Analysis: Critics Warn Obama's New 'New Deal' Is Not an Economic Silver Bullet

Much has been written about the impending "new New Deal" that President-elect Barack Obama will usher in come Jan. 20.

Two magazines -- The New Yorker and TIME -- have run feature pieces accompanied by caricatures of Obama in Franklin Delano Roosevelt's likeness, complete with top hat, spectacles and cigarette holder. Obama himself said on '60 Minutes" a week ago that the current period is "as bad as we've seen since" the Great Depression and three days ago he announced a stimulus package reminiscent of New Deal policies that he wants passed as soon as he is in office.

In his weekly video address over the weekend, Obama announced his Economic Recovery Plan, designed to save or create 2.5 million jobs by January 2011.

"We'll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children and building wind farms and solar panels, fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead," he said.

The specifics of the plans have yet to be outlined; Obama's presidential transition team press office did not respond to requests for comment.

But the objectives appear similar to the various public works and energy initiatives of FDR's New Deal -- the Civilian Conservation Corps, the Tennessee Valley Authority, the Civil Works Administration, the Works Progress Administration, the National Youth Administration and even the Rural Electrification Administration, which brought low-cost electricity to rural areas through farm cooperatives.

During the campaign, Obama proposed a $175 billion stimulus package that included infrastructure spending, tax credits to small businesses for hiring new employees, targeted tax credits for middle class families, investments in alternative energy and aid to local and state governments.

Democrats now say the package will be much larger. Sen. Charles Schumer put the figure at $500 to $700 billion and House Speaker Nancy Pelosi said it would be "in the several hundred billion category," making it one of the largest spending bills for economic recovery since the New Deal.

Obama Senior Adviser David Axelrod wouldn't put a dollar figure on the  package, but he said on "FOX News Sunday" that the plan "has to be big enough to deal with the huge problem we face."

Yet while high school history books, most of academia, and pop culture assert that FDR's New Deal policies were just the prescription needed for a sickly country, some economists and commentators are re-examining that consensus.

"Government spending alleviated pain of (the) patient, but did not cure the patient," said Amity Shlaes, senior fellow on the Council of Foreign Relations and author of The Forgotten Man.

"It's a mistake to confuse infrastructure spending with the cure; the private sector is the engine of true recovery," she said, adding that building the economy through the public sector can lead to a "less good and less enduring recovery."

UCLA economists Harold Cole and Lee Ohanian say some of FDR's policies extended the Great Depression by seven years, and that without them the economy would have been back to normal by 1936 instead of 1943.

Cole and Ohanian released a study in 2004 blaming two New Deal policies, the National Industrial Recovery Act and the National Labor Relations Act, for keeping wages and prices artificially high, leading to a longer period of high unemployment.

The NIRA, passed in June 1933, established the National Recovery Administration, which was a body that negotiated with industry leaders to set wages, prices and levels of employment and production. In return for wage increases, the businesses were protected from antitrust prosecution.

The NLRA or Wagner Act, implemented in 1933, allowed workers to join unions and guaranteed collective bargaining rights.

Cole and Ohanian wrote in the Journal of Political Economy: "The weak recovery is puzzling because the large negative shocks that some economists believe caused the 1929-33 downturn -- including monetary shocks, productivity shocks and banking shocks -- became positive after 1933. These positive shocks should have fostered a rapid recovery, with output and employment returning to trend by the late 1930s."

The two developed an economic model based on 1929 wage and price data just prior to the Depression.  They concluded that the policies led to wage increases of 25 percent more than they would have been in key industries in the three years following NIRA passage, with unemployment rates 25 percent higher, prices 23 percent higher and gross national product at 27 percent lower.

Union power increased with the NLRA, and the number of strike days doubled from 14 million in 1936 to 28 million the next year, severely affecting production.

Shlaes said she places more emphasis on monetarism than Cole and Ohanian, but she still maintains that the depression "would not have been as severe had we not regulated the labor price."

FDR's team did not "buy themselves" out of the depression, but his policies did "provide basic sustenance to people" with some forms of relief and employment, which was "pretty significant," said Guian McKee, a historian at the University of Virginia's Miller Center of Public Affairs.

Overall, McKee maintains that there were some successes and failures. Public works projects didn't end the depression, but they did build a modern infrastructure of roads, dams, airports, bridges and power grids that "laid the groundwork for future economic development," a parallel with Obama's proposal, McKee said. That current infrastructure in the United States is in desperate need of repair and will "undermine future economic growth without new investment," he added.

