A Trap in Obama’s Spending PlanBy LOUIS UCHITELLE
New York Times
December 21, 2008
As the recession deepens, President-elect Barack Obama is gearing up to spend hundreds of billions of dollars on public investment projects, counting on them to lift the economy, as they have in the past.
But this time that may not happen. Public spending, American style, has worked best in good times, when people have jobs and executives are eager to invest. A new public highway is soon lined — in good times — with stores and malls filled with consumers. A dollar spent by government generates three or four from the private sector.
That symbiosis makes a humming economy hum more, as it did in the 1950s and ’60s. But it may not work that way when the American economy is in full retreat, as it was in the 1930s and seems to be today.
As a measure of the current disaster, the Federal Reserve last week lowered interest rates to an unheard-of near-zero percent and offered in effect to give away money if a fearful nation would only spend it. But panicked by investment losses or fearful for their jobs, people tend to hold back. In such circumstances, a new road could be lined not by shopping malls, but by empty, overgrown land.
That is the risk facing Mr. Obama’s plan. By January, Congress will probably be asked to approve an outlay of more than $700 billion. Spent in one year on construction, research or equipment, it might well offset the contraction at first. But unless it also revived general confidence, the economy could collapse again, once the money was gone.
“If that spending can’t get the private sector going, then it is just a make-work maintenance operation,” said Stanley Moses, an economist at Hunter College in New York.
History illustrates how tricky it can be to make public spending work as intended. The many dams Franklin D. Roosevelt’s administration built generated an abundance of electricity, lowering its cost so that families could afford to operate the appliances then becoming available. The construction itself put money into workers’ pockets. But the appliances were too costly for most families during the Depression, and the manufacturers wouldn’t extend credit. For all the money spent by the Roosevelt administration, public investment was failing to jump-start a key private-sector industry.
His administration was inventive, however, and found a way around the problem by subsidizing installment purchases. That was when appliance production finally rose. In time, installment plans evolved into consumer loans and charge cards, and that helped make the American consumer economy the envy of the world.
These symbiotic relationships between the public and private sectors — playing off each other in ways hard to anticipate and hard to channel — became an essential ingredient of American prosperity from World War II until the mid-1970s.
“It is not in the nature of a market system to have adequate private investment all of the time,” said Robert Pollin, co-director of the Political Economy Research Institute at the University of Massachusetts at Amherst. “So we used public investment to smooth things over and improve the climate for private investment.”
That changed. In the 1970s, the public reacted against high taxes and growing budget deficits, and conservatives argued that putting money in private hands would lift the economy more effectively. Public investment tapered off, and was used less as a tool of economic policy as the economy experienced the increasingly sharp ups and downs of the 1980s, 1990s and the new century.
Now, in the opening months of the worst bust since the Great Depression, Mr. Obama is expected to seek sustained outlays over at least two years to repair roads, bridges and waterways; to build and repair public schools; to expand the broadband network; to digitize medical information; to advance green technology. An economic adviser says his goal is “to encourage private investment, particularly in areas where we have too little investment today, for example, solar systems and wind power.”
But Mr. Obama is bucking a deep private-sector funk, a bit like what Roosevelt described in his first Inaugural Address as “fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” Borrowers and lenders have pulled back. Business investment has plummeted. So has consumer spending. “A psychology of bad times is becoming the mindset of the public,” says Andrew Kohut, director of the Pew Research Center, a survey operation.
Like Roosevelt’s dams, Mr. Obama’s expenditures will no doubt generate jobs and wages in the construction phase. But in 1937, Roosevelt, thinking that the private sector could sustain itself, pulled back on public spending. Some historians say this was a big reason the economy sank again.
Mr. Obama faces a similar danger. Green-technology spending might spawn a far more efficient solar panel, but investors still might shrink at manufacturing it. What if consumers — having lost equity in their homes and scrimping on cars, vacations, even college tuition — were reluctant to buy and install the panels? “There are so many problems today and no good news, and that is enough to stop the impact of what Mr. Obama does,” said Mr. Moses of Hunter College.
The president-elect and his advisers recognize this danger. But they — and many others, including some Republicans — see no other choice. “The most important thing the new administration can do at a moment when the collective psyche has been so shattered is to spend money now on tangible things,” said Mark Zandi, chief economist at Moody’s Economy.com, who advised John McCain’s presidential campaign. “People want to see up front a repaired bridge, a new energy technology, a better water system. They want to feel these will have huge benefits down the road, and that might get them spending again.”
