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Posts Tagged ‘Roosevelt’

Starting with a column about government-subsidized debt and ending yesterday with a column about why government shouldn’t own airlines, I’ve written about coronavirus-related issues for 14 straight days. And since that’s the topic now dominating the national discussion, I expect many more coronavirus-themed columns will be forthcoming.

But I’m going to make a detour to normalcy today and write about the person who is probably America’s second-worst president in terms of economic policy.

No, I’m not talking about Barack Obama or George W. Bush.  Or even Herbert Hoover.

That’s a list of bad presidents, to be sure, but none of them are in the same league as Franklin Delano Roosevelt.

As I’ve explained before, FDR deserves scorn for doubling down on Hoover’s awful policies of higher taxes, increased spending, and more intervention – thus keeping the economy mired in misery all through the 1930s.

Amazingly, some people applaud his performance. Including some self-described conservatives.

Conrad Black, in an article for American Greatness, actually wants readers to think of FDR as a conservative.

My motive is…to correct the widespread misperception of Roosevelt as a socialist and somehow the person responsible for the present leviathan-state. …Roosevelt wanted to make America safe for wealthy people like himself. …he wanted a contented working-class and agrarian class, as he thought equitable in a rich country, and the only assurance against social instability. …retroactive quarterbacks have never suggested any serious alternatives to what Roosevelt did and no significant part of his domestic legislation has been seriously altered… When it comes to long-term social and economic policy, Roosevelt gets a solid B-plus. …Roosevelt acknowledged that the New Deal would, and did, make many mistakes, but it saved the country.

Saved the country?!? According to academic experts, the New Deal lengthened and deepened the downturn.

Why? Because FDR adopted so many bad policies. For instance, increased the top tax rate to 79 percent (and fortunately failed in his effort to impose a 100 percent tax rate). He cartelized the economy based on fascist economic principles. And he doubled the burden of federal spending in just eight years.

I’ll discuss more about FDR’s policy mistakes at the end of this column, but I also want to address his upside-down view of freedom.

He wanted to replace the Founding Fathers’ vision of “negative liberty” (the right to be left alone) with the redistributionst concept of “positive liberty” (the right to get handouts).

Here’s one of his speeches, which I first shared back in 2011.

I’m not the only one to find this point of view to be repugnant.

Here’s some of what James Bovard wrote last year, in a column for the Foundation for Economic Education.

Franklin Roosevelt did more than any other modern president to corrupt Americans’ understanding of freedom. …his 1941 “Four Freedoms” speech…declared: “The third [freedom] is freedom from want . . . everywhere in the world. The fourth is freedom from fear . . . anywhere in the world.” Proclaiming a goal of freedom from fear meant that government should fill the role in daily life previously filled by God and religion. Politicians are the biggest fearmongers, and “freedom from fear” would justify seizing new power in response to every bogus federal alarm. …Three years later, …Roosevelt called for a “Second Bill of Rights” and asserted that “True individual freedom can’t exist without economic security.” And security, according to FDR, included “the right to a useful and remunerative job,” a “decent home,” “good health,” and “good education.” Thus, if…someone was in bad health, then that person would be considered as having been deprived of his freedom, and somehow it would be the government’s fault. Freedom thus required boundless control over health care.

Amen.

There is no “right” to other people’s earnings.

Let’s now return to FDR’s specific policies.

My contribution to this discussion is a back-of-the-envelope assessment of the policies adopted while he was in office. As you can see, there were many anti-growth policies (and the policies that did the most damage get the biggest bars).

Trade was the only area where he consistently pushed policy in the right direction.

P.S. According to presidential scholars such as Al Felzenberg, President Roosevelt didn’t have firm views on economics and his administration was characterized by haphazard shifts in policy depending on which group of advisors (the reflationists, corporatists, Keynesians, anti-trust zealots, etc) were most influential.

P.P.S. FDR’s Treasury Secretary admitted the failure of the New Deal in 1939, telling a congressional committee that “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.”

P.P.P.S. I wrote above that FDR is “probably America’s second-worst president.” I’m hesitant to give a definitive answer, in part because Nixon was so terrible. More important, the wretched track record of Woodrow Wilson (creator of the income tax and Federal Reserve, as well as an odious racist) suggests he may deserve the prize for being the worst of the worst.

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I have a very low opinion of leftist politicians, in large part because I suspect most of them privately understand their policies don’t work, but they don’t care because their main goal is the accumulation of political power (Crazy Bernie is an exception since he seems to genuinely believe in socialism).

But I don’t dislike ordinary people with statist views. They have good intentions.

All that’s wrong is that they think government intervention and redistribution can improve the lives of the less fortunate. Presumably because they incorrectly assume the economy is a fixed pie and that some people must be poor if some people are rich.

One of my main goals is to help them understand why this is wrong.

A rising tide can lift all boats, which is why I write so often about growth in general and comparative growth between nations in particular.

And it also helps to share evidence about historical growth within a nation.

Amity Shlaes addresses this issue in a must-read article about U.S. growth in the City Journal. She starts with a pessimistic observation about malpractice by historians.

Free marketeers…are not winning U.S. history. …No longer is American history a story of opportunity, or of military or domestic triumph. Ours has become, rather, a story of wrongs, racial and social. …an axiom is taking hold: equal incomes lead to general prosperity and point toward utopia. Teachers, book review editors, and especially professors withhold any evidence to the contrary. …Decades in which policy endeavored or managed to even out and equalize earnings—the 1930s under Franklin Roosevelt, the 1960s under Lyndon Johnson—score high. Decades where policymakers focused on growth before equality, such as the 1920s, fare poorly.

This is upside down, Amity explains.

…progressives have their metrics wrong and their story backward. The geeky Gini metric fails to capture the American economic dynamic: in our country, innovative bursts lead to great wealth, which then moves to the rest of the population. Equality campaigns don’t lead automatically to prosperity; instead, prosperity leads to a higher standard of living and, eventually, in democracies, to greater equality. …growth cannot be assumed. Prioritizing equality over markets and growth hurts markets and growth and, most important, the low earners for whom social-justice advocates claim to fight. …a review trip through the decades is useful because the evidence for growth is right there, in our own American past.

The article looks at several periods, but I want to focus on what she wrote about the 1920s and 1930s.

We’ll start with the 1920s, which began with a deep downturn.

…the early 1920s experienced a significant recession. …the top rate was still high, at 73 percent. …In response, Wall Street and private companies mounted a “capital strike,” dumping cash not into the most promising inventions but into humdrum municipal bonds. …The high tax rates, designed to corral the resources of the rich, failed to achieve their purpose. In 1916, 206 families or individuals filed returns reporting income of $1 million or more… By 1921, just 21 families reported to the Treasury that they had earned more than a million. ….Against this tide, Harding and Coolidge made their choice: markets first. …Harding and Mellon got the top rate down to 58 percent. …In a second round, stewarded by Coolidge, …Mellon and conservatives would get a (somewhat) lower tax rate of 46 percent…in 1924, Coolidge joined Mellon, and Congress, in yet another tax fight, eventually prevailing and cutting the top rate to the target 25 percent. …the tax cuts worked—the government did draw more revenue than predicted, as business, relieved, revived. The rich earned more than the rest—the Gini coefficient rose—but when it came to tax payments, something interesting happened. …the rich now paid a greater share of all taxes. Tax cuts for the rich made the rich pay taxes. …the United States did average 4 percent real growth. …the 1920s economy gave workers something far more important than notional wage equality: a job. Unemployment averaged 5 percent or lower.

