Good Government Intentions Could Yield the Most Unpredictable Consequences

by Inya Ivkovic, MA

Stock markets and investors have had their happy reunion. Ordinary people and jobs, not so much. Government is still deeply involved in guiding the economy towards its new equilibrium. But can government involvement, while good intentioned, create more trouble than its worth? Can the government, for the sake of a few short-term brownie points, risk causing a needlessly long recession? Just like it did in the Great Depression?

Of course it can. Government intentions might be good, but they can yield most unpredictable of consequences and, far too often, quite a distance from what was initially intended. To this day, experts cannot agree whether President Roosevelt’s New Deal helped the economy or prolonged it. One of the sticking points was Roosevelt’s policy to increase wages, even as the economy took serious hits for every hour worked.

Economists believe that artificially keeping wages and prices higher was the main reason that the U.S. economy remained depressed for nearly all of 1930s. Something similar happened again in the 1970s, when the government tried to control inflation by fiddling with prices and only ended up creating supply shortages. Wholesale government policies are at play again today, bailing out the financial and banking systems after lax regulation allowed them to absorb too much risk.

At face value, what Roosevelt thought was wrong with the U.S. economy in the 1930s was too much competition. So, he moved to curb competition by imposing strict regulation, increase wages and inflate prices. When times are tough, this is an evergreen set of policies that appear logical and workable.

This worked for unions, but not for other employees, which led to unionized companies behaving like monopolies. And, although the New Deal promised to give jobs back to Americans, jobs remained elusive for many. In fact, during the Hoover years, from 1930 to 1932, total hours worked were 18% below 1929 levels. During Roosevelt’s New Deal years from 1933 to 1939, total hours worked were 23% below 1929 levels. And if government workers are excluded, total hours worked during the New Deal years averaged 17% below 1929 levels.

Some economists claim that Roosevelt missed the signs that would have made a strong recovery possible as early as 1933. The signs were the end of deflation and low borrowing costs. Also, at the time, liquidity was not an issue and banks were not in peril. What could have happened to prevent the economy from rebounding? There are arguments supporting the thesis that what threw the wrench into it all was central planning that went horribly wrong or, more specifically, Roosevelt’s price-fixing regime. Incidentally, although the U.S. Supreme Court deemed the regime unconstitutional in 1935, its bureaucratic tentacles remained more or less intact until 1945.

Eventually, Roosevelt realized his mistakes and learned from them, conceding in 1939 that the U.S. economy was reduced to nothing more than an oligopoly. And, while comparisons between the years of the Great Depression and the Great Recession of today may appear unfair, the common denominator, comprehensive government involvement in the solution, should at least be questioned.

What questions are there to ask? Simply, will the government’s policies entice people to work harder and smarter? Will the government’s policies entice people to save, invest and innovate? If yes, then, by all means, we are on the right track. If no, then this recession could last years. Just don’t forget the old adage that the road to hell is paved with good intentions.