Coyote Blog

I have written about the National Industrial Recovery Act many times, a love-note from FDR to Mussolini's fascist economic system that was thankfully overturned by the Supreme Court.  Its intent was to make the corporate-crony state the default economic system of the US.

Essentially, the NIRA cartelized the US economy, creating government-sponsored cartels in every industry that would set prices and wages as well as output and quality.  You can imagine exactly how well upstart competitors would have fared under this system.  I am pretty sure, for example, that the government mainframe cartel would never have let apply, or even DEC, see the light of day.

Now, a couple of academics have laid the blame for the long duration of the Great Depression at the NIRA's doorstep.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.
In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Hmm.  Certainly wages and prices are going to be especially "sticky" if the government creates cartels to keep them that way.

There are two words that really separate us hard-core libertarians from small-government Republicans and civil-liberties-focused Democrats:  Chaos and Anarchy.  Libertarians love chaos and anarchy, while most Americans still cringe from these words.  For most folks, chaos is some Road Warrior-style dystopia and anarchy is Molotov cocktails sailing into passing cars.

But chaos and anarchy are in fact the hallmarks of a free society.  They imply a bottom-up society where the shape and pattern of everything is driven by the sum of individual decisions, each decision made with that person's own optimization equation of his or her best interests, constrained only by the requirement they interact with other people without use of force or fraud.   Our wealth, our technology, our modern economy are all born out of this chaos.

I have heard it said that capitalism is not a system, it is the anti-system.  This is the true beauty of capitalism -- it is the only way for human beings to interact with each other without compulsion.    Every other approach to organizing society involves some group of people using physical force to coerce other people.

This does not mean that every individual decision made, every investment choice, or every business model in a free society is mistake-free.  Society and the economy are in fact riddled with mistakes.  The HAVE to be, when one considers that the shape of this country is the sum of literally billions of individual decisions, small and large, made every day.  The key, however, is that the outcomes are generally robust  to mistakes, even large ones.  Business people, for example, who make large mistakes see their business fail and their capital disappear and their assets repurchased in bankruptcy by other business people who may well make better, smarter use of them.  Costly mistakes only persist when they are enshrined by law and enforced by government, and thereby protected from the forces that tend to act to correct them.

But despite all we owe to our capitalist system that fundamentally strives on anarchy, we attend schools run by large authoritarian institutions, like the Catholic Church or the US Government, which train us from an early age to fear chaos.  This is not surprising, because the opposite of anarchy is control, regimentation,  and top-down planning, all the things that authoritarian institutions strive to have us meekly accept.   Large investments in public education in Western countries have always been in times of rapid expansions of state power and control.  This was true in France in the early 19th century and Germany in the early 20th.  It is even true in the US.  If you doubt this, and want to claim that public education is all humanitarian, then why does the state make it so hard to opt out?  The ultimate argument of every opponent of school choice is always some gauzy notion that public schools create a "shared experience," which sounds a lot like indoctrination to me.

The current administration is dominated by technocratic planners.   For them, any process that is not being controlled top-down by "smart" people like themselves is by definition a failure.   When I say that the current administration is reminiscent of Mussolini-style fascists, I am not implying that folks are going to be rounded up soon and sent to camps.  I mean that the animating assumptions -- that any process controlled top down is more efficient than one that is allowed to operate bottom-up and chaotically -- are similar.  FDR, for example, and much of the American intelligentsia were driven by very similar assumptions, and the National Industrial Recovery Act (fortunately struck down by a non-packed Supreme Court) was pretty directly modeled on Mussolini's economic planning system.

Examples?  Well, the GM/Chrysler situation is a great one.  One can easily paint a story that Obama's work to avert bankruptcy at these companies is just a crass political handout to powerful unions who supported him.  But, just as easily, one can portray these efforts as a man who is uncomfortable letting the fate of a large sector of the economy play out beyond his control.  Obama killed school choice in Washington DC despite fairly strong evidence of its success, because, again, everyone being educated in his or her own way just cedes too much control.

Another good example is this one, from the Anti-planner:

Ron Utt, the Antiplanner's faithful ally, has uncovered the first steps of President Obama's plan to force smart growth on those parts of the country that managed to escape the housing bubble. The departments of Transportation and Housing & Urban Development have signed a joint agreement to impose smart growth on the entire nation.

Under the agreement, the departments will "have every major metropolitan area in the country conduct integrated housing, transportation, and land use planning and investment in the next four years." Of course, nearly all of the metropolitan areas that already did such integrated planning suffered housing bubbles, while most of those that did not did not have bubbles. The effect of Obama's plan will be to make the next housing bubble much worse than the one that caused the current financial crisis.

Obama first hinted about this plan in a town hall meeting in February. "The days where we're just building sprawl forever, those days are over," he told a group in Fort Myers, Florida. "I think that Republicans, Democrats, everybody recognizes that that's not a smart way to desig, n communities." Not everybody.

As a note on city planning, I will not claim a direct causality, because I am the first one to warn of the danger between directly correlating two variables in a complex system, but check out this map of job losses in the recession, noting the situation in Houston as the least planned city in the country.