Imitating Failure

Shortly after the end of World War I, the U.S. economy contracted sharply and fell into a recession. The federal government did not respond with a stimulus program, did not expand government spending, did not add government workers to the payroll. Rather than pursuing fiscal stimulus, President Harding reduced government expenditures, cut taxes, and did little else. The recession last about a year and gave way to a strong recovery.

The recession of 1920-1921 was the last time the federal government responded to economic crisis by essentially doing nothing. The ideological winds were shifting toward progressivism and toward the notion that a strong central government was needed to manage the business cycle.

Thus, when the economy began to contract following the stock market crash of 1929, President Hoover responded by sharply increasing federal spending and taxes and running a substantial budget deficit.

When Roosevelt assumed the presidency in 1933, the country had already been in depression for three years despite Hoover's interventions. Although he ran on a platform which sounded traditional (cut taxes and spending), once in office FDR went well beyond Hoover, launching an alphabet soup of new programs (NRA, AAA, WPA, CCC) which constituted an unprecedented insertion of the federal government into economic life.

Roosevelt's actions were bold and decisive. What's more, his use of radio -- the new technology of the era -- provided hope and even inspiration. He was re-elected thrice and historians, enamored as always of the strong executive, have been overwhelmingly supportive. The New Deal became the template for strong, compassionate leadership. Congress is now considering Obama's so-called stimulus bill, a "new" New Deal full of massive spending, based upon this conventional wisdom.

Amity Schlaes' excellent book The Forgotten Man brought significant attention to the failure of the New Deal to cure America's economic ills during the Depression. Now, another timely book has appeared, the culmination of ten years of research, which undertakes a meticulous analysis of the results of FDR's New Deal. In New Deal or Raw Deal? (Threshold Editions, 2008), Burton Folsom, Jr., a professor of history at Hillsdale College and senior historian at the Foundation for Economic Education, asks the decisive question: "But did it work?"  The answer, to put it briefly, is "not really."

Folsom begins the book by revealing a startling confession by Henry Morgenthau, secretary of the Treasury, and a close personal confidante of Roosevelt. On May 9, 1939, Morgenthau told the House Ways and Means Committee:

"We have tried spending money. We are spending more than we have ever spent before and it does not work. ... We have never made good on our promises ... I say after eight years of this Administration we have just as much unemployment as when we started. .... And an enormous debt to boot!"

Morgenthau's frustration was understandable: in April 1939, unemployment was over 20 percent. This was nearly a decade after the 1929 crash and more than 6 years after FDR's inauguration.

During that time, FDR tried everything to end the crisis: cartelizing industry (the NRA), subsidizing farmers (the AAA), creating make-work projects (the WPA), promoting organized labor (the Wagner Act), and finally, launching the modern welfare state (social security, minimum wage laws, the AFDC). It was all funded by a combination of increased debt, excise taxes, and high progressive income taxation.

Yet, unemployment stayed very high throughout the entire period, declining during FDR's first term, then rising in his second term. As late as June 1939, industrial production remained significantly below 1929 levels (81 vs. 100).

Some of the programs were clearly at cross purposes. The WPA, for example, sought to alleviate unemployment, but the minimum wage had opposite effect.

Economic Failure but Political Success

Despite this uninspiring record, most historians tend to be overwhelmingly supportive of the New Deal. Folsom suggests that this is because most sympathize with FDR's "progressivism" and thus judge him on his good intentions rather than on the results. "In the progressive view," Folsom writes, "intentions and sincerity are among the noblest virtues a president can possess."

I might offer an additional explanation, which is that these same "progressive" historians are worshippers of the strong executive (at least when executive power is wielded by fellow "progressives").

But if the New Deal was such an economic disaster, it may be asked, then why was Roosevelt elected four times?

Corruption, it would seem, played a significant role. "If we probe deeply into Roosevelt's popularity," Folsom writes, "we almost always discover the presence of patronage -- the creating and the manipulating of federal jobs to strengthen his political support." Folsom cites Gavin Wright, an economic historian, who did a state-by-state analysis of New Deal spending. Wright noted that safe Democrat states, especially those in the South, received fewer WPA dollars than richer states in the North and West that were considered election battleground states. The effect of this naked politicization of spending is that WPA jobs often ended up going the states that needed them the least. Patronage of course has been part of American politics since at least the age of Jackson. The difference is that by the 1930s, FDR had more federal money available to distribute than all previous presidents combined.

Then there was the IRS, which Roosevelt used as his personal weapon, going after political enemies (like Louisiana governor Huey Long and Republican congressman Hamilton Fish) and wealthy Americans, like former Treasury Secretary Andrew Mellon.

"My father," said Elliot Roosevelt, "may have been the originator of the concept of employing the IRS as a weapon of political retribution." Quite an accolade, though one I don't recall seeing the last time I visited the
FDR memorial in D.C.

As Folsom sees it, FDR's New Deal left us with the twin legacy of (1) bad economic policy and (2) a more corrupt central government. If history is a guide, then Obama's "new" New Deal will ensure that today's bad economy stays with us for many years.