Excellent points about overall economic policy and lots of good information about fiscal policy.

The tax cuts were a big success, just like the Kennedy tax cuts in the 1960s and the Reagan tax cuts in the 1980s.

Moreover, the recovery from the 1920-21 recession deserves a lot of attention because it shows that spending reductions are good for prosperity.

Sadly, that lesson was almost immediately forgotten.

Here’s some of what Amity wrote about the many policy mistakes of the 1930s.

The 1930s tell the opposite story. …Hoover responded differently from the way predecessors had responded to previous crashes: he intervened. …Hoover changed policy to focus on social equality… Hoover hauled business leaders to Washington and bullied them…he cajoled Congress into passing laws…the Davis-Bacon Act of 1931…raising the top rate to 63 percent. …Hoover thoroughly intimidated business and markets… Franklin Roosevelt…sent an even clearer signal that in his presidency, equality would come first. …the New Deal’s equality measures prolonged and deepened the Depression. …For ten years, joblessness stuck stubbornly in the double digits. This mattered far more to families than any theoretical envy index. With the coming of World War II, Roosevelt pushed the top tax rate to 94 percent.

From the perspective of economic policy, the 1930s was a trainwreck. Hoover imposed terrible policy. Then FDR takes office and does more of the same.

Let’s now get to the main point of today’s column. Which decade was better for poor people:

Did poor people enjoy better results in the 1920s, when government did less and policy was more focused on growth and opportunity?

Did poor people enjoy better results in the 1930s, when government did more and policy was more focused on equality of outcomes?

The answer should be obvious.

It was better to be a poor person in the 1920s rather than the 1930s.

Just like poor people did better in the laissez-faire 1980s than they did in the statist 1970s. Just like poor people today do better in Chile than in Venezuela. Just like poor people did better in West Germany than East Germany. Just like poor people….well, you get the idea.

P.S. Today’s column is another reminder that Calvin Coolidge was one of America’s greatest presidents.

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The Great Depression was an unimaginably miserable period in American history. Income fell, unemployment rose, and misery was pervasive.

But there was still room for political satire in the 1930s. Here’s a cartoon that I shared back in 2012. Based on the notations in the upper right, I gather it’s from the Chicago Tribune, though I don’t know if that’s actually true. And I also don’t know the year.

But I certainly sympathized with the message since Hoover and Roosevelt were big-spending interventionists.

Hoover saddled the economy with taxes (an increase in the top tax rate from 25 percent to 63 percent!), spending, protectionism, regulation, and intervention. Roosevelt then doubled down on almost all of those bad policies, with further tax rate increases (up to 79 percent, and he even pushed for a 100 percent tax rate in the early 1940s!!), more spending, and lots of additional regulation and intervention.

And here’s a cartoon I posted the previous year. Since I don’t know whether public opinion was on the right side, I don’t know if it accurately captures the mood of taxpayers.

But it’s 100-percent accurate about the instinctive response of politicians. For “public choice” reasons, the crowd in Washington has an incentive to buy votes with other people’s money. One might even say they spend like drunken sailors, but that’s actually an understatement.

But I’m beginning to digress, as is my wont. Let’s get back to satire and the Great Depression.

And I’m going to be creative. That’s because I saw a cartoon on Reddit‘s libertarian page that makes a very general point about government causing a mess and politicians then blaming the private sector. But because I’m a goofy libertarian policy wonk, I immediately thought that this is a perfect summary of what happened in the 1930s.  Hoover and Roosevelt hammered the economy with bad policy, the economy stayed in the dumps for an entire decade, yet the political class someone convinced a lot of people it was all the fault of capitalism.

While I will always view this cartoon as the spot-on depiction of what happened in the 1930s, it obviously applies much more broadly.

Consider the recent financial crisis, which was the result of bad monetary policy and corrupt Fannie Mae/Freddie Mac subsidies. Yet countless politicians blamed greedy capitalism.

Maybe what we have is the cartoon version of Mitchell’s Law. That’s because when politicians cause a problem and blame the free market, they inevitably then claim that the problem justifies giving them more power and control. Lather, rinse, repeat.

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Who is the worst President in U.S. history?

No, regardless of polling data, the answer is not Barack Obama. Or even Jimmy Carter. Those guys are amateurs.

At the bottom of the list is probably Woodrow Wilson, who gave us both the income tax and the Federal Reserve. And he was a disgusting racist as well.

However, Wilson has some strong competition from Franklin Delano Roosevelt, who advocated and implemented policies that exacerbated the bad policies of Herbert Hoover and thus deepened and lengthened the Great Depression.

Today we’re going to look at a new example of FDR’s destructive statism. Something so malicious that he may actually beat Wilson for the prize of being America’s most worst Chief Executive.

Wilson, after all, may have given us the income tax. But Roosevelt actually proposed a top tax rate of 99.5 percent and then tried to impose a 100 percent tax rate via executive order! He was the American version of Francois Hollande.

These excerpts, from an article by Professor Burton Folsom of Hillsdale College, tell you everything you need to know.

Under Hoover, the top rate was hiked from 24 to 63 percent. Under Roosevelt, the top rate was again raised—first to 79 percent and later to 90 percent. In 1941, in fact, Roosevelt proposed a 99.5 percent marginal rate on all incomes over $100,000. “Why not?” he said when an adviser questioned him. After that proposal failed, Roosevelt issued an executive order to tax all income over $25,000 at the astonishing rate of 100 percent. Congress later repealed the order, but still allowed top incomes to be taxed at a marginal rate of 90 percent. …Elliott Roosevelt, the president’s son, conceded in 1975 that “my father may have been the originator of the concept of employing the IRS as a weapon of political retribution.”

Note that FDR also began the odious practice of using the IRS as a political weapon, something that tragically still happens today.

For more detail about Roosevelt’s confiscatory tax policy, here are some blurbs from a 2011 CBS News report.

When bombers struck on December 7, 1941, taxes were already high by historical standards. There were a dizzying 32 different tax brackets, starting at 10% and topping out at 79% on incomes over $1 million, 80% on incomes over $2 million, and 81% on income over $5 million. In April 1942, just a few short months after the attack, President Roosevelt proposed a 100% top rate. At a time of “grave national danger,” he argued, “no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year.” (That’s roughly $300,000 in today’s dollars). Roosevelt never got his 100% rate. However, the Revenue Act of 1942 raised top rates to 88% on incomes over $200,000. By 1944, the bottom rate had more than doubled to 23%, and the top rate reached an all-time high of 94%.

And here are some excerpts from a column that sympathized with FDR’s money grab.

