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The Law and Microeconomics of the New Deal at 70 Steven A Loyola University Chicago, School of Law LAW eCommons Faculty Publications & Other Works 2003 The Law and Microeconomics of the New Deal at 70 Steven A. Ramirez Loyola University Chicago, School of Law, [email protected] Follow this and additional works at: http://lawecommons.luc.edu/facpubs Part of the Law and Economics Commons Recommended Citation Ramirez, Steven, The Law and Microeconomics of the New Deal at 70, 62 Md. L. Rev. 515 (2003). This Article is brought to you for free and open access by LAW eCommons. It has been accepted for inclusion in Faculty Publications & Other Works by an authorized administrator of LAW eCommons. For more information, please contact [email protected]. THE LAW AND MACROECONOMICS OF THE NEW DEAL AT 70 STEVEN A. RmiREz* Recent turbulence in the financial markets, first as a result of Sep- tember 11, 2001, and then as a result of the realization in the summer of 2002 that corporate America was plagued by pervasive corruption, once again has shown that capitalism needs government intervention to thrive.' The crisis in investor confidence in the summer of 2002 in particular refocused attention on the seventy-year-old regulatory infra- structure imposed upon the economy as part of the New Deal.2 In both instances, the federal government jumped to the rescue of so- called free markets that seemed to be spinning into the abyss of seri- ous adverse macroeconomic dysfunction.3 It wasn't always so. * Professor, Washburn University School of Law. Professor Bill Rich and Professor Alex Glashausser contributed many helpful insights to this Article. This Article also bene- fited from a presentation in September 2002 at the Central States Law School Association, hosted by the University of Kentucky College of Law. 1. One example of the strength of the consensus supporting massive government in- volvement in our nation's economy was the swift response of the government to address the economic consequences of the September 11, 2001 attack on the World Trade Center in New York City. On September 17, 2001, the Federal Reserve Board (the "Fed") cut rates for the eighth time that year in order to stabilize financial markets worldwide. Richard W. Stevenson, Fed Cuts Rate by Half-Point in an Attempt to Aid Stocks, N.Y. TIMES, Sept. 18, 2001, at Cl. By the end of September, in order to stem the imminent collapse of some carriers and the cascading losses that would have hit the banking industry, the government injected $5 billion in cash into the airline industry and stood ready to guarantee another $10 billion in loans. Barbara A. Rehm & Laura Mandaro, U.S. Bailout for Airlines Looks Goodfor Lenders, AM. BANKER, Sept. 27, 2001, at 1. On the regulatory front, the Fed injected billions of dollars into the banking system and the Federal Deposit Insurance Corporation (FDIC) acted to encourage banks to take greater risks in lending to customers suffering adverse consequences from the disaster. E. Scott Reckard & James S. Granelli, Lenders Look for Economic Equilibrium, CHI. TRiB., Sept. 28, 2001, § Business, at 3. Congress quickly acted to extend unemployment benefits to the ever increasing army of laid-off employees in the aftermath of the attack. Delroy Alexander, Surge in Layoffs Vaults Claims to 9-Year High, CHI. TRIB., Sept. 28, 2001, § Business, at 1. Ultimately, the federal government undertook to act as insurer of last resort with respect to the risks of terrorism, for $100 billion. Christopher Oster, Terrorism Bill Boosts Insurers' Risk, WALL ST. J., Nov. 27, 2002, at C9. Little protest from laissez-faire enthusiasts arose in response to these actions. 2. See Robert Kuttner, Today's Markets Need a Whole New Set of Rules, Bus. WK., July 29, 2002, at 26 (stating that reforms designed to stem pervasive wrongdoing during the late 1920s are inadequate to stem wrongdoing today and that "laissez-faire" and "market funda- mentalism" had proven once more to be a "disgrace"). 3. For example, when President Bush signed the Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of 15 U.S.C., 18 U.S.C., and 28 U.S.C.), he specifically compared the new Act to the New Deal, stating that it contained "'the most far-reaching reforms of American business practices since the time of Franklin HeinOnline -- 62 Md. L. Rev. 515 2003 516 MARYLAND LAW REVIEW [VOL. 62:515 Once upon a time, mainstream economic thought held that govern- ment should have a highly restricted economic role.4 Indeed, Calvin Coolidge once said that "' [i]f the Federal Government should go out of existence, the common run of people would not detect the differ- ence in the affairs of their daily life for a considerable length of time.'" 5 The view was that government simply should not try to regu- late because markets were self-correcting. 