Wes Vernon
October 27, 2008
"Fixing" the economy
But before we do anything stupid: A history check
By Wes Vernon

Confident an Obama victory will give them even more wind at their backs, House Speaker Nancy Pelosi and Senate Democrat Leader Harry Reid anticipate a post-election lame duck session of Congress to pass yet another "stimulus package," just as a warm-up for next year.

Heedless of the evidence that previous stimuli including one earlier this year had no meaningful effect on the economy, Pelosi and Reid defy the axiom that doing the same thing over and over again and expecting a different result is a sign of insanity.

History warns

We have "been there, done that." We need to review how big government socialism worked in the past.

World-renowned historian Jim Powell, a senior fellow at the Cato Institute, posited some questions about how Franklin D. Roosevelt's New Deal dealt with the Great Depression in the thirties. (Note these were written in 2003, long before the current economic mess.) They raise a red flag today:

Why did New Dealers make it more expensive for employers to hire people? Why did FDR's Justice Department file some 150 lawsuits threatening big employers? Why did New Deal policies discourage private investment without which private employment was unlikely to revive? Why did New Dealers destroy food while people went hungry? To what extent did New Deal labor laws penalize blacks? Why did New Dealers break up the strongest banks? Why didn't New Deal securities laws help investors do better? Why didn't New Deal public works projects bring about a recovery? Why was so much New Deal relief spending channeled away from the poorest people?

Even more to the point

If FDR "ended the Great Depression," how come eight of the ten years of unemployment above 10% prior to the outbreak of World War II were on his watch?

Hoover too

In no way is this column a brief for the way the depression was handled by Herbert Hoover, whom Roosevelt replaced in 1933. Most of the historians who are critical of FDR render a negative verdict on his immediate predecessor as well.

History repeats

When the recent "bailout" legislation failed to pass the House on the first vote (following an angry partisan speech by Speaker Pelosi), Rep. Paul Ryan (R-Wisc.) a rising star in the GOP declared the defeat of the measure was the Republicans' "Herbert Hoover moment" (notwithstanding that 95 Democrats also voted no). In truth, Hoover did not just sit on his hands in the thirties. It's just that he did wrong or ineffective things.

He raised taxes in the teeth of horrible economic times the exact wrong thing to do as other Republican presidents would later show Reagan by cutting taxes and launching the longest sustaining boom in history, Bush '41 by copying Hoover in raising taxes as the economy went south, thus assuring he would also mimic Hoover in becoming a one-term president. Raising taxes in the depression merely caused many to withhold their money from investment. Hoover called them "unpatriotic hoarders," an outlook in synch with today's Democrat VP nominee Joe Biden who says paying higher taxes is "patriotic."

Hoover created the Reconstruction Finance Corporation (RFC), which advanced loans to state and local governments and to banks, railroads, and farm mortgage associations. The RFC became bogged down in bureaucracy and failed to disburse many of its funds.

Hoover increased farm subsidies. The problem was that too many farmers were cultivating too many acres, having expanded during World War I relief efforts that were no longer applicable.

Hoover also signed the Smoot-Hawley Act raising tariffs and setting off retaliation by our trading partners. The high tariff could be justified in McKinley's time when America was still building its "industrial revolution." Economists have argued Smoot-Hawley could not serve our interests in the thirties. By the same token, there are those who cite the opposite extremes of today when we have a trade policy that is "free," but short of being fair to United States industry.

The banks

FDR's major banking "reform" the Glass-Steagall Act broke up the strongest banks by separating commercial banking from investment banking. Moreover, he did nothing about the cause of 90% of the bank failures: laws that limited banks to a single office. That prevented them from diversifying their loan portfolios. Such banks were vulnerable to failure when local conditions were bad because all their deposits came from people who were actually withdrawing their money.


Compounding the damage done by Hoover's tax hikes, Roosevelt tripled taxes during the Great Depression higher personal income taxes, higher corporate income taxes, higher excise taxes, higher estate taxes, and higher gift taxes. As was the case under Hoover, many businesses decided to wait Roosevelt out and hold onto their cash for future investment. FDR retaliated by socking them with the "undistributed profits tax" to dynamite the money out of them.


