Mark W. Hendrickson
Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are republished from V & V, a website of the Center for Vision & Values.
FDR: Then and Today
Economic historian Burton Folsom's New Deal or Raw Deal? is a truly important book. Thoroughly researched, well organized and fluently written, this reader-friendly study of President Franklin Roosevelt's New Deal is "the real deal" -- a fascinating, illuminating study of the politics and economics of a key turning point in American history. Folsom, professor of history at Hillsdale College in Michigan, succeeds in making an old story come alive with superb narrative skills, crackling insights, vivid vignettes, and an ability to connect the dots like no author before him.
Having been fairly familiar with the Great Depression and New Deal, I confess that I didn't approach this book with much enthusiasm. However, once I started to read it, I was immediately hooked. It took only three paragraphs for Folsom to share the first of his many splendidly informative revelations -- specifically, this May 9, 1939, confession by FDR confidante and Treasury Secretary, Henry Morgenthau:
We are spending more than we have ever spent before and it does not work. . . . I say after eight years of this administration we have just as much unemployment as when we started. . . . And an enormous debt to boot!
In succeeding chapters, Folsom proceeds to unfold the human cruelties, economic absurdities, and Depression-lengthening effects of FDR's efforts to impose central planning, American-style, through government programs like the National Industrial Recovery Act and Agricultural Adjustment Act.
One of Folsom's most effective techniques is to let primary sources and black-and-white data tell the story. For example, the portrayal of FDR's character isn't pretty. Roosevelt comes across as ruthless, mean, and egomaniacal. He took deceitfulness to a new level for presidents (forever changing the office for the worse) as typified by his denunciation of Herbert Hoover for running deficits, raising taxes, and attempting to "center control of everything in Washington" -- and then adopting those same harmful practices once he was elected. Partisans on the left may try to dismiss Folsom's treatment of FDR as a conservative hatchet job, but the weakness in that argument is that the most damning commentaries were not Folsom's opinions, but those of FDR's inner circle -- his thoroughly Democratic associates and even his own family -- told in their own words.
The most uncanny feature of New Deal or Raw Deal? is its timeliness. Although released before we knew that Barack Obama would be president, the book shows repeated parallels between the New Deal and the present administration, beginning with the personal similarities between FDR and Obama. Both were gifted with appealing voices, personal charisma, media savvy, and winsome oratory. The most significant parallel is their philosophy of governing. Indeed, Obama seems to be running plays taken straight from the FDR playbook. Examples abound:
In 1936, FDR stated that he wanted "to give" Americans "a greater distribution . . . of wealth;" in 2008, Obama famously told Joe the Plumber that he intended to "spread the wealth around."
FDR created the Federal Communications Commission, which politicized the granting of radio-station licenses to muzzle political opponents; Obama's allies have contemplated imposition of the "fairness doctrine," to accomplish the same objective.
FDR, according to his son, Elliott, politicized the Internal Revenue Service, using it to persecute political enemies, but persuaded the IRS to ignore the tax shenanigans of valuable political allies, such as young congressman Lyndon Johnson, the future president; Obama has sanctioned punitive taxes on business executives, but has shielded political allies from accountability for their millions of ill-gotten gains at Fannie Mae, etc.
FDR's political allies engaged in voter fraud, as have -- according to court decisions -- Obama's friends in ACORN.
The New Deal's economic burden fell most heavily on lower-income Americans due to its reliance on increased excise taxes on common consumer goods -- a mistake that Obama may repeat if he follows through on his cap-and-trade scheme, which would amount to an excise tax on energy.
Federal spending during FDR's first five years was greater than total federal spending under the 31 presidents who preceded him; total new federal debt under Obama may exceed the total accumulated under all 43 of his predecessors.
One of the most sobering lessons to be learned from New Deal or Raw Deal? is that government spending buys votes and sways elections. Folsom's research on FDR's reelection victory in 1936 shows that vote totals correlated highly with how much money various New Deal programs funneled into specific districts. Where no or little federal money was dispensed, FDR's Republican opponent, Alf Landon, often received more votes. In those districts, voters were influenced primarily by the dismal economic conditions that prevailed. But the more federal money that poured into a district, the more voters overlooked the general economic malaise and rewarded FDR's largesse with votes. Similarly today, the danger is that many Americans may continue to repay Obama's handouts with votes, even if they cause the economy to continue to sink.
