Deal or no deal?

Amid the dark days of a stumbling economy, millions of Americans found light and hope in the soaring promises of a newly elected Democrat. Could this master of rhetoric animate his grand vision in the lives of a hurting populace? Could he make good on the flowery oration that had so inspired voters throughout the campaign?

The year was 1933, the president Franklin Delano Roosevelt, the context America's Great Depression. In his three-plus terms, Roosevelt responded to economic pain with a reinvention of the role of American government. The simple defense of liberty gave way to guarantees of security, and a publicly financed safety net was born.

Three quarters of a century later, the nation has once again laid its financial hardship at the feet of a Democratic visionary. Millions hope that Barack Obama will prove a modern-day FDR-that he will wash away economic challenges with a wave of government programs.

The country's political left has long celebrated Roosevelt's New Deal as the pinnacle of presidential brilliance, a triumph of government intervention and regulation over the destructive forces of unfettered capitalism. Now, with free markets again playing the villain, the stage is set for yet another liberal hero-so the narrative goes.

But history and nostalgia are rarely friends. In recent years, economics historians have challenged the picture of Roosevelt as financial savior. UCLA economists Harold L. Cole and Lee E. Ohanian believe that New Deal programs of the 1930s prolonged the Great Depression by seven years, helping to explain the historical anomaly of a 15-year sag in a nation so familiar with prosperity.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," Ohanian said upon release of his research in 2004. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

What might qualify as ill-conceived? For Roosevelt, it was the suspension of antitrust laws, the artificial inflation of workers' wages, and massive public works projects meant to create jobs. For Obama, words like bailout, rebate, and infrastructure investment are bouncing around the Democratic Congress, all with potential to mirror New Deal policies in undermining organic market corrections.

Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations and author of The Forgotten Man: A New History of the Great Depression (Harper Perennial, 2008), warns against sentimentalizing FDR's program. "The New Deal didn't work," she told WORLD. "It didn't create a strong recovery. It didn't create enough employment."

Shlaes argues that public sector rescue efforts amid economic hardship are improbable sources for recovery, often providing only a short-term balm: "Generally, the private sector carries the recovery, while the public sector alleviates the pain of the recession. The ideal is to create an environment in which the private sector wants to revive."

A significant cut to the capital gains tax is foremost among Shlaes' suggestions for prompting private sector revival. But tax cuts seem to be the last thing on politicians' minds. This month's lame-duck session of Congress opened with all attention aimed at a potential bailout for the country's big three automakers.

Without government intervention, Ford, Chrysler, and General Motors appear headed for bankruptcy, a prospect that would terminate some 3 million jobs in the first year of its aftermath. The automakers want a significant piece of the $700 billion financial rescue package legislators approved in October. Many Democrats and some Republicans believe they should get it. But the current White House occupant, George W. Bush, appears reluctant to oblige, suggesting the matter may not find resolution until after Obama is sworn into office on Jan. 20.

Critics of the automaker bailout disparage the idea of funneling public money to companies locked in unsustainable union contracts and long embroiled in financial turmoil-even before the rest of the country moved to join them. No amount of federal dollars can fix Ford's overinvestment in trucks and SUVs or GM's excessive number of brands, which foster more competition internally than with other companies.

Left alone, the market is bound to punish such uncompetitive operations and direct capital to other companies. Many fiscal conservatives view the resultant pain of that discipline as a necessary corrective. Columnist George Will calls proposals to rescue the big three from bankruptcy an extension of "the government's business model for the nation-redistributing wealth from the successful to the failed, an implausible formula for prosperity." Will and others consider bankruptcy the preferred path, a chance for failed companies to discard old business models, escape overly burdensome employee compensation standards, and start afresh.

