Ineffectiveness_of_New_Deal

The New Deal and policies stemming from Keynes' General Theory, are the reason the Depression lasted as long as it did. For starters, increased regulation on private sector activity both slowed the economy and left the private sector guessing what would change next. The uncertainty made it impossible for companies to plan. As a result, private sector unemployment continued to rise. Secondly, Roosevelt attacked private sector entrepreneurs as if they were the cause of the depression. The depression was caused by ineffective monetary policy, and prolonged by government intervention. The Federal Reserve raised interest rates through the late 1920s and early 1930s in an effort to combat the declining economy. They hadn't learned that it makes more sense to lower interest rates to promote corporate level capital investment. None of Roosevelt's banking regulations could offset his assault on the private sector. Hoover and Roosevelt took more action to regulate the private sector than had ever been taken before. Hoover signed a tariff (Smoot Hawley) on foreign imports and persuaded industries to collude so that they would maintain minimum prices on goods and standardize their operations. Roosevelt expanded federal influence to every aspect of private activity because the Keynesian scholars convinced him that central planning would solve the crisis. At the time, the Soviet Union was gaining strength and appeared to be a model for success and Keynes' multipliers related to government spending naively assumed government spending could be as effective as private sector activity. Roosevelt's unemployment relief projects just diverted valuable capital out of the private sector. His tax policies punished productivity at a time when productivity was badly needed. Individuals who proved able to create capital and become successful were punished by a progressive tax system. The confiscated capital was diverted to the public sector based on the Keynesian Theories; however, each dollar spent by the government has to be taken from the private sector. As individuals' marginal benefit from additional earnings declined, so did their propensity to invest and be productive. Each job he created in the public sector destroyed at least 1 in the private sector. Also, the addition of payroll taxes (FICA), unemployment insurance, and rising minimum wages worked to raise the cost of employing people. Businesses had to maintain tight profit margins and simply hired the number of people necessary to maintain their previous cost structure. If costs of employment went up 30%, they cut up to 30% of their workforce as long as they were able to meet demand. Up until the Depression, the government respected the private sector's supremacy when it comes to creating wealth, allocating resources, and efficiently shifting the economy during business cycles. In the depression of 1921-22, the government balanced its budget, cut expenditures, and lowered tax rates. Within months the economy recovered, unemployment fell below 3%, and the economy boomed for a decade. Oddly enough, the specific causes and effects of that recession are very similar to our current crisis. If the federal government would just stop trying to solve the problem, the problem would be solved by those who truly understand the economy and are capable of acting in a timely and efficient manner that is in accordance with free markets promoted by free people.