[THE PROBLEM WITH THIS THEORY, HOWEVER, IS THAT PEOPLE WANT TO SEE PRIVATE BENEFITS FROM PUBLIC WORKS EXPENDITURES. A REPAIRED BRIDGE IS NOT LIKELY TO MAKE PEOPLE FEEL BETTER, AS MUCH AS, PUBLIC REPAYABLE LOANS EXTENDED TO COMPANIES TO CONSTRUCT FACTORIES THAT GENERATE EMPLOYMENT, LOCAL OR OTHERWISE - e.g., TO BUILD HYBRID & ELECTRIC CAR BATTERIES, WINDMILLS, SOLAR PANELS, LIGHTBULBS, PHARMACEUTICALS, CELLULAR PHONES & OTHER INFORMATION TECHNOLOGIES, STEEL, PLASTICS, ETC. - ACTIVITIES WHICH WOULD REESTABLISH THE UNITED STATES AS A MANUFACTURING NATION, WHICH WOULD NOT ONLY RESTORE CONSUMER CONFIDENCE, BUT ALSO ALLOW CITIZENS TO EARN AN HONEST WAGE, A PORTION OF WHICH COULD THEN BE USED TO ACQUIRE THE PRODUCTS SO MANUFACTURED. CONSUMERS WOULD ALSO DERIVE CONFIDENCE FROM KNOWING THAT U.S. CURRENCY IS BEING RECYLED DOMESTICALLY RATHER THAN BEING OUTSOURCED].
Whatever the obstacles, Mr. Obama’s plan would mean giving up the view — widely held since the 1970s by economists, policy makers and business executives — that the private sector, by itself, is the key source of prosperity and full employment, and government spending is inefficient.
Perhaps with that in mind, Mr. Obama evoked as an illustration of his plan’s breadth not the desperate 1930s, but the prosperous 1950s and ’60s. That was when President Dwight Eisenhower and Congress set out to build the Interstate System of highways — a gift to an expanding auto industry and to trucking that also linked the country, encouraging all sorts of other investments.
But there is a big difference between Eisenhower’s era and Mr. Obama’s. By 1950, the Depression’s gloom had been banished by the common effort of World War II, followed by immense postwar demand for American production. Road building was just one public investment that set off huge private outlays. The space program stands out; so does military spending, which spurred computer development and created the Internet. And Medicare, born in the 1960s, became intertwined with private medicine.
[THIS IS QUITE IMPORTANT. U.S. DEFENSE DEPARTMENT SPENDING, ESPECIALLY PUBLIC RESEARCH & DEVELOPMENT, SPAWNED THE INNOVATIVE NEW MILITARY TECHNOLOGIES THAT IMPROVED U.S. NATIONAL SECURITY - A PUBLIC BENEFIT. ALTHOUGH ORIGINALLY FINANCED BY THE FEDERAL GOVERNMENT (U.S. TAXPAYERS), APPROPRIATE LEGISLATION WAS ULTIMATELY ENACTED THAT PROMOTED THE TRANSFER OF THESE PUBLICLY FUNDED TECHNOLOGIES TO PRIVATE & PUBLIC UNIVERSITIES and PRIVATE SMALL & MEDIUM-SIZED BUSINESS CAPABLE OF COMMERCIALIZING THESE TECHNOLOGIES (i.e., CONVERTING THEM) TO DERIVATIVE MARKET-RELEVANT PATENT-PROTECTED PRODUCTS FROM WHICH CONSUMERS CONTINUE TO DERIVE TANGIBLE and INTANGIBLE PRIVATE BENEFITS].
Such symbiotic successes prompted a French journalist, Jean-Jacques Servan-Schreiber, to issue a warning to Europe in 1968. In “The American Challenge,” a best seller, he wrote that “the government official, the industrial manager, the economics professor, the engineer and the scientist have joined forces” to support American economic growth, and that the juggernaut would soon reduce Europe to an American colony.
He was wrong. Europe outpaced the United States in its embrace of public-private symbiosis. And now Mr. Obama proposes, in effect, to restore the formula in this country.
[HOWEVER, THE EUROPEAN 'PUBLIC-PRIVATE PARTNERSHIP' MODEL GLOWINGLY REFERRED TO ABOVE IS NOT THE MODEL THE UNITED STATES SHOULD FOLLOW - ITS FORMULA SUFFERS FROM A FAILURE TO HONOR PRIVATE INTELLECTUAL PROPERTY RIGHTS, COMMERCIAL LICENSING (FREEDOM OF CONTRACT) AND AN OVER-RELIANCE UPON GOVERNMENT INTERVENTION].
