by Dom Armentano: Putting
Government on a Diet: 1945-1950
It is now beyond
dispute that the Keynesian policies of the Obama Administration
have not brought about a sustainable economic recovery. Massive
stimulus spending (with money borrowed from China) and unprecedented
increases in the money supply by the Federal Reserve (to hold interest
rates near zero) have not revived private investment or the U.S.
job market. We are likely headed back to recession and recriminations
for our economic problems abound.
economists correctly blame government interventionism for the current
mess. Funny money from the Fed, deficit spending, and bailouts cannot
promote prosperity; never have, never will. Liberals argue, however,
that these very same policies just weren't aggressive enough (!)
and that what really failed was leadership in Washington. If only
we had a decisive leader like Franklin D. Roosevelt, we are told.
After all, didn't FDR's leadership restore confidence during the
1930s and didn't his policies help end the Great Depression?
Well not exactly.
FDR inherited serious economic problems but the policies of the
New Deal did not fix the Hoover mistakes or promote prosperity.
The problems began early. The Democratic platform of 1932 pledged
to cut government spending by 25%; yet FDR and the Democratic congress
proceeded to expand government spending and unbalance the federal
budget. Federal spending went from $4.6 billion in 1933 to $8.2
billion in 1936 to $9.1billion in 1939, an increase of almost 50%
in 6 years. Much of this spending was financed by borrowing money.
In 1939, for example, the federal budget deficit was $2.8 billion
or roughly 30% of total federal spending.
all this government spending promote job growth in the private sector?
Not really. Although, the economy expanded modestly between 1933
and 1939, the unemployment rate stayed stubbornly high. The unemployment
rate was 24.9% in 1933 when FDR became president but it was still
17.2% in 1939, or almost double today's rate. In short, the New
Deal did NOT solve the massive unemployment problem of the 1930's.
But why not?
One answer is that contrary to the myth that FDR promoted confidence,
the exact opposite is true. Much like the current Obama Administration,
the private business community during the 1930's did not trust FDR
and the D.C. politicians and simply would not make business investment
(in both labor and capital) that would have improved productivity
and employment. As just one indicator of that lack of confidence,
gross private domestic investment which had reached $16.7 billion
in 1929 was only $9.5 billion in 1939.
government-created uncertainty in the 1930s abound. For example,
prior to the New Deal, gold was money and gold certificates and
banknotes were fully convertible into gold at par. Yet in one amazing
and unprecedented governmental stroke, private gold holdings were
confiscated and gold clauses in private contacts nullified, all
with Supreme Court approval. In addition, the Congress in 1933 created
the National Industrial Recovery Act and the Agricultural Adjustment
Act; the former mandated and legitimized business cartels (under
a complex web of code authorities) while the latter extended federal
regulation to U. S. farm outputs and prices. Both programs were
complicated command-and-control failures and both were eventually
declared unconstitutional in 1935. Finally, corporate taxes were
increased; federal minimum wage legislation passed; unionization
was promoted (through the Wagner Act); and Social Security began
with funds provided by taxes on employers and workers. And we have
only scratched the surface.
This is not
the place to debate the particular merits of these programs. All
that is maintained here is that almost every New Deal program was
"new" and untried and costly, and created vast private
market uncertainty. The fact remains that private business would
not hire or invest while the currency was being debased; or while
the rules of the game were constantly changing; or while the rules
were explicitly anti-business.
In order to
get the future right we must strive to get history right. Unfortunately
the Obama Administration and the Federal Reserve have learned almost
nothing from the policy failures of the Great Depression.
Armentano is Professor Emeritus at the University of Hartford (CT)
and the author of Antitrust
(Independent Institute, 1998) and Antitrust:
The Case for Repeal
(Mises Institute, 1999). He has published articles, op/eds and reviews
in The New
York Times, Wall Street Journal, London Financial Times, Financial
Post, Hartford Courant, National Review, Antitrust Bulletin
and many other journals.