President-elect Obama wants a massive stimulus package of $700 billion or more. But previous attempts to artificially stimulate the economy have generally been failures. The $160 billion in stimulus rebates early in 2008 failed to stimulate the economy, much less prevent the financial crisis that followed, even as they drove up the federal deficit and the national debt, while punishing hard work and providing pork for left-wing special interest groups.
During the Great Depression, Herbert Hoover and Franklin Roosevelt attempted to artificially stimulate the economy by pushing up wages — Hoover through pressure on industry, and Roosevelt through unionization and the cartel-enforcing National Recovery Act, which the Supreme Court later declared unconstitutional in the Schechter Poultry case.
The net result, according to economists, is that the Great Depression, which might otherwise have ended by 1936, instead lingered on until 1943 (a phenomenon for which President Roosevelt escaped responsibility, as he cleverly scapegoated and demonized industrialists and businessmen as “economic royalists” and “malefactors of great wealth,” and attacked critics as being unpatriotic).
As George Will notes in today’s Washington Post, “stimulus” measures largely failed in the Great Depression, policies that “included encouraging strong unions and higher wages than lagging productivity justified, on the theory that workers’ spending would be stimulative. Instead, corporate profits — prerequisites for job-creating investments — were excessively drained into labor expenses that left many workers priced out of the market.”
“In a 2004 paper, Harold L. Cole of the University of California at Los Angeles and Lee E. Ohanian of UCLA and the Federal Reserve Bank of Minneapolis argued that the Depression would have ended in 1936, rather than in 1943, were it not for policies that magnified the power of labor and encouraged the cartelization of industries. These policies expressed the New Deal premise that the Depression was caused by excessive competition that first reduced prices and wages and then reduced employment and consumer demand. In a forthcoming paper, Ohanian argues that “much of the depth of the Depression” is explained by Hoover’s policy — a precursor of the New Deal mentality — of pressuring businesses to keep nominal wages fixed.”
Current bailout proposals also seek to artificially prop up wages. Liberal lawmakers and the President-elect plan to bail out the automakers, at a cost to taxpayers of tens of billions of dollars. But the automakers wouldn’t be going broke if they didn’t pay their workers so much more than the average American worker — a whopping $70 an hour. The auto bailout proposals contain largely symbolic limits on CEO pay, but nothing limiting the inflated compensation packages of unionized auto workers — which exceed those of non-union auto workers at Toyota’s American factories by more than $20 per hour. Even without such a bailout, the automakers would keep operating after filing for bankruptcy under Chapter 11 — using a bankruptcy discharge to get rid of their ruinously expensive labor contracts and liabilities to auto dealers under state laws designed to milk automakers for the benefit of dealers. A taxpayer bailout only delays the day of reckoning and makes the painful adjustments needed for the auto industry’s survival even more painful when they finally happen.
In 1993, Republican Senators filibustered President Clinton’s “stimulus package,” correctly arguing that it was just pork for special interest groups that was unnecessary for an economic recovery (which then occurred without any “stimulus,” despite cuts in deficit spending). Today, however, Democrats have such a commanding majority in the Senate that a similar filibuster may not be possible.