[See: Lawrence A. Kogan, European Universities Learn Importance of Technology Transfer, Financial Times (9/29/06) at: http://www.itssd.org/Publications/financialtimesletter.pdf ; http://rassegnastampa.unipi.it/rassegna/archivio/2006/09/30SI16007.PDF ].
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http://www.huffingtonpost.com/larry-beinhart/the-great-depression-the_b_151572.html
The Great Depression, The New Deal, World War II and the Crash of '08
By Larry Beinhart
Posted December 16, 2008
Let's start with what everyone can agree on. There was a Great Depression, then the New Deal, then World War II. Also, that America emerged from that war as the world's economic powerhouse and embarked on an astonishing period of growth, prosperity and power.
What is controversial is how much good the New Deal did or did not do. The economy grew, but there was a downward blip from 1936-38 when Roosevelt raised taxes and cut spending in an attempt to balance the budget. (If you're interested, see graph http://en.wikipedia.org/wiki/File:Gdp20-40.jpg)
Unemployment was at about 25% at the start of the Great Depression. In 1940 it was still at 15%.
The universal consensus used to be that the New Deal was effective, though not perfect. Moreover, it saved the United States from embracing the extremes of Fascism or Communism as so many other countries did. But the Right has invested huge sums of money and put a great deal of effort into manufacturing and then selling the claim that Roosevelt's policies were not effective.
"Before we go into a new New Deal, can we just acknowledge that the first New Deal didn't work?"
George Will, ABC, The Roundtable
Even that the New Deal was counter-productive.
UCLA Economists: Government Intervention Prolonged Great Depression 2004 study found FDR's 'misguided policies' delayed recovery. By Paul Detrick Business & Media Institute
What then - according to the Right - ended the Great Depression?
The "New Deal" Was an Utter Failure. It was, in fact, the Second World War that brought an end to the Great Depression.Exposing Liberal Lies (Web Blog)
Actually, there's not much doubt that World War II finally fixed the unemployment problem and lifted the economy up to a significantly higher level.
Here, from a more reputable, fair and balanced source:
The war decisively ended the depression itself.
The war decisively ended the depression itself.
Christopher J. Tassava, EH (economic history) net.
But what was World War II, for America, as an economic event?
The United States entered World War in December of 1941.
But what was World War II, for America, as an economic event?
The United States entered World War in December of 1941.
So '41 can be treated, in economic terms, as a pre-war year.
In 1941, tax revenues were 7.7% of GDP (Gross Domestic Product) and government spending was 12.1% of GDP.
Taxes went up.
Deficits were disregarded. Government spending zoomed.
By 1944, tax revenues were 21.7% of GDP and government spending accounted for 45.3% of GDP. Almost half.
It was the New Deal without restraint.
It was Keynesian economics on steroids.
It was Roosevelt unleashed. If the New Deal did not end the Great Depression, but World War II did, what's the lesson?
By the numbers, it has to be that the New Deal was too half-hearted.
It was also that patriotism was able to overcome the backwardness of Republicans and the shortsightedness of the rich.
War is an expensive endeavor. It is also, in and of itself, not a very profitable one. As we've seen with the Iraq, Afghanistan and War on Terror adventures, it can be like throwing money into a pit and blowing it up.
Why did WWII create such success for the United States?
Looked at it strictly as an economic event, we put all our efforts and assets and all our credit into fighting half the world and we emerged as the only modern industrial nation left intact. Though it was not (as far as I know) a conscious goal, and it was a high risk way to get there, we came out of it with a dominant market share of all manufacturing and technology and even agricultural sectors.
What does this tell us about what the response to the crash of '08 should be? It should be whole-hearted. Not half-hearted. We should not fear high taxes, deficits, or government spending. Provided - provided - that we will be producing something of serious economic benefit.
This is not a war against a foreign power. It is an effort against the problems of our own economy.
What does this tell us about what the response to the crash of '08 should be? It should be whole-hearted. Not half-hearted. We should not fear high taxes, deficits, or government spending. Provided - provided - that we will be producing something of serious economic benefit.
This is not a war against a foreign power. It is an effort against the problems of our own economy.
We have to determine what those problems are and what they are not. They are not the sub prime crises or the housing bubble. Those are symptoms. There are two real problems.
One is our faith in free markets to the degree that it is magical thinking. Markets are never free (in that ideal, magical way), they are never honest by themselves, they are never far-sighted, and they don't supply everything that either a strong economy or a healthy society needs.
