The new New Deal

Cross Posted at Heritage

Could the current crisis usher in a new “New Deal”, with a new brand of corporatism to replace the free market system? Certainly European leaders are arguing that case. The current economic “crisis,” may itself have been caused by bad policy. Yet, is provides a great pretext for an expansion of government.

During the 1930s, as part of the New Deal, Franklin D. Roosevelt nationalized banks, set prices, wages and work hours, and promoted public works programs to employ the unemployed. The New Deal, or the National Industrial Recovery Act (NIRA) to be precise, was supported by many industrial leaders, some of whom had helped draft the legislation. Cartels, inflated prices and subsidies were great perks for established business, especially those that would have trouble staying ahead in a free market.

Businesses then, as now, cried to Congress about their need for a bailout, and the disaster which would be wrought by their bankruptcy. NIRA was eventually declared unconstitutional. The decision made the important point that “extraordinary conditions do not create or enlarge constitutional powers.”

Until then these laws were widely supported and considered critical to recovery from the economic crisis of the time. Yet intervention did more to cause and prolong the crisis than to aid recovery.

Although these measures were defended as being necessary during an emergency, and only temporary, many still exist today. For example the emergency farm supports created with the Agricultural Adjustment Act (AAA) have morphed into the current Farm Bill, which still pays farmers not grow food.

Like the New Deal period, we are seeing waves of nationalization, bailouts of unrelated industry, and expansion of central bank power. The nationalization of banks during the New Deal was actually smaller than what we are doing today – as a percentage of GDP it was the equivalent to about $500 billion. Today the state took shares in the largest nine banks and bailouts total well over a trillion dollars.

As John Goldberg points out, the stake that government now holds in these banks is actually greater than the stake it held in Fannie Mae and Freddie Mac, and it is quite likely that this temporary measure might too become the regular state of affairs.

If Obama is the next president, he would like to see a return to union domination and government mediation in wages and hours. Obama also favors public works programs to employ those out of work. He has already proposed at least two kinds of programs like this: his “transitional jobs” program which hires the unemployed, and his National Infrastructure Reinvestment Bank. With the excuse of an ongoing recession, he could easily roll these into New Deal sized public works projects.

But, prior to the New Deal we had small government. Prior to this new “New Deal” we already have enormous government and massive debt. The Deal we sign today would be for European style socialism, with European style unemployment and stagnation.

Government Mediation and Wage Setting - in 2008

A lesser known provision of the Employee Free Choice Act, described beautifully here, would allow government to mediate contract disputes between labor and management if they don't come to agreement fast enough - 90 days. And if another 30 days of mediation doesn't produce, government can go ahead and fix wages as it sees fit.

If you think unions wouldn't welcome this, you haven't thought hard enough about their corporatist tendencies. And when companies complain? Subsidies to shut them up. Of course they would come with price controls, but that's OK. Then we just have full blown corporatism.

Here is the relevant section of the bill, with my emphasis:

(2) If after the expiration of the 90-day period beginning on the date on which bargaining is commenced, or such additional period as the parties may agree upon, the parties have failed to reach an agreement, either party may notify the Federal Mediation and Conciliation Service of the existence of a dispute and request mediation. Whenever such a request is received, it shall be the duty of the Service promptly to put itself in communication with the parties and to use its best efforts, by mediation and conciliation, to bring them to agreement.

(3) If after the expiration of the 30-day period beginning on the date on which the request for mediation is made under paragraph (2), or such additional period as the parties may agree upon, the Service is not able to bring the parties to agreement by conciliation, the Service shall refer the dispute to an arbitration board established in accordance with such regulations as may be prescribed by the Service. The arbitration panel shall render a decision settling the dispute and such decision shall be binding upon the parties for a period of 2 years, unless amended during such period by written consent of the parties.

Lets sum up: if after 90 days the union doesn't want to give in to the company, the union may call in the government in the form of a Federal Mediation and Conciliation Service. They may then filibuster for another 30 days until that Service sets the wages, benefits, hours and so forth for them. The government shall render a decision binding upon the parties. It is binding initially for two years, at which point the process can begin again.

This effectively removes any market mechanism from any industry in which unions are able to entrench themselves. If unions gain power in a given industry (and they will find it easier without the secret ballot) they will be able to leverage government for their purpose. At that point, it will be simple to obtain compensation far exceeding the workers' worth; this will threaten to bankrupt firms so they will complain to government; government, wanting to please everybody, will offer subsidies and price controls; and we will have corporatism.

Note that once a union has taken hold at a firm, even if the union doesn't want mediation, the firm may, and so the firm can be the one to filibuster. Some firms, especially inefficient ones which are having a hard time competing, will decide that it would be better to have government step in - especially if they have a friend in congress. They may then set unrealistic demands and hold out for arbitration. This could provide an easy way to introduce new subsidies and regulations for corporations currently missing out.

Why the gloomy outlook? Perhaps government will simply arbitrate effectively between two parties, such that wages will reflect worth and no subsidies or controls will be necessary!

This might be possible if there were no rent-seeking by unions or firms or if politicians didn't or couldn't reward it. However, such behavior will be rewarded if reality is any guide.

So efficient firms with low cost and potentially low paid (perhaps unskilled) workers, if unionized, will be at the mercy of the union which can choose to filibuster until government steps in on its behalf; and inefficient firms can make wild demands of labor until government steps in, at which point it can wield its big corporate power and lobbying influence to extract subsidies from the taxpayer. If you don't think this would be a big step toward corporatism, you haven't been reading this blog enough!