Some New Deal policies are widely regarded with approval, such as the efforts to stabilize the banking system with the Emergency Banking Act in March 1933, which reopened sound banks, and the Glass-Stegall Act, passed in June 1933, which created the Federal Deposit Insurance Corporation.

But even McKee counts the NIRA as a misstep. This was "bad economics" and was "falling apart before the Supreme Court declared it unconstitutional" in 1935, he said. Though the Cole and Ohanian study "really overstates" the impact of the NIRA, since it wasn't effective in the first place, he added.

McKee also pointed out that the impact of all the other New Deal policies had to be taken into account, whether positive or negative, to get a complete picture. Rising wages were not necessarily bad, he said, as they increased the purchasing power of consumers. He disagreed with Ohanian and Cole's calculations that higher wages led to higher unemployment and that a lower-than-expected GNP meant that many consumers couldn't afford the high prices.

While today's economic conditions aren't as dire as the New Deal era, when unemployment reached 25 percent (compared to last month's 6.5 percent unemployment rate), Obama's policy solutions are "thematically similar" to a New Deal mindset, says Ohanian, who is concerned that Obama supports legislation that will bolster unions, raise taxes, and possibly restrict free trade.

Labor unions have been fighting for "card check" -- the Employer Free Choice Act, which has already passed in the House. The measure would allow unions to be formed with a simple majority of employees' signatures on cards, instead of the current method of secret ballot elections, in which unions win only about half the time. Card check also includes binding arbitration provisions, which mandate a government arbitrator step in to negotiate terms between employers and unions after 120 days, reminiscent of the NRA.

McKee said he is "not convinced that it is all that powerful" in today's environment, where he's seen a "cultural shift" away from the union model. Unions are still heavily rooted in the manufacturing sector, which is not the major player that it was back during the 1930s. With a serviced-based and IT-focused economy, even if card check gets through, it won't have the wide economic repercussions that the NLRA had, said McKee.

Obama may still be able to carry out some of his social policies in spite of, and perhaps because of, the attentive focus on the economy, McKee says. A number of his policies are in line with "stimulatory fiscal policy," including health care reform which has to focus not just on universal coverage, but also on cutting costs for employers and businesses, he said.

Shlaes also suggested that addressing the employer burden of health care costs now would help the economy turn around at a faster pace, with solutions such as portable individual plans that will move as employees go from job to job. Obama's call for promoting green technology will support emerging industries and alternative power sources, said McKee, adding that Obama might have to pull back on cap-and-trade policies for now, depending on how severe the effect might be on businesses.

The Obama team also appears to be putting the brakes on proposed tax increases, at least for now. Axelrod indicated that Obama is reconsidering his campaign pledge to roll back the Bush tax cuts on top income earners and corporations when he takes office -- and instead letting them expire in 2011 under current law. Obama adviser Bill Daley confirmed on NBC's "Meet the Press" that this possibility "looks more likely than not."

This is a "pragmatic move," said McKee. "It probably would be the wrong thing to raise taxes on anyone; we don't need to be putting any kind of drag on the economy."

Obama himself is cautious in drawing parallels to his policies with a new era of big government, even invoking the name of Ronald Reagan. The president-elect walked a fine line when asked about comparisons with the 1930s and FDR.

"For us to simply recreate what existed back in the '30s in the 21st century, I think would be missing the boat. I think the basic principle that government has a role to play in kick-starting an economy that has ground to a halt is sound," the president-elect told "60 Minutes."

"I think our basic principle that this is a free market system and that that has worked for us, that it creates innovation and risk taking. I think that's a principle that we've got to hold to as well. But what I don't want to do is get bottled up in a lot of ideology and 'is this conservative or liberal?' My interest is finding something that works. And whether it's coming from FDR or it's coming from Ronald Reagan, if the idea is right for the times then we're going to apply it."

But George Packer, who authored the New Yorker piece on Obama's liberalism and his comparison with FDR, noted:

"Obama makes a point of incorporating some of the insights of the Reagan era, such as the importance of market incentives and efficiency, but his conclusion, which is unmistakably Rooseveltian, is a call for the renewal of 'widespread economic security.' Obama has made it even more clear that he wants to lay the ghost of Reagan to rest."