In a classic play of the class hatred card, FDR set his sights on business and businessmen. This infuriated FDR's mentor Al Smith , and disappointed another FDR cheerleader John Maynard Keynes the demand-side economics guru from Britain, who wrote the president urging him to nationalize the utilities or cease his politicized attacks on them.

Much of the class hatred mindset was reprised in the current campaign when Barack Obama told "Joe the Plumber" that he should be happy to see his dreams of future success taxed away in the interest of "spreading the wealth around."

Speaking of the utilities

Roosevelt's harassment of utilities was most conspicuously played out in the New Deal's Tennessee Valley Authority venture. The TVA typified the New Dealers' obsession with snuffing out efforts by the private sector to bring the economy back. Commonwealth and Southern was thus blocked from carrying out its promising venture to "light up the south."

The National Recovery Administration (NRA)

This New Deal-created agency was counterproductive in the view (written in 2007) of historian and author Amity Shlaes. The NRA sought to solve the monetary challenges through price-setting. Its rules were so stringent they frightened away capital and discouraged employers from hiring workers.

Blacks disadvantaged

Economist David E. Bernstein writes that black people were among the New Deal's major victims. Large numbers of them held unskilled and entry-level jobs. They were displaced when the New Deal forced wages above market levels. This encouraged employers to eliminate jobs and resort to automation and other methods to reduce labor costs.

Also, the new Deal provided subsidies based on the farmer's acreage, which meant they mainly helped the big farmers with the most output. This displaced poor sharecroppers and tenant farmers, many of whom were black.

Exacerbating hunger

As many Americans were going hungry, FDR signed into law the Agricultural Adjustment Act, which led to destroying agricultural crops and farm animals the killing of "the little pigs" under Agriculture Secretary Henry Agard Wallace.

The past is prologue

The point in resurrecting this history is not to beat up on Hoover or Roosevelt. And no two crises are exactly alike. But we can apply the lessons of the past to the realities of the present. What congressional leaders now appear hell-bent on doing regardless of whether Obama is elected is to compound what Fred L. Smith, Jr., of the Competitive Enterprise Institute (CEI) calls our "our confused regulatory welfare system" which now, as in the New Deal years, has "distorted the market, encouraging bright people to take risks with our money" (italics added).

Then, as now, the Federal Reserve blundered in the twenties and thirties, with actions aimed at curbing the stock market boom, which instead exerted deflationary pressure on the economy; and in the early 21st Century, with an easy money policy, attracting borrowers with sketchy credit histories or little income. In the thirties, attempts by two presidents to remedy the mess with higher taxes and over-regulation only prolonged the Great Depression. In the early 21st Century, there are signs we will follow that path again with dire consequences.

The better route to recovery would include (but not necessarily be limited to) this recipe offered by CEI and the National Taxpayers Union (NTU):

Privatize Fannie Mae and Freddie Mac (no longer should they be Barney Frank's political playpen); prosecute corrupt officials; suspend destructive accounting rules; repeal the Carter-era Community Development Act (which ultimately gave Barney his playpen); and clean up the tax code.

Initial trends and political rhetoric bear an eerie resemblance to the mantra of top FDR advisor Harry Hopkins of "Tax! Tax! Tax! Spend! Spend! Spend! Elect! Elect! Elect!"

That will bring satisfaction to politicians bolstered by the snake oil of the "Gimme" culture. But it can damage the nation for decades in the future. And BTW, it figures that Harry Hopkins was (years later) found to have been a Soviet agent, as revealed in the Venona transcripts released in the nineties.

Heavy-handed government "solutions" have a history of backfiring.

Note: This column is indebted for its research to The forgotten Man by Amity Shlaes; FDR's Folly by Jim Powell; The Great Depression: Delayed Recovery and Economic Change in America by Michael A. Bernstein, Cambridge University Press; Only One Place of Redress by David E. Bernstein, Duke University Press; CEI and NTU.

© Wes Vernon


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