Richard Geno
New Deal or Raw Deal?
February 27, 2009

Last week, I had the opportunity to hear Burton Folsom speak to a group of more than 300 college students at San Jose State University. In addition to presenting a strong case that the programs of Franklin Roosevelt provided a "raw deal," he proved to be an enthusiastic and inspiring speaker. Based on the many questions asked after his presentation, it was apparent that by the end of the event that most students were convinced that FDR's economic legacy left a damaged America.

He started his economic journey in 1920 when the country elected Warren Harding as president as we were dealing with a 12% unemployment rate. President Harding started to initiate a program of cutting tax rates and cutting federal spending. President Harding met with an untimely death just two years into his term. Vice-president Calvin Coolidge became President, and continued the policies started by Warren Harding. What followed was the Roaring 20's, and arguably the best of economic times in American history.

Calvin Coolidge believed that high tax rates discourage private investment into the economy, which is exactly what is needed to stimulate the economy, provide jobs, and cut unemployment. The term "misery index" was not yet coined (unemployment rate plus inflation rate); but the administration of Calvin Coolidge had the lowest misery index of any administration in the 20th Century - 4.3%. The only other administrations in the 20th Century that had lower than a 10% misery index were Ronald Reagan and Bill Clinton (both between 8-9%).

What were the results from Harding and Coolidge cutting tax rates and cutting federal spending? In every year of the 1920's, there was a budget surplus. Imagine that. The 12% unemployment rate dropped to approximately 3%. It also provided an outbreak of entrepreneurship. The following significant items were invented in the 1920's: refrigerators, radios, sliced bread, air conditioning, Scotch tape, and the zipper. General Motors passed Ford by offering a variety of types of cars.

Then, Herbert Hoover was elected. The Hoover administration promoted the Smoot-Hawley tariffs, which resulted in a trade war. Interest rates went up, and the Hoover administration raised top income tax rates from 25% to 63%. He also encouraged large public spending. He responded exactly the opposite of Calvin Coolidge to the recession of the late 1920's.

In 1932, Franklin Roosevelt was elected; and he immediately pumped in massive amounts of money to "stimulate" the economy. There were many regulatory acts passed early in the Roosevelt administration. First came the National Recovery Act, where government dictated to some of the largest 500 businesses in America to set prices. All prices went up. Businesses that tried to reduce prices in order to be competitive were fined or forced out of business by the government.

The higher taxes implemented by Hoover, and the huge government spending initiated by Roosevelt stifled innovation and entrepreneurship. In addition to the loss of jobs, unlike the 1920's, there were no new inventions. In 1935, the Supreme Court ruled that the National Recovery Act was unconstitutional. However, a great deal of damage was done to the economy, and a recession that started out no worse than the recession of 1920-21 became the Great Depression.

Not deterred, Roosevelt promoted the Agricultural Adjustment Act, which paid farmers not to produce. Every farmer had to take 20-25% of his land out of productivity. Those who violated this edict were heavily fined. Later in the decade when food became scarce, the United States was importing bushels of wheat, corn and cotton. After the AAA, the government implemented the Work Progress Administration (WPA). The word "boondoggle" was defined by the WPA. Unemployment was 15% in 1936.

Not only did FDR raise the top income tax bracket to 79%, but he also proposed to Congress raising it to 99.5%. This proposal did not get through Congress. In April of 1939, after more than eight years of the New Deal, the unemployment rate was 20.7%. Henry Morgenthau, a very close friend of Franklin Roosevelt, and his Treasury Secretary, testified before Congress with brutal honesty about the greatest experiment in Keynesian fiscal policy. He said, "We have tried spending money. We are spending more than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promise. I say after eight years of this administration we have just as much unemployment as when we started… and an enormous debt to boot."

While the Coolidge Administration had reduced the national debt from $24 Billion in 1920 to $18 Billion in 1928, between 1928 and 1940, the national debt went to $40 Billion. Cynics have said that World War II ended the Great Depression; but Professor Folsom dismisses that theory. He indicated that the economy did not start to recover until Franklin Roosevelt died.

The obvious comparison was to today's situation. In December, 2008, the non-partisan Congressional Budget Office predicted that the economy would start to recover by June, 2009. If the stimulus package that President Obama and the Democrat Congress passed recently has the same effect as the government spending measures of Franklin Roosevelt, this 2008-09 recession could be significantly lengthened as it was in the 1930's.

As an economic policy, the New deal was a dismal failure. However, as a political strategy, it proved very effective. As Yogi Berra once famously said, "It looks like déjà vu all over again."