Obama’s Stimulus is Proving as Disastrous as FDR’s New Deal – Pacific Research Institute

Obama’s Stimulus is Proving as Disastrous as FDR’s New Deal

Talking about his first few months in office, President Obama said this at a fundraiser in Los Angeles:

We started off in the midst of the worst economic crisis since the Great Depression. And so what we decided to do was pass the largest economic recovery package in the history of the United States of America and we got it done in one month. All across America you’ve got folks who are going to work rebuilding roads and bridges. But also building an electric grid that can help move renewable energies from production to conception.

Obama’s subtle evocation of Roosevelt’s New Deal is not accidental. Elevated to the presidency during an economic crisis of historic proportions, Obama sees himself as a second FDR. And so do many of his followers. This idea has found its most explicit expression on November’s cover of Time, which superimposed Obama’s face on an iconic image of Roosevelt riding in an open car with a cigarette holder between his teeth.

Obama’s identification with his predecessor goes beyond historical similarities. Having subscribed to the prevailing view that the New Deal was a runaway success, Obama has chosen to apply FDR’s approach of government interventionism and massive spending to the present crisis.

This is the wrong course to take, since contrary to conventional wisdom Roosevelt’s policies did not pull America out of the Great Depression. Instead his actions made the Depression longer and more severe than it would otherwise have been.

The nation could be spared much pain if our president would read the recently-released Politically Incorrect Guide to the Great Depression and the New Deal by Robert Murphy. Correcting many popular misconceptions about FDR, this book explodes the myth of Roosevelt as America’s savior and shows him for who he really was – a willful man whose ill-conceived policies held the American economy in a mire of stagnation unseen before or since.

Since this will come as a surprise to many, let’s recount some basic facts. Prior to the Great Depression the United Stated had experienced a number of recessions, known previously as “panics.” The federal government did not significantly intervene in any one of them, as this would have been considered inappropriate and unconstitutional. With no governmental assistance to speak of, the average recovery time was less than twenty months.

The Great Depression was set off by the stock market crash in October of 1929. On two consecutive days – called Black Monday and Black Tuesday – equities lost 13 and 12 percent of their value. The trouble in the stock market soon spilled into the larger economy. From 1929 to 1933, real GDP dropped by 27 percent. By the end of 1930 unemployment was 8.9 percent, and the following year it reached 15.9 percent. The jobless rate finally crested in 1933 at nearly 25 percent.

FDR won the presidency in the campaign of 1932 and took the reins of power in March of 1933. Upon taking office he immediately launched a whirlwind of spending programs, legislation and reforms known as the New Deal. In the first 100 days he unleashed unprecedented activity and expansion of the federal government. This governmental hyperactivity remained the hallmark of the Roosevelt administrations throughout his long presidency.

Despite all his efforts, in 1940 – seven years after the launch of the New Deal – the American economy was still weak with unemployment standing at 14.6 percent. This was without question the most moribund “recovery” ever from a recession. Murphy observers that “the economy recuperated far more slowly under FDR than it did in any other slump, before or since, in American history.”

So the real question is not how FDR pulled us out of the Depression, but how did he manage to keep us in it for so long.

The reason for it will becomes clear once we take a look at his policies which – almost as if by design – kept undercutting the corrective mechanisms by which the market normally restores an ailing economy.

Recessions usually occur after a period of time during which people and businesses borrow and spend more than they can realistically afford. This produces a “boom” in which wages as well as prices of certain categories of assets grow to unsustainably high levels. We have seen this during the bubble in the late nineties when high-tech stocks became greatly overpriced. A similar overvaluation took place more recently during the housing boom. During the boom that lead to the Great Depression the overvalued asset class was stocks.

Once the boom bubble bursts, the prices of over-inflated assets drop sharply in a short period of time. This is followed by a slow-down in the economy during which most businesses are forced to cut down on their activities. As unemployment increases wages go down, since the supply of labor exceeds demand. Because people now spend less, prices in general also tend to fall.

The unemployment and the corresponding fall in wages and prices constitute a necessary albeit painful readjustment. It is part of the healing process, because it purges excesses and inefficiencies from the system. While this takes place society’s labor and resources are rearranged into a more sustainable configuration. If the correction is allowed to fully run its course, the economy becomes poised for a robust recovery.

Believing mistakenly that the Depression was ultimately caused by underconsumption, FDR sought to keep wages from dropping in order to boost “aggregate demand.” At the same time, he pursued policies that would ensure high prices so that businesses could afford to pay the artificially elevated salaries of their workers. Murphy quotes economists Lee Ohanian and Harold Cole who explain FDR’s vision in the New Deal: “Roosevelt’s recipe for economic recovery was raising prices and wages. To achieve these increases, Congress passed industrial and labor policies to limit competition and raise labor bargaining power… Prices and wages rose substantially after these policies were adopted.”

Initially Roosevelt accomplished this through the National Recovery Administration (NRA). This agency encouraged major industrial players to create so-called “Codes of Fair Competition” which in essence forbade the lowering of prices. This in effect created government sponsored cartels, making it virtually impossible for new and small businesses to break into the protected industries.

In order to be allowed to form such a cartel, Roosevelt insisted that each “participating industry raise wages and accept collective bargaining with an independent union.” This meant that those who still had jobs were able to sell their labor above its market value, but it made the situation more difficult for the unemployed as businesses could not afford to expand their work force at the inflated rates of pay.

Murphy notes how Roosevelt’s measures were implemented with great speed and on a large scale. By 1934 over 500 industries operated under the “Codes of Fair Competition,” covering almost 80 percent of private, nonfarm employment. This meant that within 18 months of Roosevelt’s inauguration, the federal government had managed to influence prices and wages in the bulk of the US economy.

When the Supreme court declared the legislation that established the NRA unconstitutional, an angry FDR threatened to pack the Court with New Deal stalwarts. Intimidated, the justices gradually relented and allowed Roosevelt continue his program in a slightly modified form. This he did through the National Labor Relations Act.

Roosevelt refused to give up his policies of prices and wages manipulation even after it became obvious they did not have the desired effect. His harmful actions were driven by the belief that government bureaucracies are better at solving economic problems than the free market itself. The nation paid dearly for Roosevelt’s conceit with the longest and most severe depression in American history.

No one summed up better the fiasco that was the Roosevelt presidency better than Henry Morgenthau, FDR’s own Treasury Secretary:

We have tried spending money. We are spending more than we have ever spent before and it does not work…We have never made good on our promises… I say after eight years of this Administration we have just as much unemployment as when we started…And an enormous debt to boot.

So extensive is the evidence of destructive consequences of FDR’s policies that Murphy asks: “How in the world did historians manage to teach generations of children that the New Deal ended the Depression.

Contrary to the prevailing dogma, FDR was not America’s savior. His misguided policies needlessly kept America in the stranglehold of economic depression for nearly a decade. And as if this were not bad enough, he permanently expanded the role government and saddled the country with programs that are now driving us into bankruptcy.

The myth of FDR is especially pernicious today, because it serves as the blueprint for this administration as it tries to deal with the current recession. Would that president Obama realize that FDR’s path is a disastrous one to follow.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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