6 Government can never spend as wisely as the markets can so government should tax little and keep a balanced budget to avoid crowding out private investment and destabilizing the currency.7 During this era of laissez-faire economics, business cycles would come and go, some even severe, but eventually the inherently self-adjusting economy would correct itself without the need for government "intrusion."8 Then came the Great Depression.9 Delano Roosevelt."' Mike Allen, Bush Signs CorporateReforms into Law; President Says Era of 'FalseProfits'Is Over, WASH. POST, July 31, 2002, at A04. For a review of the crisis in investor confidence gripping the markets in the summer of 2002, see generally Press Release, U.S. Senate Committee on Banking, Housing, and Urban Affairs, Opening Statement of Sena- tor Paul S. Sarbanes (D-MD), House-Senate Conference on the Public Company Account- ing and Investor Protection Act of 2002 (July 19, 2002), availableat http://banking.senate. gov/pre 102/0719oscf.htm. 4. JOHN KENNETH GALBRAITH, THE GREAT CRASH 1929, at 185 (1997) (stating that the prevailing economic doctrine of the late 1920s and early 1930s constituted a "rejection of both fiscal... and monetary policy" and therefore "amounted precisely to a rejection of all affirmative government economic policy"). 5. DAVID M. KENNEDY, FREEDOM FROM FEAR 30 (1999) (citing 1 ARTHUR M. SCHLES- INGER, JR., THE AGE OF ROOSEVELT 57 (1956)). 6. See Herbert Hoover, Annual Message to the Congress on the State of the Union (December 8, 1931), in THE PUBLIC PAPERS OF THE PRESIDENTS OF THE UNITED STATES: HER- BERT HOOVER 1931, at 580, 583 (1976) (stating that "private initiative and local and com- munity" action had been taken to address economic problems, allowing an "orderly readjustment of costs, inventories, and credits" with the "least possible Government entry into the economic field"); see also WILLIAM J. BARBER, FROM NEW ERA TO NEW DEAL: HER- BERT HOOVER, THE ECONOMISTS, AND AMERICAN ECONOMIC POLICY, 1921-1933, at 4 (1985) ("Standard textbook teaching typically held that economic life was governed by laws of production, distribution, and exchange and that cyclical fluctuations in aggregate income and output were a normal and inevitable part of the economic system's behavior.... [I]t was heretical to suggest that" humans could repeal these laws). 7. See Herbert Hoover, Address to the Senate on the National Economy (May 31, 1932), inTHE PUBLIC PAPERS OF THE PRESIDENTS OF THE UNITED STATES: HERBERT HOOVER 1932-33, at 243, 243-44 (1977) (stating that in light of the economic emergency and "con- tinued downward movement in the economic life of the country" government needed to impose a "[d] rastic reduction of expenditures" and increase taxes, in order to balance the federal budget and stabilize the dollar). 8. Herbert Hoover, Address to the American Bankers Association in Cleveland, Ohio (Oct. 2, 1930), in THE PUBLIC PAPERS OF THE PRESIDENTS OF THE UNITED STATES: HERBERT HOOVER 1930, at 391, 400 (1976). In this address, President Hoover stated that "readjust- ments in prices, which were . inevitable, [were] far along their course" and that "these commodities [prices] [were] below the level at which sufficient production [could] be maintained . and, therefore, sooner or later [had to] recover." Id. at 393. He also HeinOnline -- 62 Md. L. Rev. 516 2003 2003] LAw AND MACROECONOMICS OF THE NEW DEAL AT 70 517 This cataclysmic event forever changed the federal government's role in the economy. No longer would government allow presumptively efficient free markets to operate free of supervision; instead, the gov- ernment would manage macroeconomic performance-gross domes- tic product (GDP or output), unemployment, inflation or deflation, and productivity growth. In the face of this unprecedented and intractable calamity, Presi- dent Franklin D. Roosevelt (FDR) experimented with many forms of government action.1" FDR had some hits, some errors, and some rain- outs." Still, this Article posits that FDR's New Deal ultimately took a giant leap forward in demonstrating the proper role of the govern- ment in a modern-industrial state. FDR undertook massive invest- ment in physical infrastructure, typically a uniquely governmental function. FDR, however, went well beyond physical infrastructure. The New Deal revolutionized government by creating a regulatory in- frastructure, social infrastructure, and human infrastructure that would spur growth and stability for decades. In the final analysis, FDR used the legal system to redefine the political economy of the United States-from free market capitalism to a form of capitalism that was fundamentally subject to social management and social responsibility. The thesis of this Article is that the law and macroeconomics of the New Deal was ultimately a search, or at least the beginning of a search, to find the optimal legal structures to facilitate free market operation and provide a foundation for achieving greater economic growth and output, and other macroeconomic objectives.
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