Do We Need a New Deal?

The following article is from one of my favorite publications. It came in my email this evening. For a free subscription to Imprimis go here.

Hillsdale College

IMPRIMIS

Burton W. Folsom, Jr.
Charles F. Kline Chair in History and Management, Hillsdale College
Author, New Deal or Raw Deal? How FDR's Economic Legacy Has Damaged America
The following is adapted from a speech delivered on January 9, 2009, in Washington, D.C., at a seminar sponsored by Hillsdale's Allan P. Kirby, Jr. Center for Constitutional Studies and Citizenship.

THE NEW Deal has probably been the greatest political force in America during the last 100 years, and Franklin D. Roosevelt has probably been the most influential president during this time. In our current economic crisis—which some have compared with the Great Depression—many critics are calling for more federal programs and a "New New Deal." There are three reasons we do not need a New New Deal from President Obama in 2009.

First, the federal programs in FDR's New Deal did not lower unemployment. Sure, the Works Progress Administration built roads, the Tennessee Valley Authority built dams, and the Civilian Conservation Corps planted trees. But every dollar that went to creating a federal job had to come from taxpayers, who, by sending their cash to Washington, lost the chance to buy hamburgers, movie tickets, or clothes and create new jobs for restaurants, theaters, and tailors.

What's worse, some New Deal programs had terrible unintended consequences. The Agricultural Adjustment Administration, for example, overhauled agriculture by paying farmers not to produce on part of their land. After farmers took the federal dollars, the U.S. developed shortages of the very crops taxpayers were paying farmers not to produce. By 1935, for example, the U.S. was importing almost 35 million bushels of corn, 13 million bushels of wheat, and 36 million pounds of cotton. Simultaneously, we had an army of bureaucrats in the Department of Agriculture to inspect farms (and even to do aerial photography) to ensure farmers were not growing the crops we were importing into the country.

Second, the taxes to pay for the New Deal became astronomical. In 1935, Roosevelt decided to raise the marginal tax rate on top incomes to 79 percent. Later he raised it to 90 percent. These confiscatory rates discouraged entrepreneurs from investing, which prolonged the Great Depression.

Henry Morgenthau, FDR's loyal Secretary of the Treasury, was frustrated at the persistence of double-digit unemployment throughout the 1930s. In May 1939, with unemployment at 20 percent, he exploded at the failed New Deal programs. "We have tried spending money," Morgenthau noted. "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!"

Third, the New Deal divided and politicized the country in tragic ways. Those who lobbied most effectively won subsidies and bailouts even if their cause was weak. Others, who had greater needs, received nothing. Walter Waters, who led a march of veterans on Washington, lobbied successfully for a special bonus for veterans, whether they had been in battle or not. When asked why veterans—instead of longshoremen or teachers—should receive a special bonus of taxpayer dollars, he said, "I noticed, too, that the highly organized lobbies in Washington for special industries were producing results: loans were being granted to their special interests. . . . Personal lobbying paid, regardless of the justice or injustice of their demand."

Thus, as money became available, those with effective political lobbies won the subsidies and others, who sometimes had more just causes and greater need, received little or nothing. In the case of the veterans, in 1936 they won a $2 billion federal bonus—a sum exceeding six percent of the entire national debt at the time. Teachers, by contrast, were less effective lobbyists and won almost no federal subsidies. Silver miners, led by Senator Key Pittman of Nevada, won a silver subsidy that paid almost $300,000 a day each day for 14 years, but coal miners were left out.

In another example, under Presidents Hoover and Roosevelt, Illinois lobbied effectively and won $55,443,721 under the first federal welfare grant while Massachusetts received zero federal dollars. Without federal money for welfare needs, Massachusetts valiantly raised its own funds to secure what Illinois extracted from Washington. The Boston Civic Symphony repeatedly gave concerts to benefit the jobless. City officials and teachers raised money and took pay cuts. Massachusetts Governor Joseph Ely believed that no state should receive federal aid and that private charity was the best charity; that federal relief ruined both taxpayers and those in need. "Whatever the justification for relief," Ely said, "the fact remains that the way in which it has been used makes it the greatest political asset on the practical side of party politics ever held by an administration." Ely added that "millions of men and women . . . have come to believe almost that there is no hope for them except upon a government payroll."

Federal dollars always become political dollars, and the Democrats moved to use federal money to gain votes at election time. In Pennsylvania, Joseph Guffey, the successful Democratic candidate for U.S. Senate in 1934, ran a campaign ad that said, "Compare this $297,942,173 contributed by Pennsylvania to the U.S. U.S. Treasury with the cash and credit of $678,074,195 contributed to Pennsylvania by the Roosevelt Democratic administration." Vote Democrat, Guffey and others proclaimed, and the federal faucet will keep running. James Doherty, a New Hampshire Democrat, said, "It is my personal belief that to the victor belong the spoils and that Democrats should be holding most of these [WPA] positions so that we might strengthen our fences for the 1940 election." One WPA director in New Jersey—a corrupt but candid man—answered his office phone, "Democratic Headquarters."

If history is a guide, we have every reason to believe that if President Obama institutes a New New Deal, then universal health care, federal bailouts, and jobs stimulus programs will be costly, will be politicized, and will fail.