Obama has said he favors lending automakers a hand, but is yet noncommittal as to just how far a government bailout should go to prevent an industry collapse. The new president-elect maintains similar ambiguity in other matters of economic policy, hinting at dramatic measures while eschewing talk of another New Deal. "For us to simply re-create what existed back in the '30s in the 21st century, I think would be missing the boat," he told 60 Minutes in his first television interview since the election. "We've got to come up with solutions that are true to our times and true to this moment."

In Roosevelt's time, the tumultuous moment provided sufficient popular support to establish permanent reforms that still shape the country's political identity. At least one prominent member of Obama's future cabinet views the current state of the union as similarly opportune: Chief-of-staff appointee Rahm Emanuel told BBC News, "You don't ever want a crisis to go to waste; it's an opportunity to do important things that you would otherwise avoid."

Exit polling from Election Day showed that Americans chose Obama with the fluttering economy at the forefront of their minds, perhaps indicative of a growing national squeamishness with free-market capitalism. Such data might well embolden the new president to move forward with the economic policy on which he campaigned-namely, permanent tax increases for top earners and so-called "cuts" for middle- and low-income earners, many of whom already pay no income tax.

On the other hand, economists running the political gamut are condemning the prospect of any tax hikes amid the financial downturn. Left-leaning economist Sherle Schwenninger of the New America Foundation has suggested Obama should table his plans to raise taxes on the wealthy. Bob Scharin, senior tax analyst for Thomson Reuters, believes the market may force the 44th president at least to postpone his intention to raise the high earner capital gains rate from 15 percent to 20 percent.

Shlaes says not raising taxes may not be enough. She worries that a public infrastructure initiative might preclude Congress or the Obama administration from delivering tax cuts for fear of losing needed revenue: "Usually when you cut the capital gains rate dramatically you get more money than you got before, but clearly a lot of people don't see that."

Just how a wide-ranging stimulus package might impact Obama's longer term domestic agenda for health-care reform and strict climate-change policy is unknown. Many liberal Democrats still hold out hope that he can keep such promises. Conservatives hope that for the good of country he breaks them.

New Deal timeline

Franklin Delano Roosevelt did not "waste" the crisis of his day, implementing regulation and liberal reform, much of which remains central to U.S. markets today.

March 5, 1933: The day after his inauguration, Roosevelt declared a national four-day bank holiday, shutting down the country's financial institutions until federal inspectors could declare them stable. The measure was a first step toward the creation later that year of the Federal Deposit Insurance Corporation, which provides government insurance for bank deposits to this day.

May 27, 1933: The enactment of the Securities Act of 1933 required full disclosure of risks and prohibited misrepresentations in the sale of securities to the public. The measure led to the creation of the Securities and Exchange Commission the following year.

Nov. 8, 1933: Roosevelt announced the creation of the Civil Works Administration, which hired 4 million people at high wages. The prohibitive government cost of $200 million per month combined with limited effectiveness led to the program's demise by March of 1934.

April 8, 1935: Congress approved funding for Roosevelt's Works Progress Administration, which employed as many as 3 million people at a given time in government jobs ranging from construction to sewing to art projects. But guaranteed wages undermined production and unemployment remained high. Congress shut down the program in 1943.

Aug. 14, 1935: The Social Security Act established a government bureaucracy for the collection and distribution of retirement income. The program did not begin paying out until several years later, but its immediate tax burden on the American workforce triggered the "Roosevelt recession" of 1937 and 1938, according to historian Edward Berkowitz, author of America's Welfare State: From Roosevelt to Reagan (The Johns Hopkins University Press, 1991).

April 12, 1937: The Supreme Court upheld the constitutionality of the National Labor Relations Act of 1935, a measure granting workers the right to strike and form unions without fear of employer reprisal. The resultant National Labor Relations Board remains in existence today.

June 25, 1938: The creation of the Fair Labor Standards Act established a federal minimum wage, outlawed child labor, and set the standard 40-hour work week with required overtime pay of time-and-a-half for qualifying employees. The law, still in existence today, discourages some employers from offering entry level jobs or extra hours for industrious workers.