New Deal or Raw Deal? is an eye-opening book. If you read only one history of the New Deal, make sure that this is the one.
The Ghost of John Maynard Keynes
The British economist John Maynard Keynes (1883-1946) turns out to have been something of a prophet. He once wrote that "practical men," as opposed to theoreticians, "are usually the slaves of some defunct economist." Ironically, the defunct economist who is influencing Barack Obama, his advisers, and his supporters in Washington is Keynes himself.
Like a ghostly presence, Keynes' ideas are hovering over us. The very notion of a government "stimulus" for the economy originated in Keynes' 1936 book, The General Theory of Employment, Interest, and Money. In it, Keynes spelled out his theory that government could offset the economic ups and downs of the business cycle with "contracyclical" policies -- that is, by running surpluses when economic activity is vibrant and deficits during slowdowns.
Keynes' theories lost some of their luster in the 1970s when the United States experienced "stagflation" -- the simultaneous occurrence of high unemployment and high inflation -- which wasn't supposed to happen according to Keynesian theory. Today, though, desperate to justify massive deficit spending, policymakers are resurrecting Keynesian ideas. This represents a triumph of hope over experience. Let's look at some history.
After the stock market crash in 1929, President Herbert Hoover -- a virulent foe of free-market economics, contrary to popular myth -- ramped up federal spending and ran large deficits in the hope of counteracting the economic downturn. The economy did not recover, so voters elected Franklin Roosevelt in 1932. FDR then proceeded to out-Hoover Hoover, running even larger deficits and jacking up federal spending even more. The depression persisted. Then Keynes' General Theory appeared in the winter of 1935-36, and FDR was delighted that the already-famous economist prescribed deficit spending as the correct anti-depression policy. FDR then continued running high deficits for another five or six years, but the economy still did not recover.
A more recent example is the just-ended presidency of George W. Bush. If deficit spending truly stimulates and improves economic activity, then after an eight-year period during which federal spending increased by 50 percent and the national debt doubled, the economy should be booming now. Oops. Deficit spending clearly is not the cure for our economic woes.
A related Keynesian myth haunting us today is the theory of a government "multiplier." This theory asserts that each dollar spent by Uncle Sam will be spent and re-spent numerous times, causing total GDP to grow by some multiple of that spending (a common estimate is 1.5 times). The absurdity of this theory is self-evident. First, does anyone believe that one becomes wealthier by going on a spending binge? Just as an individual can't spend himself into prosperity, neither can a country. Second, if government indeed has the magical power to multiply and increase economic growth, then why bother having a private economy? Why not embrace socialism and let the government be in charge of the entire economy? Because socialistic Big Government devastates countries economically.
Here some Keynesians might protest that the only reason they want increased government spending is to compensate for private citizens not spending enough, which they believe is the cause of depressions. This misdiagnoses the problem. What ails us today is not under-consumption, but oversupply. For example, housing prices are failing due to a glut of housing units. One estimate is that 10 percent of all houses built in the United States since the year 2000 are vacant, and this percentage may rise as foreclosures increase. Similarly, in the now-global automobile market, there appears to be manufacturing capacity of over 90 million units per year, which may be as much as 30 million units above actual demand.
Keynesians claim that this supposed under-consumption represents what they call "the paradox of thrift" -- that while saving instead of spending may be good for individuals, it is bad for the overall economy. True, lower spending leads to business failures and job loss. As painful as this can be for the individuals involved, though, this is not something to be avoided. In fact, it is absolutely necessary. Unnecessary, wasteful production must end. For example, fewer houses and cars should be produced, because we don't need all that have been and are being produced. It is not economically healthy for businesses to keep wasting scarce resources by producing things that people don't need. On the contrary, it is far better for society to stop wasting resources and to re-deploy them into businesses that produce more highly valued goods.
Let us hope that the ghost of Keynes with his fallacious theories does not linger long. If it does, our country will pay a frightful price in squandered wealth and delayed economic recovery.