If there is an advantage, a greater profit, to be had through fraud, deception, excessive risk taking, collusion and monopoly, diversion of funds, failure to live up to contracts, bribing, buying or influencing governments (which are the only, and necessary, check on fraud, deception and all the rest), some members of the business community will engage in them. They will, at least in the short run, and often in the long run, out perform their more honest competitors.
There are things we need for economic health that established business have battled tooth and nail and will continue to fight until their death and ours.
The second is that in the last seven years we have come to the crisis point of a long term trend. We crossed the line from being a producing economy to being a credit economy. This is an unsustainable condition.
It is also a consequence of the underlying philosophical proposition that free markets create the best of all possible worlds.
The goal must be to transform America into an economy that produces more than it consumes.
The goal must be to transform America into an economy that produces more than it consumes.
The question is how to do that?
Oddly enough, the solutions that have been proposed are on the right track.
1. Invest in infrastructure. Expenditures on infrastructure become an invisible subsidy for all other business. They make all other business cheaper, faster, easier and more efficient. Expenditures on infrastructure, for the most part, cannot be outsourced. [THIS ASSUMES THAT THE STRUCTURES REQUIRED ARE MANUFACTURED IN THE U.S.]
2. Energy independence. Imported oil normally accounts for about a third of the US trade deficit. The way to end that is to produce our own energy and to consume less energy. The question is how? The green answers are wind, solar, tidal energy, possibly geo-thermal. These are infrastructure intensive. The primary cost is building machinery, setting it up and then building efficient transmission lines. Money that we spend on oil pours out of America just like dumping it down a sewer. Money spent on infrastructure stays in town. Then there's "clean" coal and nuclear. There's lots of literature that says both are feasible. I don't know who paid for it. The problem is to include all the costs - the environmental destruction - and actual, effective regulation. Theoretically, both are easily solved. In the real world, it has proved to be unlikely.
3. National health. [EUROPEAN/CANADIAN HEALTHCARE MODEL DESIRED] The private health care we now is the worst of all possible worlds for a modern, westernized society. Its bureaucratic, wasteful, and it rations care. Its far and away the most expensive system. It sends money to non-productive places. It make American business non-competitive.
4. Government goal setting for business and technology. [EUROPEAN MODEL] The glory of free market capitalism is that it is innovative. Thousands, even hundreds of thousands of different people come up with new ideas and try them out. Most fail, a few are wild successes. That won't go away. Imagination, ambition, greed, innovation, will remain. There are lots of things wrong with central planning. One is that it "distorts" the economy. Compared to what? To imaginary free markets? Probably. To where we are now? Unlikely. Can it be worse? Probably not. The second is that it stifles innovation. Compared to what? Innovation in financial instruments? Clearly, the market, left to itself, did not produce alternative energy, popular, efficient American cars, pleasurable mass transit, a new electrical grid, a solution to the obesity epidemic, a reduction in the prison population, and a host of other things.
We have a choice. Go to war for our economic future and well being. Or muddle along with half measures, lost in a fog of pseudo-free market theology, and let ourselves be drained by our own parasites and plundered by the more driven, forward thinking, and committed.
Larry Beinhart is the author of Wag the Dog, The Librarian, and Fog Facts: Searching for Truth in the Land of Spin.
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The Disaster Called the New Deal
By David Gordon
Book Review of New Deal or Raw Deal? How FDR's Economic Legacy Has Damaged America, By Burton Folsom, Jr. Threshold Editions, 2008.
12/9/2008
Ludwig von Mises Institute
Readers of The Mises Review will not be surprised to learn that Folsom considers the New Deal a failure. Nevertheless, even those already familiar with such books as John T. Flynn's The Roosevelt Myth will find Folsom's book valuable. Folsom advances new and important arguments.
His anti–New Deal verdict is hard to dispute: levels of unemployment at the end of the 1930s remained at depression levels. In May 1939, Treasury Secretary Henry J. Morgenthau Jr., one of Franklin Roosevelt's best friends, testified before the House Ways and Means Committee: "I say after eight years of this Administration we have just as much unemployment as when we started… And an enormous debt to boot" (p. 2). When he spoke, unemployment exceeded 20 percent. Further, and here Folsom has absorbed the pioneering research of Robert Higgs, not even the onset of World War II ended the Depression. True enough, unemployment ended; but this was only because of the draft. Absent this military slavery, there is every reason to think that Roosevelt would have continued to struggle with unemployment.
A diehard defender of Roosevelt might essay two replies to this indictment. He might argue that Roosevelt was insufficiently far-reaching: despite his radical reputation, Roosevelt only reluctantly embraced the Keynesian prescription of increased public spending. Roosevelt did indeed spend a great deal on government programs; but this must be balanced against his tax increases. When the two are taken together, the stimulus that New Deal outlays provided the economy was less than needed to restore prosperity. William Leuchtenburg, one of the most influential historians of the New Deal, favors this approach.
