"In 1929 [President Herbert] Hoover devoted . . . 13 percent of the total budget to public works spending [and] pressured state and local governments to increase their own public works spending.”
~ How Capitalism Saved America, p. 168
One of the most enduring and menacing myths about the New Deal is that the billions of dollars that FDR spent on "infrastructure spending" and "public works" reduced unemployment. It is a menacing myth because it ignores the famous broken window fallacy in economics and essentially claims that the law of opportunity cost has been "repealed." Government spending on anything — bridge repair, bridges to nowhere, museums that no one visits (such as the "Public Works Museum" in Baltimore), etc. — can only at best divert resources from the private sector to the political sphere. The taxes, government debt, and inflationary central bank money creation that is used to finance all such schemes creates unemployment in the private sector so that politicians can buy votes with taxpayer dollars by doling out government make-work jobs. What is seen are the government make-work jobs; what is unseen by the average citizen is all the private-sector jobs that are destroyed or which never materialize because they’ve been crowded out by government.
Despite employing over 10 million people in various government make-work jobs from 1933 to 1940, the unemployment rate remained at 14.6 percent that year, almost five times higher than the rate of unemployment in 1929, the year of the stock market crash. The biggest beneficiary of this Mother of All Rube Goldberg Machines was FDR himself, for New Deal spending was used masterfully as a means of buying votes where he needed them the most — in states where he had the smallest electoral margins in 1932. It had nothing to do with "stimulating" the economy and everything to do with consolidating the political power base of FDR and the Democratic Party. This is also what President-elect Obama’s promised "stimulus package" is designed to accomplish.
The FDR "Public Works" Myth
In The Roosevelt Myth John T. Flynn cited a 1938 Official Report of the U.S. Senate on Campaign Expenditures that documented how, in a number of states, Works Progress Administration (WPA) employees were told that they could only keep their government jobs if they re-registered to vote as Democrats; scores of them were fired for not re-registering as Democrats; they were required to take a pledge to vote for congressional Democrats as a condition of employment; and were instructed to donate 2 percent of their salaries to the Roosevelt re-election campaign if they wanted to keep their government jobs. Government employment increased tremendously right before the 1936 election; and in some states government employees were instructed to canvass for Democratic votes just prior to the 1936 election.
In a February 1974 article in the Review of Economics and Statistics entitled "The Political Economy of New Deal Spending: An Econometric Analysis," economist Gavin Wright showed that "WPA employment reached peaks in the fall of election years, and the pattern is most pronounced when employment is measured relative to indices of need." More recently, Jim Couch and William Shughart showed in their book, The Political Economy of the New Deal, that the lion’s share of New Deal spending did not go to the most economically-depressed states, such as the lower South, but in California and other Western states where the depression was less severe but FDR’s 1932 electoral victory margins were slimmest (or where key Democratic members of Congress were facing tough competition). Among the conclusions that Couch and Shughart reached after an exhaustive econometric study of New Deal spending are:
- States with healthier economies received proportionately more federal aid in the form of [New Deal] grants they were not expected to repay while repayable loans were directed in slightly greater amounts to their harder-hit sister states.
- New Dealers allocated significantly more funds to states where the nation’s most valuable farms were located; little money went to poor sharecroppers.
- States where blacks accounted for larger percentages of the farm population received fewer New Deal dollars, contrary to the assertions of the court historians.
- The states that gave Franklin Roosevelt larger percentages of the popular vote in 1932 were also rewarded with significantly more federal "aid" than less-supportive constituencies.
Couch and Shughart also concluded that "the distribution of the billions of dollars appropriated by Congress to prime the economic pump was guided less by considerations of economic need than by the forces of ordinary politics." What a shocker: politics determined the allocation of money by politicians.
The "New Deal failed as a matter of economic policy," wrote Couch and Shughart, but was "successful in building a winning political coalition: FDR was reelected overwhelmingly in 1936 and again in 1940 in part due to the support of the big-city machines, organized labor, and other constituencies which benefited disproportionately from New Deal largesse."
This is exactly how President-elect Obama’s proposed "stimulus package" should be viewed: It is part payoff to the urban political machines, labor unions, and other special interests that helped get him elected, and part vote-buying (with federal tax dollars) scheme as the first step in his 2012 re-election campaign. It will no more "stimulate" the economy than Herbert Hoover’s 1929 "stimulus package" did, despite the fact that it accounted for 13 percent of the entire federal budget. Hoover continued to increase "public works" spending by massive amounts, accompanied by massive tax increases to pay for it all. FDR did the same, increasing the amount of spending and taxes by orders of magnitude. All of it had no positive effect whatsoever on the overall economy; the primary economic effect was to balloon the size of federal, state, and local governments at the expense of shrinking the private sector — and to create more private-sector unemployment.
Thomas J. DiLorenzo [send him mail] is professor of economics at Loyola College in Maryland and the author of The Real Lincoln; Lincoln Unmasked: What You’re Not Supposed To Know about Dishonest Abe and How Capitalism Saved America. His latest book is Hamilton’s Curse: How Jefferson’s Archenemy Betrayed the American Revolution — And What It Means for America Today.