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FDR's Folly - and what Obama should learn from it (Part III)

Roosevelt dime
Roosevelt dime
David W. Thornton

With the unprecedented expenditures aimed at reviving the economy, what was the result of the New Deal spending? FDR’s Secretary of the Treasury, Henry Morgenthau, said it best when he told the House Ways and Means Committee in 1939, “We are spending more money than we have ever spent before, and it does not work…. I say after eight years of this administration, we have just as much unemployment as when we started and an enormous debt, to boot” [http://bit.ly/c68oje].

In fact, in 1938 the United States had entered a depression within a depression (chapter 16)! New Deal policies favored labor unions resulting in increased labor costs as well as disruptions from strikes. In response, many businesses replaced their workers with machines. Tax increases decreased the amount of money available to both businesses and consumers. In 1942, the government started income tax withholding in order to get money into the government’s hands faster.

If the New Deal programs exacerbated the Great Depression, what did help the US recover? Conventional wisdom has been that World War II and the massive production needed by the Allies ended the depression. In reality, this spending was similar to the stimulus bill of our own day. It did put people to work for a limited time, but at the cost of a skyrocketing national debt. And when the government spending stopped, the jobs went away.

As the Wall Street Journal noted, both FDR and his successor, Harry Truman, wanted more New Deal policies after WWII [6]. This new New Deal would have included federal health care, government subsidies for housing, more make-work project, and “the right to a useful and remunerative job.”

Instead, led by Georgia Senator Walter F. George, then chairman of the Senate Finance Committee, congress cut taxes. The top individual tax rate was reduced from 94% to 86.45% and the amount exempt from taxation was increased. This change meant that an additional twelve million Americans paid no income tax at all. Further, the excess profits tax was repealed and corporate tax rates were reduced from 90% to 38% [http://bit.ly/aUrhmw]. Additionally, FDR’s price controls were eliminated.

Senator George’s claim that the tax bill “will so stimulate the expansion of business as to bring in a greater total revenue” [6] proved correct. The US began collecting more revenue than it had when tax rates were higher and budget deficits turned to budget surpluses. Unemployment rates fell to a fraction of what they had been during the 1930s.

Powell points to other instances in which cuts in taxes and government spending helped heal economic problems (chapter 19). During the Panic of 1837, Martin Van Buren cut spending and taxes. In 1892, Grover Cleveland cut government spending to resolve a decline in prices. In 1920, Warren G. Harding faced the sharpest price decline prior to the Great Depression. Prompted by Treasury Secretary Andrew Mellon, he resolved it by cutting government spending.

There have been other instances of tax and spending cuts stimulating economic growth. Tax rates were cut by Presidents Kennedy, Reagan, and Bush and in each case led to a period of economic growth and increased tax revenues [http://bit.ly/dak278]. Other presidents, such as Lyndon Johnson, Richard Nixon, Jimmy Carter, and our own Barack Obama found that high levels of taxes and regulation led to economic stagnation, high unemployment, and rising inflation.

We can learn from the economic successes and mistakes of the past. President Roosevelt’s New Deal programs, while well intentioned, were costly and ultimately not only ineffective, but counterproductive. The New Deal programs caused fifteen years of economic stagnation. The US economy did not fully recover from the Great Depression until after WWII when tax rates were cut and freedom returned to the markets. This success was replicated (and foreshadowed) many times in US history by spending and tax cuts in the face of economic problems. If the federal government continues to follow the example of FDR, we can expect a long period of economic stagnation until a future administration is willing to embrace free market concepts.

Notes:
1. http://www.econreview.com/events/banks1929b.htm
2. http://www.fff.org/freedom/fd0609d.asp
3. http://www.answers.com/topic/schechter-poultry-corporation-v-united-states
4. http://www.usnews.com/money/blogs/the-best-life/2009/05/12/social-security-medicare-busts-move-closer
5. http://www.cnsnews.com/public/content/article.aspx?RsrcID=41784
6. http://online.wsj.com/article/SB10001424052702304024604575173632046893848.html
7. http://www.heritage.org/Research/Reports/2001/05/Lowering-Marginal-Tax-Rates

Powell, Jim, FDR’s Folly. Crown Forum, New York, 2003.

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