"The havoc that had been done before Roosevelt took office," Leuchtenburg argues, "was so great that even the unprecedented measures of the New Deal did not suffice to repair the damage." … Some historians say that FDR should have done more deficit spending during the recession of 1937. (p. 12)
By David Gordon
Book Review of New Deal or Raw Deal? How FDR's Economic Legacy Has Damaged America, By Burton Folsom, Jr. Threshold Editions, 2008.
12/9/2008
Ludwig von Mises Institute
Readers of The Mises Review will not be surprised to learn that Folsom considers the New Deal a failure. Nevertheless, even those already familiar with such books as John T. Flynn's The Roosevelt Myth will find Folsom's book valuable. Folsom advances new and important arguments.
His anti–New Deal verdict is hard to dispute: levels of unemployment at the end of the 1930s remained at depression levels. In May 1939, Treasury Secretary Henry J. Morgenthau Jr., one of Franklin Roosevelt's best friends, testified before the House Ways and Means Committee: "I say after eight years of this Administration we have just as much unemployment as when we started… And an enormous debt to boot" (p. 2). When he spoke, unemployment exceeded 20 percent. Further, and here Folsom has absorbed the pioneering research of Robert Higgs, not even the onset of World War II ended the Depression. True enough, unemployment ended; but this was only because of the draft. Absent this military slavery, there is every reason to think that Roosevelt would have continued to struggle with unemployment.
A diehard defender of Roosevelt might essay two replies to this indictment. He might argue that Roosevelt was insufficiently far-reaching: despite his radical reputation, Roosevelt only reluctantly embraced the Keynesian prescription of increased public spending. Roosevelt did indeed spend a great deal on government programs; but this must be balanced against his tax increases. When the two are taken together, the stimulus that New Deal outlays provided the economy was less than needed to restore prosperity. William Leuchtenburg, one of the most influential historians of the New Deal, favors this approach.
"The havoc that had been done before Roosevelt took office," Leuchtenburg argues, "was so great that even the unprecedented measures of the New Deal did not suffice to repair the damage." … Some historians say that FDR should have done more deficit spending during the recession of 1937. (p. 12)
Folsom wisely rejects this argument. It rests on a familiar fallacy, classically exposed by Frédéric Bastiat in the 19th century and Henry Hazlitt in the 20th. Spending by the government does not add to employment, since taxes displace private spending and investing. Folsom aptly quotes Hazlitt in this connection:
"Every dollar of government spending must be raised through a dollar of taxation," Hazlitt emphasized. If the WPA builds a $10 million dollar bridge, for example, "the bridge has to be paid out of taxes… Therefore," Hazlitt observed, "for every public job created by the bridge project a private job has been destroyed somewhere else… All that has happened, at best, is that there has been a diversion of jobs because of the project." (p. 84)
Keynesians of course have a response ready. They will say that investors, owing to pessimism about the future, would not have spent on their own the money the government takes in taxes. Instead, they would have hoarded it; had the money remained in private hands, the increase in employment would have been less than what occurred under the beneficent auspices of Washington.
Folsom ably dispatches this Keynesian canard. If businessmen were reluctant to invest, precisely the antibusiness attitude of the Roosevelt administration was in large part responsible. Roosevelt supported confiscatory rates of taxation; small wonder, then, that investors were reluctant to embark on new projects. They had good reason to think that if they were to be successful, Roosevelt would grab their profits for his own dubious schemes. Polls of businessmen taken in 1939 make evident this reluctance.
In March 1939, for example, AIPO [American Institute of Public Opinion] asked a national sample, "Do you think the attitude of the Roosevelt administration toward business is delaying business recovery?" More than twice as many respondents said "yes" as said "no." (p. 248)
Unfortunately, there is a gap in Folsom's case. His argument, as so far presented, is sound; but what if the government simply increases the money supply? In that case, defenders of interventionism will claim, the new jobs created by the government generate a net increase in employment.
To refute this, one needs the Austrian theory of the business cycle. Government spending, if it takes place through the expansion of bank credit, will, if "successful," result in another artificially created boom. The recovery thus generated will result in the long run in even worse economic distress, once that new boom in turn collapses. Nor can a policy of further monetary expansion indefinitely postpone disaster. Eventually people's confidence in the monetary system will crumble, and a hyperinflation will result.
