The Corner

Obama, FDR, and the Strategy of Massive Spending

“FDR comes in, he tries all these things with the New Deal; but FDR, contrary to myth, was pretty fiscally conservative.” Thus spoke President Obama at a town-hall meeting at the University of Maryland. The president likes FDR and believes the two of them think in similar ways. That may be true, but the major myths we need to correct are those put forth by President Obama on the success — or lack thereof — of FDR’s economic policies. Let’s look at three myths about FDR that Obama supported in his town-hall speech.

First, FDR was “pretty fiscally conservative.” False. No president before FDR ever grew the national debt more rapidly in peacetime. In fact, FDR increased the national debt by more in his first two terms than 30 presidents combined did before him, more than doubling it. And in April 1939, toward the end of his second term, unemployment was 20.7 percent — greater than it had ever been before the Great Depression. All that massive spending and almost no jobs created with those tax dollars.

Second, Obama falsely sees a small drop in federal spending during 1937 as actually hurting the economy. In the president’s words, “And so after the initial efforts of the New Deal and it looked like the economy was growing again, FDR then presented a very severe austerity budget. And suddenly, in 1937, the economy started going down again.” The fallacy here is a misplaced cause and effect. Spending on the WPA, for example, which was FDR’s road-building program, tended to decline after an election because he didn’t need the votes the next year. However, real government spending only declined by 0.7 percent of GDP between 1936 and 1937. Both of those years accumulated huge deficits, but 1937 had that small spending decline. Would President Obama have us believe that a 0.7 percent spending cut triggered a sharp increase in unemployment in 1938?

What seems to have triggered the increase in unemployment in 1937 and 1938 was the recent hike in income-tax rates (to a top rate of 79 percent), the increase in corporate taxes in 1937, and the effects of the Wagner Act, which sparked widespread strikes and the unionizing of the nation’s auto plants in 1937 and 1938. According to Professors Thomas Cooley at New York University and Lee Ohanian at UCLA, union membership rose from 12 to 25 percent from 1934 to 1938. The resulting strikes and wage hikes increased the costs of business beyond which employers could hire more workers or sell their more expensive cars. As a result, unemployment rose and the U.S. went into a depression within a depression. The 0.7 percent spending cut in 1937 had little or nothing to do with this.

The third myth was when President Obama said, “What really pulled America out of the Great Depression was World War II.” Unlike the previous two myths, many people believe this one. Yes, World War II accomplished much, but it was a fiscal liability, not an asset. Put another way, our economic thinking is flawed if we think the way out of a Great Depression, or the current recession, is to send 12 million soldiers overseas, feed and clothe them, give them expensive weapons, and have them destroy factories, homes, and people. That was necessary to win the war, but it caused our national debt to skyrocket from about $49 billion to about $260 billion. We temporarily traded unemployment for debt. Happily, as we argue in FDR Goes to War, the U. S. freed the economy of many regulations and taxes after the war, and that, not the war itself, sparked America’s economic recovery.

President Obama concluded, “Some have said, I think rightly, that we’ve got to be careful that any efforts we have to reduce the deficit don’t hamper economic recovery.” A more accurate statement would be that reducing the deficit is where the long-term economic recovery will begin. That is the history lesson we need to learn from FDR and the New Deal.

— Burton Folsom, Jr. is the author of New Deal or Raw Deal? (2008) and co-author with Anita Folsom of FDR Goes to War, which will be published in October by Simon & Schuster.

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