Into the Fiscal Abyss
The U.S. Treasury recently released its "2008 Financial Report of the United States Government." In case you had any doubts, our government's finances are in a terrible mess. According to the report, under generally accepted accounting principles (the ones that private businesses are required by law to use), Uncle Sam's total financial liabilities-explicit debts and unfunded obligations -- exceed $65 trillion. That's five times as large as our national GDP -- a GDP, by the way, that happens to be shrinking at an alarming rate.
I don't know about you, but I find those incomprehensibly large numbers disorienting. I feel like Alice when she fell down the rabbit hole and entered a realm of the absurd. Does anyone believe that the federal government will ever be able to scratch together an extra $65 trillion on top of the other trillions that Washington intends to spend every year? Not a chance. As I wrote last fall, "We're Broke."
So, how does the current administration propose to put Uncle Sam's fiscal house in order? What plan does it have to rescue us from outright national bankruptcy? For starters, President Obama has presented a budget with an estimated $1.7 trillion deficit for 2010. Far from pulling back from the brink, we are plunging headlong into the fiscal abyss. We'll never climb out of the hole by digging it deeper.
Being the astute politician that he is, Obama has already paid the politically obligatory lip service to the principle of fiscal responsibility by declaring his intention to cut the federal deficit in half by the end of his present four-year term. I sincerely hope he has more success in achieving this goal than his predecessor did. However, judging by the stock market's negative reaction to Obama's announcement, investors were less than thrilled by the prospect of a best-case scenario of $850 billion deficits three years from now. Such a deficit would still be nearly twice as large as any federal deficit that ever occurred before Obama's presidency, and while he inherited much of that spending, he has not been bashful about proposing massive new spending initiatives.
There is another problem with Obama's implied protection of reducing the deficit from $1.7 trillion to $850 billion: The numbers don't add up. Obama said that he would achieve this reduction through a combination of increased taxes on the incomes of the top five percent of Americans and reductions in military spending. That's impossible.
I just calculated a back-of-the-envelope estimate using 2006 figures, the most recent year for which I have data. There was approximately $440 billion of total income above the $250,000 threshold that Obama repeatedly cites as his target range. (Due to the collapse in the stock market and the precipitous decline in economic activity, the corresponding figure for the next few years likely will be significantly lower than $440 billion.) Even if Obama could somehow confiscate that entire amount, he would still be only halfway to his goal of trimming $850 billion from his budget deficit. Of course, no president could confiscate that amount, for the simple reason that if he tried, those taxpayers would quickly find ways to make that income disappear, either by simply not doing the work to generate that income or moving it offshore, disguising it, sheltering it in tax-exempt investments, etc. Even a partial move to capture those funds will, in true supply-side fashion, see that pie shrink, resulting in less-than-anticipated windfall for the government. As it turns out, the Obama administration has now stated that it plans to garner an extra $31.8 billion per year in higher taxes on "the rich."
Let's assume that the Obama administration succeeds in collecting an extra $31.8 billion in taxes from the rich (and never mind the coming loss in tax revenues due to corporate profits evaporating and millions of unemployed Americans no longer earning taxable incomes). The president and his team would need to trim more than $800 billion from the deficit. Since total military spending -- including expenses for Iraq and Afghanistan -- will be approximately $664 billion this year, Obama could theoretically abolish defense spending and still not achieve his budgetary goal.
The only possible way to rein in runaway deficits is to slash runaway federal spending. Neither party is making this case. The Republicans may not want government spending to increase as rapidly as the Democrats do, but how many Republicans have you heard calling for a reduction in federal spending? All we get from the minority party is the same old tired refrain -- tax cuts. I am certainly not opposed to tax cuts. Lower taxes are economically beneficial. They lead to increased economic activity and production, and therefore are to be desired. Politically, calling for tax cuts is the easy part, the low-hanging fruit. Economically, though, tax cuts are not enough. There is no way that we are going to grow our way out of a $1.7 trillion deficit with tax cuts alone. Radical spending cuts are needed, but they are off the radar screen. Without getting federal spending under control, we will continue our fatal freefall into the fiscal abyss.