Folsom, though not blind to the danger of inflation, ignores Austrian theory. In his own account of the continued severity of the depression that began in 1929, he rightly stresses the malign effects of the Smoot-Hawley tariff. Its extraordinarily high rates greatly restricted trade, not only through restricting imports but also because of retaliatory tariffs imposed by other nations. But he says nothing at all about the Austrian view, i.e., that the expansion of bank credit during the 1920s was the principal cause of the 1929 crash.
Quite the contrary, he follows Milton Friedman and the Chicago School in bemoaning the Federal Reserve's contraction of the money supply.[1] He appears not to be aware of the Austrian view. He does not cite Hayek or Mises on the cycle, and he ignores Lionel Robbins's outstanding The Great Depression. (The fact that Robbins wrongly repudiated his own book should not make one reluctant to benefit from its analysis.) He includes only one reference to Rothbard's America's Great Depression, and this is in connection with Herbert Hoover and the RFC (p. 276, note 18).
But I come not to bury Folsom, but, mostly, to praise him. One of his best insights is that the New Deal programs were financed in large part by the poor. At Roosevelt's behest, excise taxes were imposed on many popular items of consumption; and these weighed especially heavily on the impoverished. "In the first four years of Roosevelt's presidency, revenue from excise taxes exceeded that of income and corporate taxes combined" (p. 126). (I do not think it right, though, to call excise taxes "regressive," as Folsom does. Everyone paid the same rate; the poor were not charged more.)
This was far from the only way in which New Deal programs hurt the poor. Blacks fared very badly under Roosevelt, the supposed great exemplar of enlightened modern liberalism. Minimum-wage laws proved a stumbling block to efforts by blacks to secure jobs. These laws prevented employers from undercutting unions by offering lower wages to nonunion members. Since blacks faced exclusion from many of the powerful unions, they were in effect frozen out. Roosevelt, by the way, allowed unions freely to violate private-property rights: sit-down strikes, i.e., the forcible seizure and occupation of an employer's property, were for him quite in order. In the famous sit-down strike by Walter Reuther's United Auto Workers against General Motors, neither "Governor Frank Murphy of Michigan nor President Roosevelt was willing to support evicting the strikers from GM property" (p. 120).
Roosevelt was not much concerned with the effects of his programs on blacks. Indeed, he did little to support civil rights: he would not, e.g., support antilynching legislation. To do so might antagonize important Southern congressmen. Despite his seeming indifference to blacks, Roosevelt gained support among many members of the black community, in part owing to carefully calibrated publicity gestures by members of his administration. Nevertheless, several prominent blacks saw through him. Roosevelt snubbed Jesse Owens after the latter's triumph at the 1936 Berlin Olympic Games; and thereafter Owens campaigned against him. Joe Louis sent a telegram of support to Wendell Willkie in the 1940 election: "'Win by a knockout,' Louis telegrammed" (p. 210).
Folsom ably addresses an objection to his anti-Roosevelt thesis. If Roosevelt's policies were such a miserable failure, why was he reelected? In 1936, he won by a landslide over the Republican candidate, Governor Alf Landon of Kansas. Moreover, not even the most bitter anti-Roosevelt partisan can deny the president's popularity.
In part, Folsom claims, the answer lies in Roosevelt's great personal charm. Even opponents, such as the eminent journalist Arthur Krock, found themselves under its sway. Krock once explained to Roosevelt why he no longer attended presidential press conferences. "You charm me so much that when I go back to write a comment on the proceedings, I can't keep it in balance" (p. 223).
But Folsom has a deeper explanation. Roosevelt manipulated welfare programs, especially jobs under the WPA, to gain votes. WPA officials were quite willing, if need be, to twist arms in order to gain votes for the president and his congressional supporters. More generally, under the expert advice of Emil Hurja, the principal assistant to Postmaster General James Farley, polls were undertaken to indicate where patronage and pork could be used to best advantage.
Folsom here uses to good advantage a long-forgotten book, Who Were the Eleven Million? by David Lawrence, the founder and editor of US News & World Report. Through a county-by-county analysis of the 1936 election, Lawrence showed that voting for Roosevelt varied directly with the patronage and jobs extended. Sometimes one can trace in detail the way particular acts of political beneficence shifted voters to the Democratic camp. The Republicans were caught in a bind. As the party out of power, they could not match Roosevelt as a dispenser of favors. They could to an extent try the path of virtue, denouncing Roosevelt's tactics for what they were; but this tactic could not be pushed too far. To do so risked alienating voters who benefited from the government's largesse. Thus, Landon promised to maintain payments to farmers under the AAA, fatally compromising his denunciation of Roosevelt for political manipulation of welfare.
