Does Obama Have Any Idea Why New Deal Failed?

Does Obama Have Any Idea Why New Deal Failed?
by Burton Folsom, Jr.
08/23/2011

The Great Depression dominated the 1930s, in large part because President Franklin D. Roosevelt’s New Deal programs failed to create jobs. In May 1939, shortly after learning that unemployment stood at 20.7%, Henry Morgenthau, the secretary of the Treasury, exploded: “We have tried spending money. We are spending more than we have ever spent before and it does not work.” Morgenthau concluded, “I say after eight years of this administration we have just as much unemployment as when we started. . . . And an enormous debt to boot!”

Why did Roosevelt’s New Deal fail so miserably? The larger problem is that federal spending can’t create jobs. It merely transfers wealth from taxpayers to central planners. But worse than that, most of FDR’s New Deal was driven by politics. It was economically unsound.

Take the National Recovery Act (NRA), for example, which was FDR’s program for industry. The NRA set the prices of thousands of products. Merchants who gave discounts to customers were subject to fines and imprisonment. For example, the fixed price to press a pair of pants was 40 cents. Jacob Maged of Jersey City, N.J., gave a 5-cent discount because his shop was far from the main shopping area. He needed to give discounts to attract customers and stay in business. “You can’t tell me how to run my business,” Maged insisted. Yes, they could, Maged discovered when he went to jail for charging his customers a nickel less. Neither FDR nor any of his New Dealers, however, could clearly explain why jailing merchants for giving discounts created jobs or made American industry more competitive.

FDR also supported the Agricultural Adjustment Act (AAA) for farmers. Granted, farmers suffered from low prices, but the AAA solution was preposterous—pay farmers not to produce on up to one-fourth of their land. Farmers would get instant cash, and also, because less land was being cultivated, prices for crops would go up. But of course those rising prices would make it harder for city dwellers to put food on the table. The farmer’s gain was the city dweller’s loss, and the AAA may have destroyed more jobs than it created.

Many New Deal programs were pure politics—targeting federal money to lure specific voting groups into the Democratic Party. For example, Social Security taxes, FDR confessed, “were never a problem of economics. They are politics all the way through.” Tie older voters to the Democratic Party.

In a similar vein, FDR funded the Works Progress Administration (WPA) with $4.8 billion to build roads, bridges and other infrastructure projects. But he targeted most of the road-building to favored Democratic congressmen. James Doherty, a New Hampshire Democrat, agreed with the President: “It is my personal belief,” Doherty announced, “that to the victor belongs the spoils and that Democrats should be holding most of these [WPA] positions.” After FDR and the Democrats trounced the Republicans in the 1936 presidential election, Sen. Carter Glass of Virginia said, “The 1936 elections would have been much closer had my party not had a four billion, eight hundred million dollar relief bill as campaign fodder.”

Republican Sen. Hiram Johnson of California, who voted for FDR in 1936, nonetheless agreed with Glass. He described FDR as going around the country saying, “I will allot a few million dollars to this particular place, and a few million dollars to some other.” Johnson concluded, “He starts with probably 8 million votes bought. The other side has to buy them one by one, and they cannot hope to match his money.”

Who paid for FDR’s federal campaign fund? The taxpayers. FDR gained revenue from taxes on cigarettes, alcohol, telephone calls, telegrams, cars, tires and bank checks. He also increased taxes on corporations and incomes. In 1932, the year FDR was elected, only one in 20 American families paid the income tax and the top rate was 25%. By FDR’s death in 1945, almost two in three American families paid income taxes and the top rate was 94% on all income over $200,000.

No wonder the Great Depression persisted. Entrepreneurs and businessmen had no incentives to create businesses or expand existing ones.

President Obama publicly admires and tries to emulate FDR. And Obama is experiencing two of FDR’s problems: expensive new programs that don’t work, and discouraged entrepreneurs who are saddled with much of the bill for taxes and new regulations.