FDR proposed a 100 percent top tax rate. …Roosevelt told Congress in April 1942, “no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year.” That would be about $350,000 in today’s dollars. …lawmakers would quickly reject FDR’s plan. Four months later, Roosevelt tried again. He repeated his $25,000 “supertax” income cap call in his Labor Day message. Congress shrugged that request off, too. FDR still didn’t back down. In early October, he issued an executive order that limited top corporate salaries to $25,000 after taxes. The move would “provide for greater equality in contributing to the war effort,” Roosevelt declared. …lawmakers…ended up attaching a rider repealing the order to a bill… FDR tried and failed to get that rider axed, then let the bill with it become law without his signature.

Regarding FDR’s infamous executive order, here are the relevant passages.

In order to correct gross inequities…, the Director is authorized to take the necessary action, and to issue the appropriate regulations, so that, insofar as practicable no salary shall be authorized under Title III, Section 4, to the extent that it exceeds $25,000 after the payment of taxes allocable to the sum in excess of $25,000.

And from the archives at the University of California Santa Barbara, here is what FDR wrote when Congress used a debt limit vote to slightly scale back the 100 percent tax rate.

First, from a letter on February 6, 1943.

…there is a proposal before the Ways and Means Committee to amend the Public Debt Bill by adding a provision which in effect would nullify the Executive Order issued by me under the Act of Oct. 2, 1942 (price and wage control), limiting salaries to $25,000 net after taxes. …It is my earnest hope that the Public Debt Bill can be passed without the addition of amendments not related to the subject matter of the bill.

And here are excerpts from another letter from FDR later that month.

When the Act of October 2, 1942, was passed, it authorized me to adjust wages or salaries whenever I found it necessary “to correct gross inequities…” Pursuant to this authority, I issued an Executive Order in which, among other things, it was provided that in order to correct gross inequities and to provide for greater equality in contributing to the war effort no salary should be authorized to the extent that it exceeds $25,000 net after the payment of taxes.

Even though Congress was overwhelmingly controlled by Democrats, there was resistance to FDR’s plan to confiscate all income.

So Roosevelt had a back-up plan.

If the Congress does not approve the recommendation submitted by the Treasury last June that a flat 100 percent supertax be imposed on such excess incomes, then I hope the Congress will provide a minimum tax of 50 percent, with steeply graduated rates as high as 90 percent. …If taxes are levied which substantially accomplish the purpose I have indicated, either in a separate bill or in the general revenue bill you are considering, I shall immediately rescind the section of the Executive Order in question.

And, sadly, Congress did approve much higher tax rates, not only on the so-called rich, but also on ordinary taxpayers.

Indeed, this was early evidence that tax hikes on the rich basically serve as a precedent for higher burdens on the middle class, something that bears keeping in mind when considering the tax plans of Bernie Sanders and Hillary Clinton (or, tongue in cheek, the Barack Obama flat tax).

Let’s close by considering why FDR pushed a confiscatory tax rate. Unlike modern leftists, he did have the excuse of fighting World War II.

But if that was his main goal, surely it was a mistake to push the top tax rate far beyond the revenue-maximizing level.

That hurt the economy and resulted in less money to fight Nazi Germany and Imperial Japan.

So what motivated Roosevelt? According to Burton and Anita Folsom, it was all about class warfare.

Why “soak the rich” for 100 percent of their income (more or less) when they already face rates of 90 percent in both income and corporate taxes? He knew that rich people would shelter their income in foreign investments, tax-exempt bonds, or collectibles if tax rates were confiscatory. In fact, he saw it happen during his early New Deal years. When he raised the top rate to 79 percent in 1935, the revenue into the federal government from income taxes that year was less than half of what it was six years earlier when the top rate was 24 percent. …First, FDR, as a progressive, believed…that “swollen fortunes” needed to be taxed at punitive rates to redistribute wealth. In fact, as we can see, redistributing wealth was more important to FDR than increasing it. …Second, high taxes on the rich provided excellent cover for his having made the income tax a mass tax. How could a steelworker in Pittsburgh, for example, refuse to pay a new 24 percent tax when his rich factory owner had to pay more than 90 percent? Third, and possibly most important, class warfare was the major campaign strategy for FDR during his whole presidency. He believed he won votes when he attacked the rich.

In other words, FDR’s goal was fomenting resentment rather than collecting revenue.

And there are leftists today who still have that attitude. Heck, there’s an entire political party with that mentality.

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Maybe the warm weather is affecting my judgement, but I’m finding myself in the odd position of admiring some folks on the left for their honesty.

A few days ago, for instance, I (sort of) applauded Matthew Yglesias for openly admitting that punitive tax rates would put us on the downward-sloping portion of the Laffer Curve.

He still favors such a policy, which is very bizarre, but at least his approach is much more honest than other statists who want us to believe that very high tax rates generate more revenue.

Today, I’m going to indirectly give kudos to another leftist.

Writing for the Washington Post, Katrina vanden Heuvel openly argues that the meaning of freedom should be changed. Here’s some of her argument, and we’ll start with her reasonably fair description of how freedom currently is interpreted.

For conservatives, freedom is centered in markets, free from government interference. …Government is the threat; the best thing it can do is to get out of the way. …freedom entails privatization, deregulation, limiting government’s reach and capacity.

Needless to say, I agree with this definition. After all, isn’t freedom just another way of saying “the absence of coercive constraint on the individual?

Heck, this is why I’m a libertarian. Sure, I like the fact that liberty produces more prosperity, but my main goal it to eliminate needless government coercion.

But I’m digressing. Let’s get back to her column. She complains that folks on the left have acquiesced to this traditional conception of freedom.

Democrats chose to tack to these conservative winds. Bill Clinton’s New Democrats echoed the themes rather than challenge them. “The era of big government is over,” he told Americans, while celebrating “ending welfare as we know it,” deregulation of Wall Street… Obama chose consciously not to challenge the conservative limits on what freedom means.

Then she gets to her main argument. She wants Hillary Clinton to lead an effort to redefine the meaning of freedom.

This is Hillary Clinton’s historic opportunity. …She would do a great service for the country — and for her own political prospects — by offering a far more expansive American view of what freedom requires, and what threatens it. …expanding freedom from want by lifting the floor under workers, insuring every child a healthy start, providing free public education from pre-k to college, rebuilding the United States and putting people to work… Will she favor fair taxes on the rich and corporations to rebuild the United States and put people to work? Will she make the case for vital public investments — in new energy, in infrastructure, in education and training — that have been starved for too long? Will she call for breaking up banks…? Will she favor expanding social security…? …to offer Americans a bolder conception of freedom…and set up the debate that America must decide.

Needless to say, I strongly disagree with such policies. How can “freedom” be based on having entitlements to other people’s money?!?

Heck, it’s almost like slavery since it presupposes that a “right” to live off the labor of others. But that’s not technically true since presumably there wouldn’t be any requirement to work. So what would really happen in such a society is that people would conclude it’s better to ride in the wagon of government dependency, as illustrated by these cartoons.

Which means, sooner or later, a Greek-style collapse because a shrinking population of producers can’t keep pace with an ever-expanding population of moochers and looters.

