The Truth About FDR, The New Deal, and Managed Economics

Barack Obama, Cory Truax, Economics, Uncategorized

The narrative is an established and popular one. President Herbert Hoover was a deregulation-crazed proponent of laissez faire, Austrian School economics who saw the economy crashing around him, and because he subscribed to a hands-off theory of government, the economy came crashing down into the Great Depression. Then along came the economic knight in shining armor, Franklin Delano Roosevelt, to the rescue of our Gross Domestic Product and the soundness of the dollar.

FDR created government program on top of government program, and in doing so, we’re told, created jobs and restored the American economy. Indeed, FDR’s spending lifted America out of the Great Depression, and established once and for all that government can be a catalyst for creating economic well-being and wealth.

But that narrative and its underlying philosophy are glaringly and manifestly false. The following analysis will establish that claim with statistics and quotes from the period itself.

HERBERT HOOVER: FREE-MARKET CAPITALIST?

Our first task in correcting the record on what happened in the Great Depression is getting to the truth about what policies were in place leading up the Black Tuesday, October 29th, 1929.

The established account is that President Herbert Hoover and his Treasury Secretary Andrew Mellon were well aware of the market’s coming crash and the resultant mass unemployment. But that, due to strict and ideological adherence to the derisively used “invisible hand economics,” they did either nothing or did too little too late.

That’s simply not true.

Just a month after the crash, the Hoover Administration began its tinkering with wages, employment, income taxes, and tariffs. Hoover first tried to manipulate the labor market by a forced migration of Mexican workers back to Mexico. In early Summer 1930, Hoover drastically rose the tariff on imported goods in an attempt to create more demand for American products. By 1932, we saw the creation of a brand new government “public works” program in the Emergency Relief and Construction Act. This was the first “New Deal” — made up government projects that “provided employment.”

Moreover, Hoover signed the Revenue Act of 1932, which raised income taxes across the board. And finally, the free-market capitalist President Hoover created the Reconstruction Finance Corporation to enable the government to insure loans to banks and big businesses.

Those are just the facts. That’s the history. Check my facts, and tell me if you think I’m wrong. Does any of that seem like the actions of a hands-off, laissez faire capitalist?

Hoover actively fought the Depression, but our financial shape continued to deteriorate. But for all the government intervention and action of the Hoover administration, the next administration makes Hoover look like Freidrich Hayek himself.

FDR AND THE TRUTH ABOUT THE NEW DEAL

Maybe the most damaging enduring lie in history is that FDR’s New Deal pulled America out of its Great Depression. Two entire generations of left-of-center folks base their entire concept of economics on being told FDR’s SPENDING is the greatest model of economic success. It’s imperative for future policy-making in America that we correct the record.

Let’s first understand the vast nature of the New Deal itself. Under FDR, federal sending in relation to the entire Gross Domestic Product more than doubled. The New Deal created no less than 15 brand new government agencies to oversee all of the new spending — the more recognizable being such organizations as the FDIC, the National Recovery Administration (NRA), the Civilian Conservation Corps (CCC), and the Tennessee Valley Authority (TVA).

Along with new government and new spending, we saw absolute micromanagement of the economy with FDR’s bureaucracy enacting price ceilings, price floors, and wage controls. The Wagner Act further tinkered with the labor market by heavily empowering labor unions. And finally, to give further perspective on how wide and sweeping the New Deal programs were, consider that FDR spent more on the Great Depression than the United States did on fighting World War I. And that’s adjusted for inflation. To say the very least, it was unprecedented spending and government intervention.

Side Note: Also rarely mentioned is that several of FDR’s programs and administrations were declared unconstitutional by the Supreme Court due to the fact that the Court could find no Constitutional authority to allow the program or agency.

AND WHAT DID THEY HAVE TO SHOW FOR IT?

I find the following quote to be one of the most powerful I’ve ever heard in the debate over the New Deal. I’ll go ahead and give you the words, and then tell you who, from the era, said them.

We have tried spending money. We are spending more than we have ever spent before, and it does not work. And I have just one interest, and now if I am wrong, somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I saw after eight years of this administration, we have just as much unemployment as we started - and an enormous debt to boot.

Those words were spoken in 1939 — 7 years into the New Deal — by a gentleman named Henry Morgenthau. Henry Morgenthau was Franklin Delano Roosevelt’s Secretary of the Treasury. And here you have him admitting that all of that spending did nothing to repair the economy.

And the numbers support his claim. Check the unemployment statistics:
1933: 24.9%
1934: 21.7%
1935: 20.1%
1936: 16.9%
1937: 14.3%
1938: 19.0%

Now, you can claim, if you’re emotionally invested in believing in the New Deal as the Tooth Fairy of economic policy, that bringing unemployment down from 25% to 19% is success. But I call it a dismal failure. The money printed or borrowed to “create” each new job far outstripped the wealth it “created.”

BUT WAIT. IT GETS WORSE.

It would be one thing if the New Deal simply didn’t help. It’s entirely another if it actually ENCUMBERED an economic recovery. But that’s exactly what two UCLA economists have theorized.

Their research suggests that the government’s mandated inflated wages and artificial prices coupled with forced collusion between businesses actually PROLONGED the Great Depression by up to 7 years. Certainly SOMETHING prolonged our Depression, because the history lays bare Western Europe recovering several years before the United States.

NOW LISTEN TO ME, Liberal, Progressive, New Deal-Supporter: you need to answer for these facts. The New Deal didn’t create employment. All of that spending, as admitted by the TREASURY SECRETARY of the period, only added debt.

The program may have even made it worse.

Neverthless, Paul Krugman and his ilk are constantly telling us that all we need to do is spend money. The primary intellectual underpinning for that call is the lie that the New Deal was an effectual program.

THE PHILOSOPHY

One quick point here: besides the history, I’d like to hear the THEORY on WHY spending would work. The single example government spending proponents have used in the past was the New Deal. And unless someone can rebut what I’ve presented here, that example is burned to dust. Thus, what’s the actual theory behind the claim?

WHERE WE’RE HEADED

Because of our current economic circumstances, I’m hearing lots of economic fallacies bandied about. The whole “The New Deal saved us from the Great Depression” was a popular one, so I addressed that first. A great deal of folks used the New Deal’s fabled success as justification for the “Stimulus Package” from the first months of the Obama Administration. And just the same way the spending failed in the 1930s, it will fail again. Another fallacy I’m hearing, however, revolves around how we got where we are.

The popular line is that Republican deregulation and general capitalism caused the financial meltdown in the late Summer of 2008. It may be too late to correct that narrative before it finds its way into our kids’ history books, but I’d like to take my shot at it. So, the next column will be another “Correcting the Record” column about what actually happened in 2008.

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Cory Truax @ July 18, 2010