Conservative Political Commentary

...usually with an attempt at historical and economic context

Wednesday, November 4, 2009

FDR and the Great Depression, Barack Obama and the Great Recession


Ted Roelofs of The Grand Rapids [MI] Press reported as follows on a debate between authors Joseph Alter of Newsweek and Bloomberg columnist Amity Shlaes on the effectiveness of FDR’s Depression-era policies.

“Alter conceded Roosevelt made missteps.
But he argued there is no alternative to ‘massive’ government stimulus
when an economy is plunging.

“‘It would be nice if there was an alternative,’ he said.

“Shlaes maintained virtually nothing Roosevelt did helped pull the
United States out of the Depression, short of entry into World War II in
1941.

“Unemployment stood at 19 percent in 1938, despite the flurry of social
engineering Roosevelt spearheaded in the preceding years. By 1942 with
the massive war effort under way, it stood at about 5 percent.

“In her book [The Forgotten Man: A New History of the Great Depression], she argued Roosevelt's biggest failing was a ‘lack of faith in the marketplace….’” [1]

Examples for Obama?
President Franklin Delano Roosevelt wasted no time getting to work on the Great Depression problem after taking office in 1933. He immediately declared a bank holiday, an idea he had rejected three days earlier when Herbert Hoover had suggested it. [2]

FDR’s policies worsened and prolonged the Depression. In spite of a strong and sustained effort, the remedies were mostly misguided, ineffective, and counterproductive. They were also short-sighted, not giving adequate consideration to other factors outside the immediate environment of a particular issue, or longer-term effects.

Of course, FDR inherited the Great Depression and Barack Obama inherited a recession and a financial meltdown. Obama’s was and is a difficult situation but there are some lessons that could be taken from history. He need not repeat all the previous mistakes.

Barack Obama’s economic policies have been referred to as “The New New Deal,” and Obama is apparently an admirer of FDR’s policies. In the numbered items below, I mention some of FDR’s policies (italicized) and make applications to current policies (non-italicized).

President Roosevelt was supposedly attempting to help the unemployed and the poor. His policies did economic injury to many workers and others in the following ways:

1. Minimum wage laws froze many workers, especially African-American, out of hiring possibilities.

Minimum wage laws still hamper employment today. Teen unemployment is the highest since the government started keeping records of this in 1948, over 25 percent. [3] Factors other than minimum wage laws have more effect, but minimum wage requirements exacerbate the problem.

2. Many lawsuits, anti-trust and the like were filed against large employers which undermined their ability to hire and pay workers. [4]

Left-leaning governments always want to go after large companies that might be commercially successful, wanting to assert power over them and tax them if they are profitable. Witness the government’s vendetta against Microsoft in recent years. The failing companies, such as Wall Street banks and the auto manufacturers, they want to “bail out,” i.e. take control at great taxpayer expense, saying they are “pulling the economy back from the brink,” and “restoring stability” to the financial system. Really? More likely, they have set the financial system and the American economy up for disastrous failure through unpayable debt.

We are a long way from seeing the “stability” they talk about. Also, The Obama Administration is greatly endangering national sovereignty through international arrangements on finance, “climate change,” etc. I do not like conspiracy theories, but the one about the international banking cartel, starting with the Rothchilds and the Rockefellers plotting to take over the world’s money and reduce the population to serfdom begins to have some plausibility. I don’t endorse it, but what would be different if it isn’t true? It is true that we are in danger of a massive economic collapse simply because of our national debt and endless deficits. Not all Obama’s fault, but he was on board with the bank bailouts and was the principal operator in the auto company takeovers.

According to The New York Times, “Beyond the $700 billion bailout known as TARP, which has been used to prop up banks and car companies, the government has created an array of other programs to provide support to the struggling financial system. Through April 30, the government has made commitments of about $12.2 trillion and spent $2.5 trillion — but also has collected more than $10 billion in dividends and fees.” [5] (emphasis theirs).

3. Under FDR, increasing tax rates put potential employers in a difficult position for hiring. Also, they could see that if they were successful, their profits would be largely taxed away. [6]

Every dollar a company pays in taxes is a dollar that is unavailable for hiring or investment in plant and equipment. Today’s employers face some of the highest corporate tax rates in the industrialized world, and see more coming as the Bush tax cuts expire. Also, they could hardly be blamed for waiting to see what happens with the Obamacare and cap and trade proposals before deciding on major hiring or investments. The business environment is very difficult and hardly improving in terms of employment.


4. Excise taxes were placed on many consumer goods. This especially hurt the poor.

We still have a lot of “hidden” taxes, on products and services. But the Democratic Congress also wants to tax sugar-sweetened drinks and other popular consumer items in connection with Obamacare. This would take more money out of the pockets of people they claim they’re trying to help. And these taxes are just the beginning. Even if they don’t pass their health care bill, they’ll still try to control everyone’s diet and shopping habits through costly taxes. And then there’s VAT that seems to be up for discussion.

5. FDR destroyed much food while millions were hungry. In an ill-advised attempt to create artificial shortages and thus raise prices, the government paid farmers to plow under 10 million acres of crops and to slaughter and discard six million farm animals. Then they paid farmers for not producing. [7]

Well, the Obama Administration hasn’t yet sunk to the level of destroying farm products. They do, as their predecessors did, still cling to unwarranted farm subsidies and government controls on farming. And they continue the previously existing harmful practices of mandates and subsidies for ethanol.