Nonetheless, I give Ms. vanden Heuvel credit for acknowledging that her preferred policies are contrary to the traditional definition of freedom.

To be sure, I’d admire her even more if she simply admitted that she favors government coercion over freedom. That would be true honesty, but I can understand that folks on the left would prefer to change the meaning of words rather than admit what their agenda really implies.

P.S. Some of you may recognize that the issues discussed above are basically a rehash of the debate between advocates of “negative liberty” and supporters of “positive liberty.” The former is focused on protecting people from the predations of government while the latter is about somehow guaranteeing goodies from the government.

P.P.S. As mentioned in Ms. vanden Heuvel’s column, today’s effort to redefine freedom is similar to the so-called economic bill of rights peddled in the 1940s by FDR.

 

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This is a column I never expected to write. That’s because I’m going to applaud Presidents Franklin Roosevelt and Harry Truman.

This won’t be unconstrained applause, to be sure. Roosevelt, after all, pursued awful policies that lengthened and deepened the economic misery of the 1930s. And, as you can see from this video, the “economic bill of rights” that he wanted after WWII was downright malicious.

Truman, meanwhile, was a less consequential figure, but it’s worth noting that he wanted a restoration of the New Deal after WWII, which almost certainly would have hindered and perhaps even sabotaged the recovery.

But just as very few policy makers are completely good, it’s also true that very few policy makers are totally bad. And a review of fiscal history reveals that FDR and Truman both deserve credit for restraining domestic spending during wartime.

Here’s some of what I wrote for The Hill. I was specifically responding to the cranky notion, pursued by Bernie Sanders, the openly socialist Senator from Vermont, that there should be tax hikes on the rich to finance military operations overseas.

The idea has a certain perverse appeal to libertarians. We don’t like nation-building and we don’t like punitive tax policy, so perhaps mixing them together would encourage Republicans to think twice (or thrice) before trying to remake the world.

But “perverse appeal” isn’t the same as “good policy.”

That’s why I suggest another approach, one that used to exist in our nation.

…lawmakers would be well served to instead look on the spending side of the budget. …This may seem like a foreign concept in today’s Washington, but it actually was standard procedure at times in our history.

Consider, for instance, what happened to domestic spending when the nation entered World War II.

As you see from this chart, these outlays fell significantly as a share of GDP. And this was while Roosevelt was in the White House!

I note in the article that much of this improvement was the result of rising GDP, but the raw numbers from the OMB Historical Tables also show that nominal spending was constrained.

The same thing happened during the Korean War. Once the conflict began and policy makers began funding the troops, they also put the brakes on domestic spending.

Unfortunately, restraining domestic spending when military spending is rising is no longer the standard practice in Washington.

I point out in the article that we got across-the-board profligacy under President Johnson.

Reagan, by contrast, did reduce the burden of domestic spending when he boosted defense outlays to win the Cold War.

But then we had a return to guns-and-butter spending last decade during the Bush years.

Which led me to write this surreal passage.

…we have two odd collections of bedfellows, with Presidents Franklin Roosevelt, Truman and Reagan in one camp vs. LBJ and Bush in the other camp.

Though there’s only one good president mentioned in that excerpt if we’re grading overall records.

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It’s difficult to promote good economic policy when some policy makers have a deeply flawed grasp of history.

This is why I’ve tried to educate people, for instance, that government intervention bears the blame for the 2008 financial crisis, not capitalism or deregulation.

Going back in time, I’ve also explained the truth about “sweatshops” and “robber barons.”

But one of the biggest challenges is correcting the mythology that capitalism caused the Great Depression and that government pulled the economy out of its tailspin.

To help correct the record, I’ve shared a superb video from the Center for Freedom and Prosperity that discusses the failed statist policies of both Hoover and Roosevelt.

Now, to augment that analysis, we have a video from Learn Liberty. Narrated by Professor Stephen Davies, it punctures several of the myths about government policy in the 1930s.

Professors Davies is right on the mark in every case.

And I’m happy to pile on with additional data and evidence.

Myth #1: Herbert Hoover was a laissez-faire President – Hoover was a protectionist. He was an interventionist. He raised tax rates dramatically. And, as I had to explain when correcting Andrew Sullivan, he was a big spender. Heck, FDR’s people privately admitted that their interventionist policies were simply more of the same since Hoover already got the ball rolling in the wrong direction. Indeed, here’s another video on the Great Depression and it specifically explains how Hoover was a big-government interventionist.

Myth #2: The New Deal ended the depression – This is a remarkable bit of mythology since the economy never recovered lost output during the 1930s and unemployment remained at double-digit levels. Simply stated, FDR kept hammering the economy with interventionist policies and more fiscal burdens, thwarting the natural efficiency of markets.

Myth #3: World War II ended the depression – I have a slightly different perspective than Professor Davies. He’s right that wars destroy wealth and that private output suffers as government vacuums up resources for the military. But most people define economic downturns by what happens to overall output and employment. By that standard, it’s reasonable to think that WWII ended the depression. That’s why I think the key lesson is that private growth rebounded after World War II ended and government shrank, when all the Keynesians were predicting doom.

By the way, Reagan understood this important bit of knowledge about post-WWII economic history. And if you want more evidence about how you can rejuvenate an economy by reducing the fiscal burden of government, check out what happened in the early 1920s.

P.S. If you want to see an economically illiterate President in action, watch this video and you’ll understand why I think Obama will never be as bad as FDR.

P.P.S. Since we’re looking at the economic history of the 1930s, I strongly urge you to watch the Hayek v Keynes rap videos, both Part I and Part II. This satirical commercial for Keynesian Christmas carols also is very well done.

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There have been many truly awful presidents elected in the United States, but if I had to pick my least favorite, I might choose Herbert Hoover.

I obviously have disdain for Hoover’s big-government policies, but I also am extremely irritated that – as Jonah Goldberg explained – he allowed the left to create an utterly bogus narrative that the Great Depression was caused by capitalism and free markets.

Indeed, the Center for Freedom and Prosperity produced a video demonstrating that the statist policies of both Hoover and Roosevelt helped trigger, deepen, and lengthen the economic slump.

Building on that theme, here’s a new video from Prager University that looks specifically at the misguided policies of Herbert Hoover.

Amen. Great job unmasking Hoover’s terrible record.

As I explained when correcting a glaring error by Andrew Sullivan, Hoover was a big-government interventionist. Heck, even FDR’s inner circle understood that the New Deal was simply an extension of Hoover’s statist policies.

In other words, FDR doubled down on Hoover’s awful record. And with awful results. We have a better understanding today of how the New Deal caused the downturn to be deeper and longer.

This Tom Sowell video is definitely worth watching if you want more information on that topic.

And here’s something else to share with your big-government friends. The Keynesian crowd was predicting another massive depression after World War II because of both a reduction in wartime outlays and the demobilization of millions of troops. Yet that didn’t happen, as Jeff Jacoby has succinctly explained. And if you want more details on how smaller government helped restore growth after WWII, check out what Jason Taylor and Rich Vedder wrote for Cato.

