Yesterday on NRO, Conrad Black continued his crusade to redeem Franklin Delano Roosevelt from those who dare to ask embarrassing questions about the New Deal. Here’s the most embarrassing question of all: Why, despite everything FDR tried, did high unemployment persist all through the 1930s?
In the first sentence of his piece, Black refers assumptively to the policies FDR used “to lead the country out of the Great Depression” — as if FDR actually got the country out of the depression. No economist who has studied the question seriously suggests that he did; for decades, the principal New Deal discussion has been about why unemployment remained sky-high throughout FDR’s first two terms and didn’t come down until he began removing 12 million men from the labor force via military conscription for World War II. Even FDR’s Treasury secretary, Henry Morgenthau, acknowledged frustration at the failure to resolve this problem.
Many economists, most recently Lee Ohanian and Harold Cole at UCLA, have shown that high unemployment persisted mainly because of New Deal policies that made it more expensive for employers to hire people. Other economists, like Robert Higgs, have pointed to FDR’s denunciations of investors and his proliferation of soak-the-rich taxes that discouraged investment — without which it was virtually impossible to create more private-sector jobs.
The private sector was brought down in the 1930s by Federal Reserve blunders, tax hikes, tariff hikes, unit banking laws (which ban large banks with multiple branches), labor-market restrictions, efforts to prop up wages and prices, and other misguided policies. The private sector had to be revived for the economy to prosper, but the New Deal hobbled the private sector while greatly inflating the public sector. Multiplying the number of people on relief rolls might have been a humanitarian thing to do, but it only delayed the private sector’s recovery by increasing taxes, which tripled during the New Deal period.
I believe FDR’s biggest mistake was failing to focus single-mindedly on the recovery of private-sector enterprise and employment. New Dealers were determined to push through their “reforms” even when they threw obstacles in the way of private-sector recovery. Syndicated columnist Walter Lippmann, a co-founder of The New Republic, observed that New Dealers didn’t want recovery if it meant going back to the way business had operated in the Roaring Twenties (when unemployment fell to an all-time low of 1.8 percent). President Obama, listen up!
Black commits one of the most familiar fallacies by reciting a litany of New Deal projects — libraries, schools, public works, and so forth — as if their funding came out of thin air. But government doesn’t have any money other than what it gets by (a) taxing people now, (b) borrowing money now and taxing people later, or (c) inflating the currency, which is another form of taxation. Every New Deal project on Black’s list meant that less money was spent elsewhere because it was taxed away. New Deal economics basically involved robbing Peter to pay Paul, with added inefficiencies along the way and a net loss for everyone.
Remember, too, that the New Deal was mainly paid for by the middle class and the poor, because the biggest revenue generator for the federal government during the 1930s was an excise tax on cigarettes, beer, chewing gum, and other cheap pleasures enjoyed disproportionately by those two groups. Until 1936, the federal excise tax generated more revenue than the federal personal income tax and the federal corporate income tax combined. Not until 1942 did the personal income tax become the biggest source of federal revenue. You can look it up in Historical Statistics of the United States, Colonial Times to 1970, volume 2, page 1107.
Perhaps Black is suggesting that politicians have a special talent for spending other people’s money in a way that will do more to stimulate the economy than if those people had spent it themselves. That proposition is laughable. All the available evidence verifies the common-sense truth that people are less careful with other people’s money than they are with their own. That’s true even when their intentions are good and their motives are pure — which was rarely the case in the New Deal. FDR’s spending programs stimulated a mad scramble among political bosses for control of the loot and the patronage. James T. Patterson documented much of this in his book The New Deal and the States.
Black might not be aware of the considerable empirical literature — dozens of books and articles — by economists who have reported their findings on the New Deal. They were the subject of my book FDR’s Folly. I think it’s shocking that in the 1,280 pages of Black’s book Franklin Delano Roosevelt, Champion of Freedom, he didn’t seem to consult the work of economists who wrote about the Great Depression — the most important economic event in American history. Some of the work, like A Monetary History of the United States, by Milton Friedman and Anna Schwartz, was published 40 years before Black’s book. A Monetary History is among the most widely cited economics books and has had an immense influence, yet apparently Black didn’t think it merited a mention when discussing the Great Depression.
Instead, Black was committed to the traditional heroic New Deal narrative based on sources that are the stock-in-trade of biography and political history — correspondence, diaries, speeches, memoirs, and so on. These sources are wholly inadequate to explain why New Deal spending was skewed away from the poorest people who lived in the South, how the National Industrial Recovery Act made it harder for employers to hire people, how the Wagner Act destroyed jobs, how the Social Security Act made it more expensive for employers to hire people, how New Deal anti-discounting laws made everything more expensive for people who desperately needed bargains, and so on.
I know of only one political historian who consulted any of the economists’ findings in writing about the New Deal. “Whatever it was,” Stanford’s David M. Kennedy wrote in his Pulitzer Prize-winning Freedom from Fear: The American People in Depression and War, the New Deal “was not a recovery program, or at any rate not an effective one.”