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Should We Try Another New Deal?

by Jim Powell

This article appeared on cato.org on November 26, 2003.

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For decades, political historians have portrayed Franklin Delano Roosevelt's New Deal as a heroic enterprise that saved capitalism and America. Now Democratic presidential candidates are calling for another New Deal. Howard Dean and Richard Gephardt think this would be a great idea. John Kerry is talking about a New Deal for health care. Wesley Clark is evoking the glory of FDR's "Hundred Days" when so much New Deal legislation was passed.

If America found itself in another serious economic crisis, should we try something like FDR's New Deal again?

As I reported in FDR's Folly, mounting evidence, developed by economists at Princeton, Columbia, Stanford, the University of Chicago, University of California (Berkeley) and other universities suggest that by tripling federal taxes, making it more expensive for employers to hire people, discouraging investors from taking risks, making it harder for employers to raise capital and in other ways thwarting revival of the private sector, FDR prolonged unemployment that averaged 17 percent throughout the New Deal era. One might credit FDR with good intentions, but his policies backfired. Here are some New Deal lessons for us today:

Jim Powell, a senior fellow at the Cato Institute, is the author of "FDR's Folly, How Roosevelt and His New Deal Prolonged the Great Depression."

More by Jim Powell
• Government cannot create sustained growth and productive jobs.
  If government could do these things, then the New Deal would have ended double-digit unemployment and, for that matter, the Soviet Union wouldn't have disappeared from the map.



• It's simplistic to imagine that government intervention in a complex economy will work as intended.
  New Deal farm programs, for instance, enriched big farmers, did little for small farmers, burdened taxpayers, forced consumers to pay more for food and aggravated trade relations with other countries where New Dealers tried to dump subsidized farm surpluses.



• Government jobs don't help people develop values and skills needed in the private sector.
  Whatever the merits of New Deal projects for clearing forests, fixing roads and the like, these didn't help people prepare for private sector jobs. In a 1940 tune, Louis Armstrong and the Mills Brothers sang these lines about a New Deal "workfare" program: "I'm so tired, can't get fired, don't be a fool, working hard is passé."



• Government spending, widely touted as a depression cure, doesn't come out of thin air.
  It comes from current taxes or future taxes (that repay borrowing). So the presumed good some people get from government spending is offset by the harm other people suffer from government taxing.



• Public works are no shortcut to recovery.
  First of all, if the purpose is to help the poor, public works projects tend to hire skilled, better-off people, such as engineers and heavy equipment operators. Second, the more ambitious the public works project, the longer it's likely to take. New Deal dams, for instance, took years to complete. Efforts to avoid corruption can mean substantial delays, as happened under FDR's Interior Secretary Harold Ickes.



• People tend to spend their own money more carefully than they spend somebody else's money.
  Hence, there's always likely to be a lot of waste in government spending, undermining its effectiveness. FDR's largest welfare program, the Works Progress Administration, reportedly delivered only 59% of appropriations to the intended welfare recipients, the rest going for overhead.



• Whatever the high-minded purpose of a government-spending program, it's likely to be allocated in ways that will help current office-holders win the next election.
  Helping the advertised beneficiaries like the poor is a secondary consideration. New Deal spending and loan programs were concentrated in better-off western and eastern states where FDR had the most to gain in the next election, rather than in the poorest southern states where substantial majorities were already on his side.



• Far from assuring more public control, government takeover of private enterprises tends to mean evasion of public control.
  For instance, FDR established the Tennessee Valley Authority monopoly that forced private utilities out of business and is now reportedly exempt from about 130 laws and taxes. It's said to be the largest violator of the Clean Air Act.



• Once a government program is established, it's almost impossible to reform or phase out, regardless of the problems.
  This is certainly the case with FDR's Social Security which, together with LBJ's Medicare, are estimated to have unfunded liabilities of some $24 trillion. A crisis looms ahead as increasing numbers of people reach retirement age.

The last thing Americans need is another New Deal.