P.S. I’ve compared Bush and Obama to Hoover and Roosevelt because of some very obvious similarities. Bush was a big-government Republican who helped pave the way for a big-government Democrat, just as Hoover was a big-government Republican who also created the conditions for a big-government Democrat.

The analogy also is good because I suspect political and economic incompetence led both Hoover and Bush to expand the burden of government, whereas their successors were ideologically committed to bigger government. We know about Obama’s visceral statism, and you can watch a video of FDR advocating genuinely awful policy.

The good news is that Obama will never be as bad as FDR, no matter how hard he tries.

P.P.S. It’s also worth mentioning that a very serious downturn in 1921 was quickly ended in part thanks to big reductions in the burden of government spending. Your Keynesian friends will also have a hard time explaining how that happened.

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Last year, I explained with considerable relief that President Obama would never be as bad as Franklin Roosevelt.

Yes, Obama has imposed a class-warfare tax hike, pushed through Obamacare, and squandered $billions on a faux stimulus (perfectly captured by this cartoon). But that’s trivial compared to the damage caused by FDR (and Hoover).

“I’ve tried, but it’s time for me to admit I’m not as bad as FDR”

Obama’s policies, to be sure, have contributed to an extremely weak expansion.

That’s bad, but FDR’s statism helped extend the Great Depression – by an additional seven years according to scholarly research! That’s a much worse track record.

But that doesn’t mean Obama doesn’t want to be as bad as FDR. Indeed, one of his top advisers seems very happy that the President’s second inaugural address was reminiscent of Roosevelt’s so-called Second Bill of Rights.

Here’s some of what Cass Sunstein wrote for Bloomberg.

Obama is updating Franklin Delano Roosevelt’s Second Bill of Rights. …Roosevelt announced the Second Bill of Rights in his State of the Union address in 1944. With the Great Depression over, and the war almost won, FDR declared that we “have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence.” …Then he listed them:

  • The right to a useful and remunerative job in the industries or shops or farms or mines of the nation.
  • The right to earn enough to provide adequate food and clothing and recreation.
  • The right of every farmer to raise and sell his products at a return which will give him and his family a decent living.
  • The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad.
  • The right of every family to a decent home.
  • The right to adequate medical care and the opportunity to achieve and enjoy good health.
  • The right to adequate protection from the economic fears of old age, sickness, accident and unemployment.
  • The right to a good education.

…the Second Bill was meant to specify the goals of postwar America… Obama took more such steps. …Obama’s second inaugural did not refer explicitly to the Second Bill of Rights, but it had an unmistakably Rooseveltian flavor. …Obama emphasized “that a great nation must care for the vulnerable, and protect its people from life’s worst hazards and misfortune.” …Having helped America to survive its greatest economic challenge since the 1930s, the current occupant of that office is giving new meaning to those commitments, and making them his own.

I guess we have to give Sunstein credit for chutzpah. We’re suffering through the weakest expansion since the end of World War II, and he wants us to be grateful for Obama’s policies since they supposedly “helped America to survive.”

Wow, I’d hate to see his idea of failure.

But here’s the good news. America will have gridlock for the next two years, and probably the next four years.

The bad news is that we won’t take necessary steps to reform entitlements, but the good news is that we won’t make things worse with the kind of statist policies outlined in FDR’s fake Bill of Rights.

Yes, I expect Republicans to screw up on some of the small issues and give the White House a few minor victories, but I can’t imagine them approving any big Obama initiatives, even if their opposition is driven only by partisanship rather than principle.

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I’ve explained on many occasions that Franklin Roosevelt’s New Deal was bad news for the economy. And the same can be said of Herbert Hoover’s policies, since he also expanded the burden of federal spending, raised tax rates, and increased government intervention.

So when I was specifically asked to take part in a symposium on Barack Obama, Franklin Roosevelt, and the New Deal, I quickly said yes.

I was asked to respond to this question: “Was that an FDR-Sized Stimulus?” Here’s some of what I wrote.

President Obama probably wants to be another FDR, and his policies share an ideological kinship with those that were imposed during the New Deal. But there’s really no comparing the 1930s and today. And that’s a good thing. As explained by Walter Williams and Thomas Sowell, President Roosevelt’s policies are increasingly understood to have had a negative impact on the American economy. …what should have been a routine or even serious recession became the Great Depression.

In other words, my assessment is that Obama is a Mini-Me version of FDR, which is a lot better (or, to be more accurate, less worse) than the real thing.

To be sure, Obama wants higher tax rates, and he has expanded government control over the economy. And the main achievement of his first year was the so-called stimulus, which was based on the same Keynesian theory that a nation can become richer by switching money from one pocket to another. …Obama did get his health plan through Congress, but its costs, fortunately, pale in comparison to Social Security and its $30 trillion long-run deficit. And the Dodd-Frank bailout bill is peanuts compared to all the intervention of Roosevelt’s New Deal. In other words, Obama’s policies have nudged the nation in the wrong direction and slowed economic growth. FDR, by contrast, dramatically expanded the burden of government and managed to keep us in a depression for a decade. So thank goodness Barack Obama is no Franklin Roosevelt.

The last sentence of the excerpt is a perfect summary of my remarks. I think Obama’s policies have been bad for the economy, but he has done far less damage than FDR because his policy mistakes have been much smaller.

“Hey, don’t sell me short. Just wait to see how much havoc I can wreak if reelected!”

Moreover, Obama has never proposed anything as crazy as FDR’s “Economic Bill of Rights.” As I pointed out in my article, this “would have created a massive entitlement state—putting America on a path to becoming a failed European welfare state a couple of decades before European governments made the same mistake.”

On the other hand, subsequent presidents did create that massive entitlement state and Obama added another straw to the camel’s back with Obamacare.

And he is rigidly opposed to the entitlement reforms that would save America from becoming another Greece.

So maybe I didn’t give him enough credit for being as bad as FDR.

P.S. Here’s some 1930s economic humor, and it still applies today. And I also found this cartoon online.

And here’s a good Mini-Me image involving Jimmy Carter. I wasn’t able to find one of Obama and FDR.

If anybody has the skill to create such an image, please send it my way.

P.P.S. The symposium also features an excellent contribution from Professor Lee Ohanian of UCLA.

And from the left, it’s interesting to see that Dean Baker of the Center for Economic and Policy Research basically agrees with me.

But only in the sense that he also says Obama is a junior-sized version of FDR. Dean actually thinks Obama should have embraced his inner-FDR and wasted even more money on an even bigger so-called stimulus.

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I’ve pointed out on several occasions that Herbert Hoover was a big-spending Keynesian. Heck, Hoover was pursuing failed Keynesian policies several years before Keynes produced his most well-known book, The General Theory.

Hoover’s big spending was so pronounced that it generated this cartoon in 1932.

Sadly, this cartoon applies just as well today.

Except Bush and Obama take the place of Hoover and Roosevelt – with the same dismal results.

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Here’s an absolutely horrifying video of President Franklin Roosevelt promoting a “Second Bill of Rights” based on coercive redistribution.

