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“How Government Prolonged The Depression,” and Confirming Daschle

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The Forgotten Man: A New History of the Great Depression

That’s the title of a story on today’s Wall Street Journal by Harold Cole and Lee Ohanian which should be must reading in the Senate this week. Key graphs:

The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation’s antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of “fair competition” which spelled out what producers could and could not do, and which were designed to eliminate “excessive competition” that FDR believed to be the source of the Depression.

These codes distorted the economy by artificially raising wages and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment. Following government approval of each industry code, industry prices and wages increased substantially, while prices and wages in sectors that weren’t covered by the NIRA, such as agriculture, did not. We have calculated that manufacturing wages were as much as 25% above the level that would have prevailed without the New Deal. And while the artificially high wages created by the NIRA benefited the few that were fortunate to have a job in those industries, they significantly depressed production and employment, as the growth in wage costs far exceeded productivity growth.

Now if I was advising the crafty Mitch McConnell or the always thinking Jon Kyl, I’d suggest they request Amity Shlaes to address a luncheon gathering of as many senators as they could find as a way of bringing attention to the core message of The Forgotten Man, her magnificent history of the Great Depression. That core message has to do with the certainty of rules that markets require to function. Time is short so I don’t think the Senate GOP can expect their Democratic friends to read Shlaes’ riveting book, but if they bought lunch in the spirit of bipartisanship and asked Amity to speak?

I wrote on Saturday on ways to improve the stimulus –housing, habaitat, nuclear power and the fleet– and heard from folks who know that shipbuilding for the Navy does indeed produce extraordinary ripple effects on employment. My follow-up question for the in-the-know folks: What sport of ships could be most easily ordered up, provide the Navy with the most force that the Navy wants, and for which the facilities exist to begin production quickly? The proposals on habitat, housing and nukes are easily understood, but the economic consequences of ship-building less so. Any info to please.

My two cents on the latest confirmation dance is sure to disappoint my most partisan listeners: Tom Daschle should be confirmed quickly because (1) his biggest error it looks to me to be the sort of error that a former senior elected official used to riding around in government cars could easily make, while the others look like the screw-ups that a suddenly wealthy former senator could easily make, (2) he wouldn’t have endangered his political career and ambitions for this amount of money given the huge income he had coming in, and (3) we absolutely have to fix the confirmation mess or more and more people will flee public service at the highest levels. Partisans tell me that giving passes to Secretary Geithner and now Daschle will never matter down the road when future GOP nominees run into trouble. Perhaps not. But a double dose of restraint when presented with the opportunity to slice and dice a nominee make the GOP’s policy objections much more potent, and no matter how much you disagree with him –and I worked pretty hard for John Thune, twice, because I disagreed with Daschle a lot– he is a good man and a smart one, and I’d rather have a center-left pro running DHS who will at least be open to the arguments of the big medical groups/hospitals/insurers than an ideologue from the university world.

Errors on tax returns related to unusual circumstances and nanny issues are simply not the sort of character issues for which confirmation should be denied. Fixing the “confirmation mess” requires some restraint when presented with targets. The GOP should stay fixed on the stimulus bill, and not go chasing Daschle.


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