Folsom places great emphasis on Roosevelt's character, and the president comes off very poorly indeed. Politicians are hardly noted for honesty, but even judged by the low standards of the breed, Roosevelt was mendacious. In a speech in the 1920 election, when he ran for vice president on the Democratic ticket, Roosevelt falsely claimed to have drafted the constitution of Haiti. When challenged, he denied ever making the statement, though numerous witnesses attested that he had done so. Folsom might also have mentioned the charges of dubious dealings leveled against Roosevelt's Warm Springs Foundation for polio victims. (Folsom does mention this project but says little about it.)
The president did not grow more honest with age. Though he had promised to stay neutral in the fight between Alben Barkley and Pat Harrison for Senate majority leader, he came down decisively for Barkley, who won the vote, 38-37.[2] As a result, he converted the popular Harrison from a strong New Dealer to an opponent.
Roosevelt also had an unslakeable thirst for power. Though the 1936 elections gave the Democrats overwhelming control of Congress, this was not enough for Roosevelt. He sought to purge those who were not fully behind his program. In particular, he could not forgive those who dared to oppose his unsuccessful proposal to pack the Supreme Court. He opposed long-serving and influential Democratic congressmen, favoring instead more pliant newcomers. (One favorite was Lyndon Johnson, whose later efforts to bring the New Deal to South Vietnam were not altogether a success.) In most cases, Roosevelt's efforts proved unavailing. The once-dominant Roosevelt, despite his undoubted political gifts, found himself in a much weaker political position at the end of the 1930s than he had been in 1936. Roosevelt had overreached.
Roosevelt's quest for power and disdain for criticism had a sinister side. He used government agencies, especially the FBI and IRS, to harass his political opponents. Thus, at the president's instigation, a case of tax evasion against former Treasury Secretary Andrew Mellon was pursued, though known to be without basis by Elmer Irey, the head of the special intelligence unit of the IRS. Robert Jackson, who ordered the prosecution of Mellon, was later elevated to the Supreme Court. Mellon was eventually vindicated. As soon as Jesse Owens and Joe Louis criticized Roosevelt, IRS investigations of them commenced. Readers of this well-documented book will view Roosevelt with distaste.[3]
Notes
[1] It is possible to support the Austrian view of the Depression's cause while still rejecting the Fed's monetary policy once the Depression started as overly deflationist, but it is most unlikely that Folsom adopts this approach. For a criticism of Chicago orthodoxy, see Murray Rothbard, America's Great Depression, and Melchior Palyi, The Twilight of Gold.
[2] I cannot resist the story of Barkley's death. In a speech in 1956, he said, "I would rather be a servant in the House of the Lord than to sit in the seats of the mighty" and moments later dropped dead from a heart attack.
[3] There appears to be a mishap in the text of p. 306, note 38. Folsom refers to a letter from Arthur Sears Henning to Herbert Hoover, apparently on the court-packing plan, and thanks Gary Dean Best for calling this letter to his attention; but the letter is not mentioned in the accompanying text.
[2] I cannot resist the story of Barkley's death. In a speech in 1956, he said, "I would rather be a servant in the House of the Lord than to sit in the seats of the mighty" and moments later dropped dead from a heart attack.
[3] There appears to be a mishap in the text of p. 306, note 38. Folsom refers to a letter from Arthur Sears Henning to Herbert Hoover, apparently on the court-packing plan, and thanks Gary Dean Best for calling this letter to his attention; but the letter is not mentioned in the accompanying text.
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George Will: ‘The First New Deal Didn’t Work
By Faiz Shakir
ThinkProgress.com
Nov. 23rd, 2008
Economists on both the left and right broadly agree that the need for stimulative government spending is necessary to prevent a further collapse of the global economic system — just as the New Deal and the deficit spending of World War II restored the health of the global economy in the last century.
This morning on ABC’s This Week, conservative columnist George Will echoed the false right-wing meme that FDR’s New Deal policies made the Depression worse:
Before we go into a new New Deal, can we just acknowledge that the first New Deal didn’t work?
As Nobel-laureate Paul Krugman wrote recently in the New York Times, “There’s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse. So it’s important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts. The New Deal brought real relief to most Americans.”
Krugman observed that the true short-comings of the New Deal policies resulted from the fact that they were not bold enough over the short-term:
[T]he truth is that the New Deal wasn’t as successful in the short run as it was in the long run. And the reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious. […]
In short, Mr. Obama’s chances of leading a new New Deal depend largely on whether his short-run economic plans are sufficiently bold. Progressives can only hope that he has the necessary audacity.Brad DeLong offers this chart to emphasize the value of the New Deal.