At first, I was going to post it and contrast it with this superb Reagan video and compare how one President’s policies kept America mired in a depression while the other implemented policies that triggered an American renaissance.

But there’s a much more important question, one that also applies to modern leftists. Do they actually believe this nonsense?

In other words, are people who push for bad policy misguided or malicious?

In the case of FDR, did he really think that the government could guarantee “rights” to jobs, recreation, housing, good health, and security?

If so, he was horribly misguided and blindly ignorant to the realities of economics.

But if he didn’t believe that government magically could provide all these things, then would it be fair to say he was maliciously lying in order to delude people and get their votes?

I don’t know Roosevelt’s motives, Like most politicians, he probably listened to both the angel (however misguided) on one shoulder and the devil on the other shoulder.

But if he was listening to the angel and trying to do what he thought was best, at least FDR had an excuse. Communism had not yet collapsed. Socialism had not yet collapsed. And Greek-style redistributionism had not yet collapsed.

So it was possible seventy years ago for a well-intentioned person to believe that government was some sort of perpetual motion machine of prosperity.

I’m not sure there is a similarly charitable interpretation for the motives of modern-day statists.

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It was a strange experience to read the comments and emails generated by yesterday’s post on the “Obama downgrade.”

Democrats and liberals were upset that I blamed Obama for the downgrade, as you might expect. Republicans and conservatives, however, were agitated that my first sentence pointed out that Bush bore significant responsibility for the spending binge that created the fiscal crisis.

This got me thinking about the underlying causes of America’s long-term fiscal problems and whether it might be possible to come up with some sort of reasonable estimate on which Presidents are most responsible for fiscal crisis.

So I decided to look at the most recent long-run forecast from the Congressional Budget Office. As you might suspect, entitlement programs are THE reason why the United States is in deep trouble.

What does this allow us to say about various presidents? Well, it turns out that Social Security is a relatively minor part of the problem, so even though President Roosevelt’s policies exacerbated and extended the Great Depression, the program he created is only responsible for a small share of the fiscal crisis. To give the illusion of scientific exactitude, let’s assign FDR 13.2 percent of the blame.

The health care numbers are much harder to disentangle because it’s not apparent how much of the increase is due to Medicare, Medicaid, Bush’s prescription drug entitlement, and Obamacare. A healthcare policy wonk may know these numbers, but the CBO long-run forecast didn’t provide much detail.

So with a big caveat that these are just wild estimations, I feel reasonably comfortable in saying that both Bush and Obama made matters worse with their reckless entitlement expansions, but that they merely deepened a fiscal hole that was created when President Johnson imposed Medicare and Medicaid.

With that in mind (and ignoring, for the sake of simplicity, the role of other Presidents – such as Nixon – who expanded the size and scope of health entitlements), here is my ranking of presidential responsibility for America’s fiscal decline.

This does not mean, however, that it was unfair yesterday to apply the “Obama Downgrade” label.

In part, he is responsible because the downgrade from Standard & Poor happened on his watch. But the real reason he earned that label is that he doubled down on the reckless policies of his predecessors and demagogued against lawmakers such as Cong. Paul Ryan who actually have tried to solve the problem.

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I had some fun at Andrew Sullivan’s expense a couple of weeks ago, mocking him for asserting that spending cuts today would be repeating the mistakes of Herbert Hoover. That was a rather odd thing for him to write since Hoover boosted the burden of government spending by 47 percent in just four years.

Since it is notoriously difficult to educate Obamaphiles, I’m guessing that he (and others) need some supplementary material.

How about the words of a key aide to Franklin Delano Roosevelt? Would that be considered a legitimate source? One would think so, which means this excerpt from a 2007 book review (the same statement was also cited by PBS) is rather revealing.

FDR aide Rexford Tugwell would claim in a 1974 interview that “practically the whole New Deal was extrapolated from programs that Hoover started.”

The fact that Hoover and Roosevelt were two peas in a big-government pod may be of interest to economic historians, but the real lesson is that interventiondidn’t work for either one of them. That’s what Andrew Sullivan and others need to learn. But since people like that probably won’t listen to me, maybe they’ll be more willing to accept the confession of Roosevelt’s Treasury Secretary.

FDR’s Treasury Secretary, Henry Morgenthau, wrote in his diary: “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!”

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In a previous post, I commented on a Wall Street Journal column by former Senator Phil Gramm, calling attention to evidence that the economy is under-performing compared to what happened after previous recessions. This is an important issue, particularly when you compare the economy’s tepid performance today with the strong recovery following the implementation of Reaganomics. But there was another part of the column that also is worth highlighting. Much of what we are seeing from the Obama Administration is disturbingly reminiscent of the anti-growth policies of Hoover and Roosevelt, particularly the punitive class-warfare mentality. Here’s how Senator Gramm characterizes the similarities.

Today’s lagging growth and persistent high unemployment are reminiscent of the 1930s, perhaps because in no other period of American history has our government followed policies as similar to those of the Great Depression era. …The top individual income tax rate rose from 24% to 63% to 79% during the Hoover and Roosevelt administrations. Corporate rates were increased to 15% from 11%, and when private businesses did not invest, Congress imposed a 27% undistributed profits tax. In 1929, the U.S. government collected $1.1 billion in total income taxes; by 1935 collections had fallen to $527 million. …The Roosevelt administration also conducted a seven-year populist tirade against private business, which FDR denounced as the province of “economic royalists” and “malefactors of great wealth.” … Churchill, who was generally guarded when criticizing New Deal policies, could not hold back. “The disposition to hunt down rich men as if they were noxious beasts,” he noted in “Great Contemporaries” (1939), is “a very attractive sport.” But “confidence is shaken and enterprise chilled, and the unemployed queue up at the soup kitchens or march out to the public works with ever growing expense to the taxpayer and nothing more appetizing to take home to their families than the leg or wing of what was once a millionaire. . . It is indispensable to the wealth of nations and to the wage and life standards of labour, that capital and credit should be honoured and cherished partners in the economic system. . . .” The regulatory burden exploded during the Roosevelt administration, not just through the creation of new government agencies but through an extraordinary barrage of executive orders—more than all subsequent presidents through Bill Clinton combined. Then, as now, uncertainty reigned. …Henry Morgenthau summarized the policy failure to the House Ways and Means Committee in April 1939: “Now, gentleman, we have tried spending money. 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.”

