Commentary

Government Jobs Don’t Cure Depression

Reply to Conrad Black

I have very much enjoyed participating in these debates with Conrad Black. He expresses his views forcefully and with conviction, so our exchanges are always lively. They help call attention to ideas that seem to drive Obama-administration policies. I’m surprised at some of the positions he takes and expect that there must be more common ground than appears to be the case.

Black’s most important claim is that FDR got America out of the Great Depression. High unemployment is the main reason that period is referred to as the Great Depression, and Black claims that FDR eliminated unemployment by putting as many people as possible in government jobs. (FDR probably emphasized government jobs over outright welfare to make recipients feel better about themselves, and to make taxpayers feel less resentful that welfare spending was a key reason that the New Deal tripled taxes.)

Hence all the time Black spends arguing that the Federal Emergency Relief Act, the Civil Works Administration, the Public Works Administration, the Works Progress Administration, and other New Deal agencies gave citizens “real” jobs; by Black’s definition, that term means simply that people did work and were paid.

Call those government jobs whatever you want, but they were line items in the federal budget, paid for by current taxes, by borrowing (repaid from future taxes), or by inflation (a tax that works by devaluing dollar-denominated earnings and assets). When the FERA, CWA, PWA, WPA, etc., line items went away, those government jobs went away.

However impressive some of the government work might have been, it didn’t involve things that people were willing and able to pay for. New Deal government jobs weren’t self-sustaining. They weren’t part of the ongoing private sector that involves people basically exchanging things they produce or services they provide for products and services they want from other people.

Black likes to recite the list of parks, schools, dams, and other things built by New Deal relief agencies, but the list shows only what the spending priorities were for the New Dealers. If American taxpayers had been able to keep more of their money, they probably would have spent it on different things that reflected their priorities — and, I suspect, the economy would have recovered sooner. There probably would have been a much greater focus on spending to help employers — including millions of small employers — do better.

It was the private sector, not a government-jobs program, that transformed the wild American continent into a phenomenally prosperous economy. Before the Great Depression, the Roaring Twenties had prosperity and all-time low unemployment without big government-jobs programs.

If government jobs were the secret of success, the Soviet Union wouldn’t have collapsed, because it had nothing but government jobs. Communist China, glutted with government jobs, would have generated more income per capita than Hong Kong where, at least before the Communist takeover, there were hardly any government jobs. But Hong Kong’s per capita income was about 20 times higher than that on the mainland.

Increasing the number of government jobs did nothing then and does nothing now to revive the private sector that pays all the bills, in large part because of the depressing effect of the taxes required to pay for government jobs.

In FDR’s Folly and other writings, I have asked whether the New Deal cured or prolonged the Great Depression. Many people are asking the same question now that Obama is pursuing what he calls a “New New Deal.”

Since the Old New Deal, economists have learned quite a bit about FDR’s efforts and their effects. These researchers’ findings — principally about New Deal obstacles to recovery — have been ignored for decades by biographers and political historians who continued to rely on diaries, correspondence, speeches, official documents, and other traditional sources relating to the political story of that period. In Black’s 1,280-page biography of FDR, published in 2003, for example, he ignored the findings of economists that were the basis of FDR’s Folly, which he now dismisses as “an anthology of [my] favorite economists.”

Perhaps Black believes all the economists I cited are wrong. Or perhaps he doesn’t feel equipped to rebut them, so he ignores them now as he ignored them in his book, and soldiers on as best he can with his considerable knowledge of political history.

Black indicates a continuing lack of curiosity about the economic effects of the New Deal by insisting on a political framework for distinguishing among “five New Deals.” The first New Deal was this, the second New Deal was that, etc. Such a descriptive, political approach tells us absolutely nothing about the economic effects of the New Deal — when economic issues were at the forefront of people’s minds. If one is trying to determine the economic effects of the New Deal, the logical procedure would be to do empirical studies of New Deal policies one at a time, as dozens of economists have done and as I reported in FDR’s Folly.

What were the effects of the tripling of taxation? What were the effects of New Deal laws that banned discounting and made sales illegal? How much did New Deal policies to force up food prices affect the three-quarters of Americans who weren’t farmers? What was the effect of the Tennessee Valley Authority during the 1930s, considering that it took out of production about 730,000 acres, forced about 15,000 people out of their homes, finished only three small dams during the 1930s, and, overall, transferred resources from the 98 percent of the people who didn’t live there to the 2 percent who did? Some kind of economic analysis, not a political narrative, is needed to answer such questions.

Of course, economists don’t always agree, and I discussed such disagreements in FDR’s Folly. For instance, I talked about the longest-running research dialogue, one that has spanned more than three decades, about the reasons for the New Deal’s skewing of spending away from the poorest people who lived in the South.

