Asymmetrical Information - Megan McArdle

06.27.12

Liberals Shouldn’t Defend FDR’s Attacks on the Court

The National Recovery Administration was bad economics and bad law. Don’t romanticize it.

My once-and-future colleague, Andrew Sullivan, offers a take on the legendary conflict between FDR and the Supreme Court which is common, in various versions, on the left-wing blogs I read:

And when you look back at how the Court tried to sabotage the New Deal under Roosevelt—under far more desperate economic circumstances—you see that naked politics has never, alas, been absent from the Court. What’s different now is a reversal of roles in which the president is acting according to the old norms and the court is actively reactionary. Under Roosevelt, the Justices were being conservative, trying to preserve the old order under radically changed circumstances.

America plunges deeper into Depression while a reactionary court callously stops FDR from taking Bold and Needed Action! Only FDR’s threats to pack the court—and the resulting decision by Justice Owen Roberts to “Switch in Time”—saved America from a Dark Fate.

It’s a dramatic, compelling narrative. The only trouble is, it’s bad economics. The NRA wasn’t going to save America, and we should be glad that the Court put it to rest.

The centerpiece of the conflict between FDR and the Court was a program called the National Industrial Recovery Act, which was challenged in a case called Shechter Poultry v. United States. NIRA was—well, it hardly seems enough to call it a terrible program. The National Recovery Administration, the entity at the heart of the Schecter Poultry case, was quasi-fascist, and I do use that term advisedly. It involved organizing the entire economy into giant business cartels which were basically explicitly encouraged to engage in price-fixing in return for paying higher wages. Businesses that signed onto a NRA code (early version here) got to display an NRA Blue Eagle (fun fact: the Philadelphia Eagles are named after this logo). Americans were supposed to promise not to shop at any business that didn’t display that blue eagle. In a particularly creepy touch, 100,000 school children were apparently marched onto Boston Common so that Mayor James Curley could lead them in a pledge: "I promise as a good American citizen to do my part for the NRA. I will buy only where the Blue Eagle flies... I will help President Roosevelt bring back good times."

Maybe you like precious schoolchildren lisping loyalty oaths to government programs more than I do. But even so, not this program. The NIRA was based on a lunatic confusion of cause with effect. President Roosevelt had noticed, along with everyone else, that prices were falling and people were being thrown out of work. So he decided that if businesses would just stop lowering those darn prices, everything would be okay. The Great Depression, his advisors believed, was being caused by "unfair competition".

This is like thinking that the way to deal with your drinking problem is to just stop vomiting and blacking out so much. Prices were falling because the banking system had collapsed, which was sucking the money out of the economy like a gigantic national vacuum. Even if the cartels managed to keep prices from falling, people still weren’t going to have enough money to buy the goods they wanted, because their savings accounts were shut down and they couldn’t roll their loans over, and neither could the people who bought their merchandise or wrote their paychecks. With too little money in circulation, fixing prices artificially high would just mean that even more people would be going without necessities.

The NRA’s main accomplishment was to introduce a massive bureaucracy with all the attendant frictions, red tape, and inefficiencies—though to be fair, had it survived longer, it might also have done a fair job of crushing new firms and innovation. Historical experience with these sorts of bureaucracies indicates that they slow recovery down; they certainly don’t speed it up. And indeed, the NRA abjectly failed for the same reason that Nixon’s wage and price controls failed to stop inflation 40 years later: you cannot fix problems with the money supply by commanding people to ignore them. If there is too little money in circulation, prices will fall precipitously, and if there is too much money in circulation, they will race upwards. Fixing the prices by law just produces shortages here, unconsumed surpluses there, and black markets and inefficiency everywhere.

Because we like nice, neat narratives, and because we tend to project our own passions onto the past, popular legend remembers FDR as a great Keynesian who overcame the Great Depression by whacking it back with the stimulus stick. But this is wrong in practically all ways. FDR didn’t end the Great Depression; World War II did. He didn’t actually do all that much stimulus. And FDR was not an economic Keynesian; he was an economic idiot. Which is not to say that he didn’t have some good ideas—he did—but he didn’t seem able to tell them from the bad ones.

FDR’s administration did some good Keynesian stimulus, such as the Works Progress Administration, and some good monetary expansion, such as the Federal Deposit Insurance Corporation. But that’s because they did a lot of things. For a time, it seemed like anyone with a half-baked idea could walk into FDR’s office and walk out as the head of a new agency. For example, early on, his administration spent a ludicrous amount of time (and money) buying gold in the open market because they thought that artificially raising the price of gold would somehow make the price of everything else go up. Farm policy centered around growing less food. (This is when my mother’s family, who were pouring milk on the ground and leaving produce to rot even as people starved in the cities, became Republicans.)

Then there were the, y’know, massive cartels. Whey failed to work as expected, FDR blamed “selfish businessmen” rather than the appropriate target, “massively misguided policy advisers who thought they could make summer come if they only ate enough ice cream.”

I don’t mean to sound too harsh—the administration did a basically good job with the banking system, and I’m pretty fond of the Hoover Dam. But the popular narrative of FDR striding into office and fixing the Great Depression by the proper application of modern economic principals is nonsense. He didn’t have economic principals, so much as a great willingness to try anything that was suggested to him. Unfortunately, a fair number of those things were stupid, and the NRA was the stupidest.And he had a hard time recognizing which one of his many ideas was working—even as it drowned in its own contradictions, FDR was puzzled and angry at the NRA’s failure.

The NRA was also a massive federal power grab that deserved to get struck down because no government should have powers that sweeping.

To be sure, it’s possible that it would have gone away on its own—as I understand things, it was not exactly wildly popular, and it was up for reauthorization when the court struck it down. But it’s hardly a national tragedy that the Court said no, on the very sensible grounds that Schecter Poultry was buying, slaughtering and selling its poultry entirely within the state of New York, and that it wasn’t really the federal government’s concern how much they were charging.

You can retort that they were engaged in a stream of commerce that emanated and penumbra’d over the state line, but who wants to argue that the commerce clause either does, or should, empower the federal government to organize the entire economy into cartels? Or—as the court actually allowed in Wickard v. Fillburn—that growing wheat for personal consumption is "commerce" that the federal government is entitled to forbid? Many of the sweeping decisions that followed the "switch in time" were in fact giving the federal government powers that were only required if they wanted to enact a stupid, economically illiterate law like FDR’s farm programs, which have enriched a handful of farmers at the expense of taxpayers and consumers, and which we’re still struggling to get rid of 70 years later. 

I’m not trying to get liberals to concede that 80 years of Supreme Court jurisprudence were all a hideous mistake. But thinking that the healthcare law should be allowed to stand does not require romanticizing FDR’s conflict with the court, which mostly used bad methods to defend bad laws.