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Jonah Goldberg writes in National Review that President Obama is beginning to look like the next Herbert Hoover. This is rather ironic since the left wanted him to become the next Franklin Delano Roosevelt, ushering in a new era of politically-popular statism.
…the Great Depression discredited laissez-faire economics for a generation or more. Hoover, who was hardly the “market fundamentalist” FDR made him out to be, suffered largely from the (bad) luck of the draw, giving Democrats a chance to argue for a new deal of the cards. For reasons fair and unfair, Obama, who inherited a bad recession and made it worse, every day looks more like a modern-day Hoover, whining about his problems, rather than an FDR cheerily getting things done. Inadequate to the task, Obama is discrediting the statism he was elected to restore. 
Jonah makes a compelling case, particularly from a political perspective. But if we look just at economic policy, the Obama-as-FDR analogy is more accurate. Hoover was a big-government interventionist with failed policies. That’s a pretty good description of Bush. FDR got elected in 1932 by promising to fix the mess, which is akin to Obama’s hope and change message in 2008. And, just like FDR, Obama then continued the big-government interventionist policies of his predecessor. The only difference is that Roosevelt somehow was able to remain popular even though his policies kept the nation mired in depression for another decade. Obama, by contrast, is veering dangerously close to becoming another Jimmy Carter. Tom Sowell has some key details about the timing and impact of the Hoover-Roosevelt policies.
The history of the United States is full of evidence on the negative effects of government intervention. For the first 150 years of this country’s existence, the federal government did not think it was its business to intervene when the economy turned down. All of those downturns ended faster than the first downturn where the federal government intervened big time– the Great Depression of the 1930s. …if you look at the facts, they go like this: Unemployment never hit double digits in any of the 12 months following the big stock market crash of 1929 that is often blamed for the massive unemployment of the 1930s. Unemployment peaked at 9 percent, two months after the October 1929 crash, and then began drifting downward. Unemployment was down to 6.3 percent by June 1930, when the first big federal intervention occurred. Within six months, the downward trend in unemployment reversed and hit double digits for the first time in December 1930. What were politicians to do? Say “We messed up”? Or keep trying one huge intervention after another? The record shows what they did: President Hoover’s interventions were followed by President Roosevelt’s bigger interventions– and unemployment remained in double digits in every month for the entire remainder of the decade. There is another set of facts: The record that was set in 1929 for the biggest stock market decline in one day was broken in 1987. But Ronald Reagan did nothing– and the media clobbered him for it. Then the economy rebounded and there were 20 years of sustained economic growth with low inflation and low unemployment. Can you imagine Barack Obama doing another Ronald Reagan?

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Walter Williams explains how Roosevelt’s policies extended the Great Depression. SInce Obama apparently would like to be the new FDR, this does not bode well for America’s future. The good news, so to speak, is that Obama’s policies are not nearly as bad as what Roosevelt (and Hoover) enacted, so America today is experiencing sub-par growth rather than economic cataclysm.
…let’s look at the failed stimulus program of Obama’s hero, Franklin Delano Roosevelt. FDR’s Treasury Secretary, Henry Morgenthau, wrote in his diary: “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!” Morgenthau was being a bit gracious. The unemployment figures for FDR’s first eight years were: 18 percent in 1935; 14 percent in 1936; by 1938, unemployment was back to 20 percent. …During the Roosevelt administration, the top rate was raised at first to 79 percent and then later to 90 percent. Hillsdale College economic historian Professor Burton Folsom notes that in 1941, Roosevelt even proposed a whopping 99.5 percent marginal rate on all incomes over $100,000. …The Great Depression did not end until after WWII. Why it lasted so long went unanswered until Harold L. Cole, professor of economics at the University of Pennsylvania, and Lee E. Ohanian, professor of economics at UCLA, published their research project “How Government Prolonged the Depression” in the Journal of Political Economy (August 2004). Professor Cole explained, “The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes. Ironically, our work shows that the recovery would have been very rapid had the government not intervened.” Professors Cole and Ohanian argue that FDR’s economic policies added at least seven years to the depression.

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Much of the economic debate in Washington revolves around the silly Keynesian notion that politicians can stimulate an economy by borrowing money from the private sector and using the funds to make government bigger. That didn’t work for Hoover and Roosevelt during the 1930s, Japan during the 1990s, Bush in 2008, or Obama last year and this year, but the theory is convenient for politicians seeking ways to justify their natural tendencies. There are other factors that impact economic performance, however, and Amity Shlaes explains in the Washington Post that Obama is making the same mistakes as Roosevelt in some of these other areas. Here’s a blurb from her column, comparing Obama’s class-warfare tax agenda with FDR’s disastrous “soak the rich” law.
By fixating on the debt and stimulus plans, Obama and Congress are overlooking challenges to the economy from taxes, employment and the entrepreneurial environment. President Roosevelt’s great error was to ignore such factors — and the result was that sickening double dip. …Income taxes, the dividend tax and capital gains taxes are all set to rise as the Bush tax cuts expire. The Obama administration portrays these increases as necessary for budgetary and social reasons. …The administration and congressional Democrats are also striving to ensure that businesses pony up. …Roosevelt, too, pursued the dual purposes of revenue and social good. In 1935 he signed legislation known as the “soak the rich” law. FDR, more radical than Obama in his class hostility, spoke explicitly of the need for “very high taxes.” Roosevelt’s tax trap was the undistributed-profits tax, which hit businesses that chose not to disgorge their cash as dividends or wages. The idea was to goad companies into action. The outcome was not what the New Dealers envisioned. Horrified by what they perceived as an existential threat, businesses stopped buying equipment and postponed expansion. They hired lawyers to find ways around the undistributed-profits tax. In May 1938, after months of unemployment rates in the high teens, the Democratic Congress cut back the detested tax. That bill became law without the president’s signature.

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Citing a scholarly book by Richard Vedder and Lowell Gallaway, Tom Sowell concisely explains that government intervention caused the Great Depression.

Right here and right now there is a widespread belief that the unregulated market is what got us into our present economic predicament, and that the government must “do something” to get the economy moving again. FDR’s intervention in the 1930s has often been cited by those who think this way. …Although the big stock market crash occurred in October 1929, unemployment never reached double digits in any of the next 12 months after that crash. Unemployment peaked at 9 percent, two months after the stock market crashed– and then began drifting generally downward over the next six months, falling to 6.3 percent by June 1930. This was what happened in the market, before the federal government decided to “do something.” What the government decided to do in June 1930– against the advice of literally a thousand economists, who took out newspaper ads warning against it– was impose higher tariffs, in order to save American jobs by reducing imported goods. This was the first massive federal intervention to rescue the economy, under President Herbert Hoover, who took pride in being the first President of the United States to intervene to try to get the economy out of an economic downturn. Within six months after this government intervention, unemployment shot up into double digits– and stayed in double digits in every month throughout the entire remainder of the decade of the 1930s, as the Roosevelt administration expanded federal intervention far beyond what Hoover had started. If more government regulation of business is the magic answer that so many seem to think it is, the whole history of the 1930s would have been different.

I particularly like that Sowell compares the 1929 and 1987 stock market crashes. The market actually fell more in 1987, but Reagan wisely did nothing and the economy continued growing.

The very fact that we still remember the stock market crash of 1929 is remarkable, since there was a similar stock market crash in 1987 that most people have long since forgotten. What was the difference between these two stock market crashes? The 1929 stock market crash was followed by the most catastrophic depression in American history, with as many as one-fourth of all American workers being unemployed. The 1987 stock market crash was followed by two decades of economic growth with low unemployment. But that was only one difference. The other big difference was that the Reagan administration did not intervene in the economy after the 1987 stock market crash– despite many outcries in the media that the government should “do something.”