Bad Economics
According to Robert Higgs, “In their understanding of the Depression, Roosevelt and his economic advisers had cause and effect reversed. They did not recognize that prices had fallen because of the Depression. They believed that the Depression prevailed because prices had fallen. The obvious remedy, then, was to raise prices, which they decided to do by creating artificial shortages. Hence arose a collection of crackpot policies designed to cure the Depression by cutting back on production. The scheme was so patently self-defeating that it’s hard to believe anyone seriously believed it would work.” [8] (emphasis his).

FDR went a long way toward nationalizing industry, in effect, through the National Industrial Recovery Act, which was later struck down by the U.S. Supreme Court:
“Chief Justice Charles Evans Hughes wrote that, ‘extraordinary conditions do not create or enlarge constitutional power.’ Congress ‘cannot delegate legislative power to the President to exercise an unfettered discretion to make whatever laws he thinks may be needed.’” [9]

FDR unconstitutionally confiscated gold by an Executive Order, which also made it illegal to own most kinds of monetary gold. It did nothing to help, and amounted to legalized thievery. [10] This harmed individual savers and investors, and, more indirectly, workers. And it threatened and reduced everyone’s freedom. If gold can be confiscated, what’s to stop government confiscation of other things (over and above taxes), in the interest of “fairness,” of course.

Liberal governments see a problem and they think the federal government must act to correct it. Their corrections may benefit, temporarily, some group experiencing hardship, but what is usually ignored is the effect on others, and what their actions mean down the road. This recalls the “Forgotten Man” of William Graham Sumner:

“As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X or, in the better case, what A, B and C shall do for X. As for A and B, who get a law to make themselves do for X what they are willing to do for him, we have nothing to say except that they might better have done it without any law, but what I want to do is to look up C. I want to show you what manner of man he is. I call him the Forgotten Man. Perhaps the appellation is not strictly correct. He is the man who never is thought of. He is the victim of the reformer, social speculator and philanthropist, and I hope to show you before I get through that he deserves your notice both for his character and for the many burdens which are laid upon him.” [11]

Henry Hazlitt quotes this and observes that in the 1930’s, the “forgotten man” label was applied to X. C was still forgotten [12] (Amity Shlaes uses this phrase in the title of her book.)

The Congress is currently considering legislation to mandate a week of annual sick pay for all employees, as a result of the swine flu scare. Many companies cannot afford to pay employees when they aren’t working, so if this passes, unemployment or underemployment will likely increase. But the squeaky wheel gets the grease. More government micro-management. Another reason to believe the government is less concerned about the economy than with finding excuses for expanding government power.

Unemployment was 3.1% before the stock market crash of 1929 and 24.8% when Franklin D. Roosevelt took office. The rate was in double digits until 1941. [13] The published rates do not count people who have given up looking for work or have taken part-time jobs.

Well, the Great Depression is over. World War II lifted America out of it. But the current recession is not over, except perhaps in some narrow technical sense according to some “experts.” And over or not, its ill effects linger, and from all indications will linger for some time. There are too many instances of Obama following FDR’s ill-advised prescriptions, when we should have learned better. FDR didn’t have a previous great depression in memory to serve as his example. Previous depressions were left to the market and recovery was fairly quick. But Obama has the example of the Great Depression. Circumstances and technologies change, but the laws of economics still apply. The sooner the government ends its love affair with deficit spending and embraces something more oriented toward free markets and individual liberty, the sooner things will begin to improve. But don’t hold your breath.


[1] Ted Roelofs, The Grand Rapids Press, “Authors debate: Did FDR’s social programs make the Great Depression worse?” 10/12/2009, at http://www.mlive.com/business/west-michigan/index.ssf/2009/10/authors_debate_did_fdrs_social.html.

[2] Robert Higgs, “How FDR Made the Depression Worse,” Feb. 1995, Ludwig von Mises Institute, at http://mises.org/freemarket_detail.aspx?control=258.

[3] Catherine Rampell, The New York Times, “Teen unemployment at record level,” 09/08/2009, SF Gate, at http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/09/07/BU6H19IVRT.DTL&type=business.

[4] Jim Powell, “Tough Questions for Defenders of the new Deal,” 11/06/2003, Cato Institute, at http://www.cato.org/research/articles/powell-031106.html.

[5] The New York Times, “Adding Up the Government’s Total Bailout Tab,” 02/04/2009, at http://www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html.

[6] Powell, see [4].

[7] Ibid.

[8] Higgs, see [2].

[9] Ibid.

[10] David J. Heinrich, “FDR’s Heinous Crimes,” 10/21/2004, Mises Economics Blog,
at http://blog.mises.org/archives/002627.asp. Text of the Executive Order is here.

[11] William Graham Sumner, “The Forgotten Man,” 1883, The Forgotten Man and Other Essays, at The Online Library of Liberty, at
http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php&title=1654&search=%22Forgotten+Man%22&chapter=108194&layout=html#a_2270750.

[12] Henry Hazlitt, Economics in One Lesson, Ludwig von Mises Institute, 2008. Originally published by Harper & Brothers, 1946, page 179

Photo: Dreamstime.com. FDR statue

2 comments:

A Reason-Based Initiative said...

Let's pretend you have autocratic control of the government levers of power. How would you combat this recession and simultaneously reduce the deficit?

Eddie said...

I will have some suggestions in my next article. We are in a deep economic hole, but there are some things that can be done that do not include digging it deeper, as the Administration is trying to do.

Thanks for your interest.