Black might have cited Paul Krugman, one of the most ardent Keynesians, who wrote an interesting New York Times column called “New Deal Economics.” Replying to those who said Keynesian “stimulus” spending didn’t work during the Great Depression, Krugman wrote that “the New Deal didn’t pursue Keynesian policies” (Krugman’s emphasis). According to Krugman, FDR’s budget deficits weren’t big enough to qualify as Keynesian stimulus. FDR should have been “bolder.”

The same article shows a graph of U.S. economic expansion that occurred from 1933 to 1937, based on data from the St. Louis Federal Reserve Bank. Gross domestic product increased about 60 percent. This was the biggest expansion of the New Deal period, and according to Krugman, it couldn’t have been caused by Keynesian stimulus because government spending and deficits weren’t big enough. So … what reason is there to expect that Obama’s $800 billion “stimulus” bill is going to stimulate anything other than government jobs? Why does Obama look back fondly at the New Deal?

Look at Krugman’s graph more carefully, and you’ll see it shows the U.S. economy beginning to turn around in early 1933, probably before FDR took office. Despite Hoover’s blunders — trying to prop up wages and prices, signing the Smoot-Hawley tariff, signing a big tax hike, and signing the Norris-LaGuardia Act that accelerated union organizing and doubled the number of strikes during Hoover’s last year — enough adjustments had occurred that the economy was ready for a turnaround before FDR began his Hundred Days.

Ready for a turnaround? Remember, the U.S. economy had recovered from previous panics and crashes without a big government-jobs program, and the economy didn’t collapse during the Great Depression. Output, employment, and income were down by about 25 percent at the low point in 1933. This was severe, millions were desperate, and economic problems increased the risk of political problems. But about three-quarters of the private sector was still functioning. It needed to expand. It had dynamic forces within itself that had generated expansion before and could do so again — in an environment with predictable rules to live by, low taxes, sound money, secure private property, and other essentials for enterprise.

FDR’s first year, 1933, is especially interesting. GDP increased by 17 percent. It’s highly unlikely this could be explained by any of FDR’s policies, because there hadn’t been time for them to play out through our large and complex economy. FDR’s 1933 decision to devalue the dollar from $20 per ounce of gold to $35 increased the value of the federal government’s gold holdings (which had been expanded by seizing privately owned gold), and this enabled the government to print another $3 billion of currency, but currency held by the public didn’t increase until 1934. The most important economic policies enacted in 1933 actually promoted contraction: The National Industrial Recovery Act established cartels that fixed wages, prices, and output, and the Agricultural Adjustment Act reduced farm acreage. So, the 17 percent expansion of GDP must have occurred despite these policies. Probably the economy would have expanded even more if those highlights of the Hundred Days had never happened.

The perplexing question about the New Deal was why, despite episodes of economic expansion during the 1930s, high unemployment persisted year after year until World War II mobilization began. I have previously cited work by Lee Ohanian, Harold Cole, Robert Higgs, Richard K. Vedder, Lowell E. Galloway, and others whose evidence pointed to New Deal labor-market restrictions that made it more difficult for private-sector employers to hire people.

I believe FDR’s best opportunity to lead America out of the Depression was when he first entered the White House in March 1933. He had a sunny personality, superb communications skills, and political genius. He was a refreshing contrast to his discouraged predecessor, Herbert Hoover, who had made a bad situation worse. The nation was eager for FDR to provide leadership and bold action.

Suppose FDR had announced that he wanted to begin by repealing the Smoot-Hawley tariff and Hoover’s tax hikes. Foreign trade wasn’t nearly as big a part of the economy then as it is now, but the effect of those tariffs was entirely negative. They forced hard-pressed American consumers and businesses to pay more for many things, and those high tariffs provoked other nations to retaliate by enacting high tariffs that substantially wiped out American export markets. Of course, affected interest groups would have resisted this move, but FDR had the political ability to form a coalition of consumers who needed bargains and businesses that needed lower-cost raw materials. Similarly, repealing Hoover’s tax hikes would have given the economy a much-needed stimulus. Most important would have been cuts in excise taxes, the most burdensome taxes for the largest number of Americans. In the process of pushing for repeal of these bad policies, FDR could have blamed everything on Hoover, and who would have disagreed? Beyond this, FDR would have done well if he had observed the doctor’s credo — first, do no harm.

FDR’s special talents were perhaps most important to help him buy time with the American public until sound policies were clearly working. Krugman’s graph suggests that encouraging signs would have come much more quickly than anybody expected.

Jim Powell, a Senior Fellow at the Cato Institute, is the author of FDR’s Folly, Bully Boy, Wilson’s War, Greatest Emancipations, The Triumph of Liberty and other books.