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The politicians in Washington and their enablers in the academy are wildly wrong about how to boost growth. They think more government spending is a key to prosperity, but this blog already has revealed that the Great Depression was made worse because of bigger government. Experts have pointed out that the best way to boost growth is to get government out of the way, as happened in the early 1920s when President Harding allowed the economy to adjust and thus deserves credit for quickly ending a serious downturn. Another great example of the benefits of a laissez-faire approach took place after World War II. The Keynesians all though the Great Depression would resume as government spending was reduced after the war. But as Jason Taylor and Richard Vedder explain for Cato Policy Report, less government spending was exactly the right approach:

….the “Depression of 1946″ may be one of the most widely predicted events that never happened in American history. As the war was winding down, leading Keynesian economists of the day argued, as Alvin Hansen did, that “the government cannot just disband the Army, close down munitions factories, stop building ships, and remove all economic controls.” After all, the belief was that the only thing that finally ended the Great Depression of the 1930s was the dramatic increase in government involvement in the economy. In fact, Hansen’s advice went unheeded. Government canceled war contracts, and its spending fell from $84 billion in 1945 to under $30 billion in 1946. By 1947, the government was paying back its massive wartime debts by running a budget surplus of close to 6 percent of GDP. The military released around 10 million Americans back into civilian life. Most economic controls were lifted, and all were gone less than a year after V-J Day. In short, the economy underwent what the historian Jack Stokes Ballard refers to as the “shock of peace.” From the economy’s perspective, it was the “shock of de-stimulus.” …What happened? Labor markets adjusted quickly and efficiently once they were finally unfettered — neither the Hoover nor the Roosevelt administration gave labor markets a chance to adjust to economic shocks during the 1930s when dramatic labor market interventions (e.g., the National Industrial Recovery Act, the National Labor Relations Act, the Fair Labor Standards Act, among others) were pursued. Most economists today acknowledge that these interventionist polices extended the length and depth of the Great Depression. After the Second World War, unemployment rates, artificially low because of wartime conscription, rose a bit, but remained under 4.5 percent in the first three postwar years — below the long-run average rate of unemployment during the 20th century. …many who lost government-supported jobs in the military or in munitions plants found employment as civilian industries expanded production — in fact civilian employment grew, on net, by over 4 million between 1945 and 1947 when so many pundits were predicting economic Armageddon. Household consumption, business investment, and net exports all boomed as government spending receded. The postwar era provides a classic illustration of how government spending “crowds out” private sector spending and how the economy can thrive when the government’s shadow is dramatically reduced.

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A great column in the Wall Street Journal explains how FDR’s policies hurt the economy. That is true, but the really interesting part of the column for me is that it explains how Roosevelt (and then Truman) were convinced the economy would return to depression after World War II unless there was another giant Keynesian plan. Fortunately, Congress said no. This meant there was no repeat of the Hoover-Roosevelt mistakes of the 1930s and the economy was able to recover and enjoy strong growth:

FDR did not get us out of the Great Depression—not during the 1930s, and only in a limited sense during World War II. Let’s start with the New Deal. Its various alphabet-soup agencies—the WPA, AAA, NRA and even the TVA (Tennessee Valley Authority)—failed to create sustainable jobs. In May 1939, U.S. unemployment still exceeded 20%. European countries, according to a League of Nations survey, averaged only about 12% in 1938. The New Deal, by forcing taxes up and discouraging entrepreneurs from investing, probably did more harm than good. …His key advisers were frantic at the possibility of the Great Depression’s return when the war ended and the soldiers came home. The president believed a New Deal revival was the answer—and on Oct. 28, 1944, about six months before his death, he spelled out his vision for a postwar America. It included government-subsidized housing, federal involvement in health care, more TVA projects, and the “right to a useful and remunerative job” provided by the federal government if necessary. Roosevelt died before the war ended and before he could implement his New Deal revival. His successor, Harry Truman, in a 16,000 word message on Sept. 6, 1945, urged Congress to enact FDR’s ideas as the best way to achieve full employment after the war. Congress—both chambers with Democratic majorities—responded by just saying “no.” No to the whole New Deal revival: no federal program for health care, no full-employment act, only limited federal housing, and no increase in minimum wage or Social Security benefits. Instead, Congress reduced taxes. Income tax rates were cut across the board. …Corporate tax rates were trimmed and FDR’s “excess profits” tax was repealed, which meant that top marginal corporate tax rates effectively went to 38% from 90% after 1945. Georgia Sen. Walter George, chairman of the Senate Finance Committee, defended the Revenue Act of 1945 with arguments that today we would call “supply-side economics.” If the tax bill “has the effect which it is hoped it will have,” George said, “it will so stimulate the expansion of business as to bring in a greater total revenue.” He was prophetic. By the late 1940s, a revived economy was generating more annual federal revenue than the U.S. had received during the war years, when tax rates were higher. Price controls from the war were also eliminated by the end of 1946. …Congress substituted the tonic of freedom for FDR’s New Deal revival and the American economy recovered well. Unemployment, which had been in double digits throughout the 1930s, was only 3.9% in 1946 and, except for a couple of short recessions, remained in that range for the next decade.

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Art Laffer has a compelling column in the today’s Wall Street Journal discussing how higher tax rates under Presidents Hoover and Roosevelt played an important role in driving the economy into a ditch during the 1930s. The interesting question, of course, is the degree to which President Obama is going to repeat these mistakes. We already see that some of the mistakes that happened during the Great Depression are being replicated, including higher government spending (with a big help from Bush), more government regulation, and protectionism. The good news, so to speak, is that Obama is moving policy in the wrong direction in small steps, whereas Hoover and Roosevelt took giant leaps. So while it is likely that our long-term growth rate will be dampened, hopefully there will not be a lengthy period of economic stagnation:

While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy’s relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy’s relapse in 1937. In 1930-31, during the Hoover administration and in the midst of an economic collapse, there was a very slight increase in tax rates on personal income at both the lowest and highest brackets. The corporate tax rate was also slightly increased to 12% from 11%. But beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That’s not a misprint!) The corporate rate was raised to 13.75% from 12%. All sorts of Federal excise taxes too numerous to list were raised as well. The highest inheritance tax rate was also raised in 1932 to 45% from 20% and the gift tax was reinstituted with the highest rate set at 33.5%. But the tax hikes didn’t stop there. In 1934, during the Roosevelt administration, the highest estate tax rate was raised to 60% from 45% and raised again to 70% in 1935. The highest gift tax rate was raised to 45% in 1934 from 33.5% in 1933 and raised again to 52.5% in 1935. The highest corporate tax rate was raised to 15% in 1936 with a surtax on undistributed profits up to 27%. In 1936 the highest personal income tax rate was raised yet again to 79% from 63%—a stifling 216% increase in four years. Finally, in 1937 a 1% employer and a 1% employee tax was placed on all wages up to $3,000. …The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I’d give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s. Net legislated state-tax increases as a percentage of previous year tax receipts are at 3.1%, their highest level since 1991; the Bush tax cuts are set to expire in 2011; and additional taxes to pay for health-care and the proposed cap-and-trade scheme are on the horizon.

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