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Lessons from the New Deal


In a commentary for Forbes Online, supply-sider Bruce Bartlett seemed to side with Keynesian Paul Krugman in saying FDR might have been able to end the Great Depression if federal budget deficits were much bigger. Bartlett hastened to add that FDR’s tax hikes were part of what he called “absolutely the wrong policy,” a view that Krugman doesn’t seem to share since he has referred to tax cuts as “quack remedies.”

Confusing? While most people are focusing on what specifically the government should have done during the Great Depression and what it should do now, I’d offer four thoughts:

1.  The New Deal prolonged the Great Depression because of not one but a combination of misguided policies that made it harder for employers to create jobs and harder for consumers to buy things. Keynesian commentators talk as if FDR made a single key mistake, like not incurring big enough budget deficits. This ignores the tripling of the tax burden during the New Deal period (1933-1940). Also ignored is the fact that New Deal spending was mainly paid for by the middle class and the poor, because the biggest revenue generator for the federal government was the excise tax on beer, cigarettes, chewing gum, and other cheap pleasures disproportionately enjoyed by the middle class and the poor. Moreover, several New Deal laws made everything — especially food — more expensive when Americans desperately needed bargains. Keynesians blame the depression of 1938 on spending cuts, but a succession of New Deal blunders played a role in that. The New Deal centralized power in the Federal Reserve Board which, in 1936 and 1937, hiked minimum required bank reserves 50 percent and then another 33-1/3 percent. Suddenly, less money was available for borrowing, and interest rates went up — a double whammy for employers. The Wagner Act (upheld by the Supreme Court in 1937) promoted compulsory unionism in mass production industries, which sent wage costs soaring eleven percent in a single depression year — with a resulting surge in unemployment. The Social Security payroll tax, which began in 1937, made it more expensive for employers to hire people, and it removed $2 billion from the economy (Social Security didn’t begin to pay benefits until 1940).  FDR’s undistributed profits tax, enacted in 1936, became a big issue in 1937. If there’s a single “key” policy mistake during the 1930s, I would say that the New Dealers never focused single-mindedly on private-sector recovery. They were eager to enact “reforms” that threw obstacles in the way of private-sector job creation.

2.   More government intervention in the economy is a bad idea, because government is the principal source of economic instability. There’s no sure way to keep bad or incompetent people out of power — a proposition that both Republicans and Democrats ought to agree on!  Even the best people make errors, because they’re human. They have to interpret conflicting data: hopeful news mixed up with discouraging news. Often it isn’t apparent what’s happening or what should be done — hence, debates about the New Deal which have been going on for some seven decades. Policymakers have particular difficulty predicting the future impact of their policies as they play out through a large, complex economy. Surely former Fed Chairman Alan Greenspan would have curtailed his easy money policy, and “affordable housing” hustlers like Sen. Christopher Dodd and Rep. Barney Frank would have shown restraint, if they had anticipated that their excesses would help set off the subprime crisis that spread like wildfire. Because of the power of such politicians and officials, their errors don’t harm only a city or a state or a region. They harm millions throughout the country and beyond. Political power magnifies the harm done by human error.

3.  Keynesian and other supposedly scientific theories for a government-run economy crash because of politics. Even if the theory of government spending “stimulus” made sense (considering that it doesn’t create any new wealth), government spending would be skewed toward powerful pressure groups who are likely to be better off than the general population. These aren’t the groups that economists might target for optimum “stimulus.” For instance, New Deal spending and loans were skewed away from the poorest people who lived in the South. Although FDR expressed sympathy for small family farmers, his New Deal subsidies favored big farmers who had more acres to put into various programs. Both Bush and Obama support bailouts for high-wage (unionized) Detroit auto workers. The recently-passed “stimulus” package doled out billions to the education and health-care sectors where unemployment is below average. A bill might have a worthwhile project in it, but the bill is unlikely to pass unless it attracts support by spreading wasteful spending around a majority of congressional districts. Once a government program is started, it becomes almost impossible to reform or abolish because of pressure group lobbying, regardless how much harm is done. The odds are that harmful programs will waste more and more money every year.  No surprise about that, since Obama’s $787 billion, 1,073-page “stimulus” bill was rushed through Congress with members of Congress reportedly voting for it without reading it.

4.  Government should make it easier for entrepreneurs to start businesses, easier for employers to hire people, and it should give everybody more control over the money we earn. Back during the 1930s, FDR denounced employers and investors as “economic royalists,” he piled on business taxes, he signed a number of laws that made it more expensive for employers to hire people, and he unleashed a barrage of lawsuits against about 150 big employers and industries (in some cases, for practices that the New Deal had made compulsory a few years earlier). Is it any wonder that New Deal era investment was at historic lows, and  unemployment averaged 17 percent? Today, the government is interfering with successful businesses and providing huge taxpayer bailouts for failing businesses. Grand-standing Congressmen threaten to tear up millions of private mortgage contracts, thereby increasing the risks of being a mortgage lender — and driving away capital to safe havens. What we need are predictable rules to live by, secure private property, low taxes, open markets and freedom from political interference, so that people will be confident that they can plan for the future.

Jim Powell, a senior fellow at the Cato Institute, is the author of FDR’s Folly, Bully Boy, and Greatest Emancipations, among other books.