Anger at AIG
A raw nerve was struck. Reports that employees of the insurance giant AIG -- the recipient of four federal bailouts totaling more than $170 billion -- were now receiving $165 million in bonuses, caused an explosion of public anger, even bloodthirsty rage. The death threats sent to AIG employees included lurid fulminations, such as recommendations that bonus recipients be "executed with piano wire around their necks," and "I'm looking for all the [executives'] names, kids, where they live, etc." Politicians vied to see who could feign the most apoplectic indignation, with Senator Charles Grassley (R-IA) getting swept up in the bloodlust by recommending that AIG employees consider suicide.
Let's take a deep breath, calm down, and analyze this startling turn of events.
Point number one: AIG, as a company, deserves no sympathy. Its over-investment in toxic derivatives is central to the global economic contraction that so far has vaporized $50 trillion of assets worldwide. AIG may be Enron on steroids, possibly the perpetrator of massive fraud. This is for a court of law to decide, one way or the other, and the sooner the better -- so that justice may be served and uncertainty dispelled. At the same time, some AIG employees deserve respect, if not gratitude. CEO Edward Liddy, for example, came on board six months ago to help clean up AIG's mess for a $1 per year salary and no bonuses. A number of AIG's recent bonus recipients have voluntarily returned the entire bonus that they are contractually entitled to receive. To characterize everyone at AIG as a greedy crook is ugly and unfair.
Point number two: Big Business in general and AIG, in particular, have alienated themselves from the American sense of fairness by paying generous bonuses to executives even when the company loses money. Most Americans accept bonuses as a well-deserved reward for success. What Americans find unfathomable is when executives think they deserve to be rewarded when the company goes into the tank on their watch. This latter-day version of golden parachutes is obscene to hard-working Americans of modest incomes who are footing the astronomical bill for the AIG bailout, and especially to citizens who have lost jobs and/or houses. Corporate America's boards of directors should voluntarily rectify this grotesque insult to middle America's values before the government presumes to dictate executive compensation.
Point number three: News flash! President Obama made an economic statement that I wish to endorse. This may be a rare occasion, since I believe in free markets and Obama often prefers government intervention, but I think the president deserves credit for stating:
The business models that created a lot of paper wealth but not real wealth in the country and have now resulted in crisis can't be the model for economic growth going forward.
Amen. Less than 24 hours before I read those words, I had made the same point to an audience of Christian college students. Capital needs to be valued and respected as a tool for lessening poverty, uplifting standards of living, and creating goods and services that bless one's fellow man. But if capital becomes a plaything to be packaged into exotic instruments of dubious security, and then sold to unsuspecting investors to generate commissions and fees -- an elaborate scheme to create "a lot of paper wealth" -- then something good and worthy has been corrupted into something ignoble and pernicious.
Point number four: As important as the previous points have been, by far the most significant aspect of this uproar is that it serves as a diversion from larger problems -- a convenient diversion for many politicians. How dare congressmen piously denounce the scandalous waste of $165 million in AIG bonuses after having wasted billions of taxpayer dollars in recent pork-laden spending bills? How dare the choleric Rep. Barney Frank (D-MA) try to lord guilt over all AIG bonus recipients (even those that returned the bonuses) when he himself thwarted needed reform at Fannie Mae and Freddie Mac, resulting in taxpayers being saddled with $5 trillion of liabilities. (Speaking of Fannie -- which, like AIG, was generous in contributing to Obama's political career -- why doesn't the president demand that his friend, former CEO Franklin Raines, return the tens of millions in bonuses that Raines received by cooking the books at Fannie?) How dare Sen. Chris Dodds (D-CT) -- dubbed by one wit "the senator from AIG" -- act indignant about AIG bonuses when he apparently undid congressional attempts to curtail such bonuses by slipping into the "stimulus" bill the provision that "There is an exception for contractually obligated bonuses agreed on before Feb. 11, 2009."
Without a doubt, AIG deserves criticism, blame, yes, even anger, for its role in bringing our economy to its knees. But let's not allow slick politicians to use AIG as a scapegoat that diverts our attention from the fact that many of our country's most powerful elected officials have done as much, if not more, than AIG in bringing about our present precarious predicament, and that those same politicians now threaten to drown us all in a deluge of ill-advised government spending. *
"I've just learned about his illness. Let's hope it's nothing trivial." --Irvin S. Cobb