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How Democrats Failed to Learn From FDR's New Deal


FDR's New Deal did nothing to restart the nation's economic engine; that took rearmament for World War II.

Franklin Delanor Roosevelt is popularly regarded as the man who saved democratic capitalism with vigorous governmental intervention.

Contemporary Democrats view FDR's New Deal as the Big Bang for all that is good and true and seek to build on it by extending the reach of government into the economy through increased regulation, new programs and higher taxes.

But a distinction must be drawn between FDR the brilliant politician who prepared the nation for World War II and kept Britain afloat after the defeat of France, and FDR the economic illiterate.

Roosevelt's opponents, and even his friends, referred to him as "featherduster" – a lightweight and a clever dig as his blueblood heritage. Supreme Court Justice Oliver Wendell Holmes, Jr. derided FDR as a "second-rate intellect but first-rate temperament."

In the 1930s, the conventional wisdom was that capitalism had failed. FDR apparently never challenged that assumption. But the failure of government – not the free market – created the Great Depression. The economic collapse could have been avoided. The money supply dropped about 33% from 1929 to 1933, in large part due to the Federal Reserve's incompetence.

FDR's temperament saved the nation – not his failed economic policy. Despite endless cheerleading from those with a vested interest in making big government bigger, FDR's New Deal did nothing to restart the nation's economic engine. That took rearmament for World War II.

The median annual unemployment rate during the New Deal was about 17% and never dropped below 14% during the 1930s. The hard times almost certainly would have continued for years if U.S. industry hadn't hired millions to produce the endless supply of armaments needed to defeat Nazi Germany and Imperial Japan.

In many cases, FDR's policies deepened the depression and created needless hardship for those he sought to help.

Here's how:

Tax Hikes

FDR nearly tripled the tax burden between 1933 and 1940, boosting excise, income, inheritance, corporate, and dividend taxes and slapping a tax on "excess profits." The highest individual tax rate soared to 79%. High taxes sucked money out of the private sector, smothered entrepreneurship and killed incentives to work and invest. By contrast, Treasury Secretary Andrew Mellon helped spark an economic boom in the 1920s by backing a plan to slash the top individual tax rate to 25% from 73%.

High Employment Costs

The New Deal raised the cost of employment, making it expensive to hire new workers and contributing to the nation's high unemployment rate. The National Industrial Recovery Act and the Davis-Bacon Act mandated artificially high wages, further crimping private employment. The new minimum wage cut demand for unskilled workers. The new Social Security tax raised compensation costs. Compulsory union membership often fostered violent tactics – and the goal wasn't increased efficiency or innovative products to grab market share. The WPA and other government agencies "created" jobs, but at great cost – private sector employment was lower in 1940 than it was in 1929.

Brutalizing Business

FDR railed against "economic royalists" and "privileged princes" who sought to establish an "industrial dictatorship" and a "new despotism." Roosevelt issued about 3,700 executive orders, many limiting business activity, and let lose a plague of anti-trust lawyers on American industry. New securities laws made it difficult to raise capital. FDR ordered the breakup of the nation's strongest banks, including those with the lowest failure rates. This created an uncertain business climate that stifled investment and killed private sector job creation.

Inflating Prices

The National Industrial Recovery Act of 1933, struck down by the U.S. Supreme Court two years later, created "codes" – cartels – in about 500 industries and limited competition in an effort to maintain high prices and, it was thought, wages. Business owners who responded to the market by cutting prices received a stiff warning from the federal government followed by a fine. The Agricultural Adjustment Act of 1933 also sought to keep prices high by limiting production. "Excess" food was destroyed or sold below cost overseas as millions of Americans went hungry. In 1937, "marketing orders" limited production of milk and fruit. Roosevelt apparently thought it was government's role to protect established high-cost producers from entrepreneurs who could beat them on price. Roosevelt's policies stifled job creation and raised prices for families already struggling to make ends meet.

Showcase Projects

FDR used tax money to build the Tennessee Valley Authority, TVA, a power-generating monopoly. He then exempted the TVA from state and federal taxes and regulations. But the massive project failed to produce an economic boom. In a report for the Cato Institute, Jim Powell, author of FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression, says non-TVA southern states such as North Carolina and Georgia posted stronger growth than TVA states because there was a faster transition to higher-paying jobs in manufacturing and services from farming.

But Roosevelt got one thing spectacularly right: the Securities and Exchange Act of 1933. Think of it as a recognition of "efficient markets" long before economists developed the idea. The SEC is unlike most New Deal legislation because it required full disclosure of relevant information and didn't attempt to pick – or mandate – winners or losers. The key to success on Wall Street is brain wattage and hard work. This creates intense competition among Morgan Stanley (MS), Merrill Lynch (MER), Goldman Sachs (GS) and other brokerage houses as well as providers of market information such as Moody's (MCO) and Standard & Poor's. Investors benefit because everyone starts with the same basic information and therefore competes on quality of research – not the number of cronies analysts can buttonhole in Congress. Internet mania aside, this fosters the rational allocation of capital to promising companies that will boost the economy.

Nevertheless, if the New Deal were a product in a competitive market, Roosevelt would have been bankrupt. But politicians have different goals, different means of achieving them and a different scale for measuring success that have little to do with a market economy. Most of FDR's "make work" government jobs created little of value and therefore didn't give the economy a long-term boost. No matter. Harry Hopkins, one of FDR's closest advisors, summed up the political philosophy of the New Deal: "We shall tax and tax, spend and spend, elect and elect."

Voters might want to keep this in mind the next time a presidential candidate yaps about "giving" you some nifty benefit (i.e. buying your vote with your money) or "investing" in a spiffy new program which, wouldn't you know it, just happens to gobble more of your taxes.

Historian David M. Kennedy won the 1999 Pulitzer Prize for his book Freedom from Fear, a review of the economic consequences of the New Deal. "Whatever it was," he wrote, FDR's New Deal "was not a recovery program."

This isn't news to anyone outside "progressive" circles in Berkeley, Madison, Ann Arbor, Manhattan's Upper West Side or, it seems, the Democratic Party. FDR's failure to create positive economic change was discussed during the depression, if not widely acknowledged. Here's part of Louis Armstrong's l940 song about the Works Progress Administration, the granddaddy of the nation's workfare programs:

Sleep while you work,
Rest while you play,
Lean on your shovel
To pass the time away...

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