treasury Secretary, outlined his own agony before lawmakers in the later 1930s:

„We have tried spending money. We are spending more money than we have ever spent before, and it does not work... I want to see the country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say, after eight [sic] years of this administration, we have just as much unemployment as when we started... and an enormous debt to boot.“

The principal justification most of us grew up with was that this inefficiency was the lesser evil. Without the New Deal, American school books say, the U.S. would have turned to fascism, as Europe did. But this argument is exagerrated. For my „Forgotten Man“ book, I perused the newspapers of the 1930s for years. I found a country a good deal less radical than school books allege. Huey Long, the great populist „Kingfish“ of Louisiana was a force. So was the radio bigot, Father Coughlin. But as a whole the country was remarkably phlegmatic.

Flabbergasting discovery. The writer Odette Keun came over to the U.S. to cover the revolution subsequent to the passage of our great labor law, The Wagner Act. She wrote an admirably honest report: „Broadly speaking, Labor in America is conservative. It is one of the most flabbergasting discoveries I have made.“

The only recourse the U.S. administration has today in responding to these arguments is to say – the 1930s model faltered only because the New Dealers did not spend enough. This is a strange argument given the overall potential and performance of the North American economy over the decades. The great strength of the U.S., to date, is that it was not like Europe – our government was a few crucial percentage points smaller than the governments on the Continent. Now we are foregoing that advantage.

Additional relevant points for today are simple. The famous „multiplier effect“ of public spending may exist. U.S. cities do indeed need new highways, new buildings and new roads, maybe even from government. But these needs should be weighed against damage that comes when officials create projects and jobs for political reasons.

What else do we know? An emergency such as a Great Depression, a Sept. 11, a Katrina, a financial crisis, can serve as a catalyst for an infrastructure project and for job creation too. But the dire moral quality of that emergency does not guarantee that the project undertaken in its name will be more efficient than your standard earmark.

In other words, President Obama might think again about climbing onto FDR's shoulders. The New Deal edifice may look solid, but it doesn't form a good basis for the American future.

("Die Presse", Print-Ausgabe, 15.03.2009)