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Fresh Debate About FDR's New Deal
by Jim Powell
J
im Powell, a senior fellow at the Cato Institute, is author of FDR's Folly, How Roosevelt and His New Deal Prolonged the Great Depression, (Crown Forum, 2003).December 2, 2003
It has been 70 years since Franklin Delano Roosevelt launched his New Deal in an effort to banish the Great Depression of the 1930s -- perhaps the most important economic event in American history. The New Deal was controversial then, and it's still controversial, because it failed to resolve the most important problem of the era: chronic unemployment that averaged 17 percent.
Newsweek columnist Robert Samuelson acknowledged that if World War II hadn't come along, America might have stumbled through many more years of double-digit unemployment. Samuelson, however, is among those who give FDR high marks for handling the political crisis of the 1930s, the worst political crisis this country has faced since the Civil War.
But the political crisis was caused by the double-digit unemployment, and in my new book, FDR's Folly, How Roosevelt and His New Deal Prolonged the Great Depression (Crown Forum, 2003), I report mounting evidence developed by dozens of economists, at Princeton, Brown, Columbia, Stanford, the University of Chicago, University of Virginia, University of California (Berkeley) and other universities, that double-digit unemployment was prolonged by FDR's own New Deal policies.
How can that be? Consider just a few of FDR's policies. The New Deal tripled federal taxes between 1933 and 1940 -- excise taxes, personal income taxes, inheritance taxes, corporate income taxes, dividend taxes, excess profits taxes all went up, and FDR introduced an undistributed profits tax. A number of New Deal laws, including some 700 industrial cartel codes, made it more expensive for employers to hire people, and this discouraged hiring.
Frequent changes in the tax laws plus FDR's anti-business rhetoric ("economic royalists") discouraged people from making investments essential for growth and jobs. New Deal securities laws made it harder for employers to raise capital. FDR issued antitrust lawsuits against some 150 employers and companies, making it harder for them to focus on business. FDR signed a law ordering the break-up of America's strongest banks, with the lowest failure rates. New Deal farm policies destroyed food -- 10 million acres of crops and 6 million farm animals -- thereby wiping out farm jobs and forcing food prices above market levels for 100 million American consumers. FDR's Folly spells out much more in startling, sometimes hilarious detail.
Robert Bartley, who edited the Wall Street Journal for three decades and is now a commentator, called for a fresh debate about the New Deal. Newspaper publisher Conrad Black, author of Franklin Delano Roosevelt, Champion of Freedom, responded by claiming that if "workfare" recipients were included among the "employed," then New Deal unemployment rates were lower than the U.S. Department of Labor has reported for decades. Those tempted to agree with Black might listen to jazz great Louis Armstrong's 1940 tune "The WPA" -- referring to FDR's biggest "workfare" program, the Works Progress Administration. Among the memorable lines: "Sleep while you work, rest while you play, lean on your shovel to pass the time away, at the WPA."
There's a fascinating split between economists and political historians about the New Deal. The idea that FDR cured double-digit unemployment, wrote author and commentator Thomas Sowell in a recent column, "was never pervasive among economists, and even J.M. Keynes -- a liberal icon -- criticized some of FDR's policies as hindering recovery from the depression."
Meanwhile, pro-FDR political historians such as James MacGregor Burns, Arthur M. Schlesinger, Jr., Frank Freidel, William Leuchtenburg, and Kenneth S. Davis, have focused on the personalities, elections, speeches, "Fireside Chats" and other aspects of the New Deal's political story, disregarding evidence about the economic consequences of New Deal policies. This continues to be the case with younger political historians like Alan Brinkley, author of The End of Reform: New Deal Liberalism in Recession and War, who called the New Deal "a bright moment." Disregarding the economic consequences, too, are children's book authors like Joy Hakim, whose recent bestseller Freedom: A History of US includes a glowing account of New Deal heroics.
Aside from FDR's Folly, the only major work mentioning evidence about the economic consequences of the New Deal is by Stanford University political historian David M. Kennedy: his 1999 book Freedom from Fear, winner of a Pulitzer Prize. "Whatever it was," he wrote, the New Deal "was not a recovery program." The New Deal might be gone, but the debate goes on.
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[See also Europe & United Nations Try to Cram Down US Throat Socialist Financial and Environmental Global Governance; Will Bush & Successor Swallow?, ITSSD Journal on Economic Freedom, at: http://itssdeconomicfreedom.blogspot.com/2008/10/europe-un-us-blue-party-cram-down-bush.html ].
