Will the Bail-out Just Make Things Worse?

Fear of another Great Depression, or even a Pretty Bad Recession, is stinking up just about every place right now, Washington most of all. There's so much fear that we're approaching a Republican New Deal, a bail-out plan to end all bail-out plans. The bail-out will provide a period of economic liposuction, buying those plastic surgeons at the Fed and Treasury time to do a tummy tuck, and maybe a rhinoplasty, to boot, making the economy look all pretty again (but see Tony Judt: Innovation Ain't Always Progress).

But what if the government just makes things worse? That's the theme of "The Forgotten Man," a revisionist history at the Great Depression published last year and now out in paperback. The author, Amity Shlaes, aims to rip the heart out of the monetary policy orthodoxy around the roots of the Great Depression. The standard line is that if the Federal Reserve hadn't bungled by tightening credit, things would've been fine.

But Shlaes thinks monetary policy wasn't the real problem. In fact, she starts her book with the forgotten Black Tuesday, the one in 1937, which showed that the New Deal was not succeeding. She instead makes a case that under Hoover and Roosevelt, government was a mother hen that stifled the economy, year after year. The more it tried to help, the worse things got. "Life is more than monetary," she told me when I interviewed her about the book.

Not many in the world of economics would agree with her assessment.

But the book is an interesting journey through the 1930s, a reminder of how hard the Depression was, and how different life was before it. It used to be possible, for instance, to be a Forgotten Man, someone who can do things without needing government support. Traditional federalists and modern libertarians will find themselves nodding as she writes about Hoover: "before a year would pass, Hoover had done damage that did matter on three fronts: by intervening in business, by signing into law a destructive tariff, and by assailing the stock market." They'll cheer when she notes, in 1938, that Roosevelt's new Deal "meant the United States seemed a less reliable place--.Knowing that the government wanted to enter an area of the economy was one thing. But knowing that it could always make vast changes was more disquieting. Roosevelt had had to deal with strikes of labor in the spring. Now he had to deal with the more serious strike of capital."

Among her heroes in "The Forgotten Man" is Andrew Mellon. He himself is not entirely forgotten, but how many people today know that he was probably even more important than Alan Greenspan today (the line goes that three presidents served under Mellon while he was Treasury Secretary). Shlaes venerates him, making a nice case for Mellon as the original venture capitalist, and one today's VCs might want to emulate a little more closely. His originality and his ability to bet long with great success at a time of huge economic and social change â€" electrification, the emergence of broadcast media and the commercialization of the airplane were all going on â€" make him particularly worth remembering. In addition, Shlaes shows him as behaving magnanimously towards those who tried to crush his name towards the end of his life.

She's even more impressed by a few stalwart ordinary people, like Bill Wilson, who bootstrapped Alcoholics Anonymous, and the Shechters, kosher butchers who were beset by Roosevelt's minions in the National Recovery Administration, which assaulted businesses that did not toe the government's mandates on things like wages and prices, even if it meant they went out of business failed. The Shechters fought the NRA all the way to the Supreme Court, where they won, driving a stake into what the government could control.

She yearns for this era where people didn't rely on the government for much of anything. Shlaes isn't just being nostalgic: she's trying to seed a new way of thinking about government. Most people alive today have no memory of what small government is really like. It's unlikely that we'll be able to get back to it, either â€" the historian William McNeill argued in the "Rise of the West" that 'the managerial elite' tend to manage more and more things over time, becoming a self-perpetuating force. That force will only get bigger in the wake of our current fiscal crisis.

Little wonder that Shlaes has come out swinging during the debate over the bail-out. Last week, she published an essay arguing that the market will fix itself, noting that a sharp recession occurred in 1920-21, but worked itself out without government intervention.

James Pethokoukis who writes for U.S News and World Report, responded by dubbing her the most extreme of what he calls "the MellonHeads," who are against the idea of a bail-out. He sarcastically invokes Andrew Mellon's 'liquidation' strategy ["Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people." ].

Pethokoukis says neither Shlaes nor anyone else has the stomach for, say, 11 percent unemployment like that which occurred during 1920-21. I'm not sure why he'd say that â€" it hit 9 percent in 1975, and was at 10.8 percent at the end of 1982. A lot of people now living stomached both periods, albeit with a lot of indigestion and maybe an ulcer or two. Pethokoukis says that "The MellonHeads might want to spend more time making the case how big government caused a mess only big government can fix and how we can avoid a repeat."

Shlaes likely thinks nothing of the sort. Her view of history is that big government can't fix the mess, and is headed for a repeat. As BNET's The Corner Office says about The Forgotten Man, it's a provocative argument, and good Meltdown reading. It's also tilting at windmills -- the government may have put the Great in the Great Depression, but it isn't going to sit around and wait to see if it happens again.