How FDR's New Deal Harmed Millions of Poor People

http://www.cato.org/dailys/12-29-03.html ^

[Stew Padasso]

December 29, 2003

How FDR's New Deal Harmed Millions of Poor People by By Jim Powell

Jim Powell, senior fellow at the Cato Institute, is author of FDR's Folly, How Roosevelt and His New Deal Prolonged the Great Depression (Crown Forum, 2003).

Democratic presidential candidates as well as some conservative intellectuals, are suggesting that Franklin Delano Roosevelt's New Deal is a good model for government policy today.

Mounting evidence, however, makes clear that poor people were principal victims of the New Deal. The evidence has been developed by dozens of economists -- including two Nobel Prize winners -- at Brown, Columbia, Princeton, Johns Hopkins, the University of California (Berkeley) and University of Chicago, among other universities.

New Deal programs were financed by tripling federal taxes from $1.6 billion in 1933 to $5.3 billion in 1940. Excise taxes, personal income taxes, inheritance taxes, corporate income taxes, holding company taxes and so-called "excess profits" taxes all went up.

The most important source of New Deal revenue were excise taxes levied on alcoholic beverages, cigarettes, matches, candy, chewing gum, margarine, fruit juice, soft drinks, cars, tires (including tires on wheelchairs), telephone calls, movie tickets, playing cards, electricity, radios -- these and many other everyday things were subject to New Deal excise taxes, which meant that the New Deal was substantially financed by the middle class and poor people. Yes, to hear FDR's "Fireside Chats," one had to pay FDR excise taxes for a radio and electricity! A Treasury Department report acknowledged that excise taxes "often fell disproportionately on the less affluent."

Until 1937, New Deal revenue from excise taxes exceeded the combined revenue from both personal income taxes and corporate income taxes. It wasn't until 1942, in the midst of World War II, that income taxes exceeded excise taxes for the first time under FDR. Consumers had less money to spend, and employers had less money for growth and jobs.

New Deal taxes were major job destroyers during the 1930s, prolonging unemployment that averaged 17%. Higher business taxes meant that employers had less money for growth and jobs. Social Security excise taxes on payrolls made it more expensive for employers to hire people, which discouraged hiring.

Other New Deal programs destroyed jobs, too. For example, the National Industrial Recovery Act (1933) cut back production and forced wages above market levels, making it more expensive for employers to hire people - blacks alone were estimated to have lost some 500,000 jobs because of the National Industrial Recovery Act. The Agricultural Adjustment Act (1933) cut back farm production and devastated black tenant farmers who needed work. The National Labor Relations Act (1935) gave unions monopoly bargaining power in workplaces and led to violent strikes and compulsory unionization of mass production industries. Unions secured above-market wages, triggering big layoffs and helping to usher in the depression of 1938.

What about the good supposedly done by New Deal spending programs? These didn't increase the number of jobs in the economy, because the money spent on New Deal projects came from taxpayers who consequently had less money to spend on food, coats, cars, books and other things that would have stimulated the economy. This is a classic case of the seen versus the unseen -- we can see the jobs created by New Deal spending, but we cannot see jobs destroyed by New Deal taxing.

For defenders of the New Deal, perhaps the most embarrassing revelation about New Deal spending programs is they channeled money AWAY from the South, the poorest region in the United States. The largest share of New Deal spending and loan programs went to political "swing" states in the West and East - where incomes were at least 60% higher than in the South. As an incumbent, FDR didn't see any point giving much money to the South where voters were already overwhelmingly on his side.

Americans needed bargains, but FDR hammered consumers -- and millions had little money. His National Industrial Recovery Act forced consumers to pay above-market prices for goods and services, and the Agricultural Adjustment Act forced Americans to pay more for food. Moreover, FDR banned discounting by signing the Anti-Chain Store Act (1936) and the Retail Price Maintenance Act (1937).

Poor people suffered from other high-minded New Deal policies like the Tennessee Valley Authority monopoly. Its dams flooded an estimated 750,000 acres, an area about the size of Rhode Island, and TVA agents dispossessed thousands of people. Poor black sharecroppers, who didn't own property, got no compensation.

FDR might not have intended to harm millions of poor people, but that's what happened. We should evaluate government policies according to their actual consequences, not their good intentions.

[Ff--150]

ping!

[inquest]

Great post, thanks. I would also point out FDR's constant meddling in the stock market, which undoubtedly made investors very nervous, not knowing what he was going to pull out of his hat next.

[Grampa Dave]

Thanks for posting this.

[Grampa Dave]

Conrad Black must be doubly depressed with this coming out re his adored and loved FDR.

[Maria S]

Boy! This would infuriate my yellow-dog democrat elder relatives...they are convinced FDR could walk on water.

[Blood of Tyrants]

New Deal taxes were major job destroyers during the 1930s, prolonging unemployment that averaged 17%. Higher business taxes meant that employers had less money for growth and jobs. Social Security excise taxes on payrolls made it more expensive for employers to hire people, which discouraged hiring.

Thanks for the post. I am often needing ammo to shoot at the Rat FDR worhsippers.

[Blood of Tyrants]

Ha! I can top that. Some people I know are convinced that FDR could urinate lemonade, would drink it if offered, and then deny that it wasn't lemonade!

[elbucko]

Democratic presidential candidates as well as some conservative intellectuals, are suggesting that Franklin Delano Roosevelt's New Deal is a good model for government policy today.

The erroneous notion that the New Deal was good for America has become an urban legend. It will take a hundred years before enough study and facts emerge to even begin to dispel the myth of the New Deal and give it its rightful description of a "Raw Deal". Much of it perpetrated on Americans by the communists/socialists in FDR's administration.

[elbucko]

Well said.

[tacticalogic]

ping.

[Pagey]

This is a classic case of the seen versus the unseen -- we can see the jobs created by New Deal spending, but we cannot see jobs destroyed by New Deal taxing.

I just love reading and saving articles like this. You cannot tax the people into prosperity. Our elected officials refuse to acknowledge this fact. Billy Clintoon is 100% disingenuous when he says his tax increase helped the soaring economy when he was in office. It's disgusting to note, that with all those taxes coming in during those 8 years, the skunk gutted the military at the same time and did it with a smile.

[genghis]

I was looking for this book for 20 years. The first 8 years of his administration unemployment never dropped below 14%. This was not a "natural" part of the business cycle, but solely the result of insane policies developed by fdr. The book is a wonderful compilation of those policies. Why libs admire him is beyond my conprehension.

[seowulf]

FDR's policies weren't much different from Musslolini's. FDR was a fascist, i.e. centralized government control of private enterprise. My favorite anecdote is about a chicken farmer who went to jail for picking out the best chickens from several different coops to sell to his customers. This violated one of those famous fascist Acts of FDR's.

[Lizavetta]

This is a classic case of the seen versus the unseen -- we can see the jobs created by New Deal spending, but we cannot see jobs destroyed by New Deal taxing.

Exactly.....the unseen consequences described very well by Hazlitt. He uses the example of the broken window where people will say that it will stimulate business because a glassmaker will have some work to do. What you don't see is the business suit, food, or other items the window owner will now NOT BUY in order to pay for the window repair.

There is no increase in business....the money just got spent in different way.

[cwb]

Ahh, the "Raw Deal"...as many people called it. There's also a great research paper done by the Reserve Bank of Minnesota, that comes to the same conclusion; that FDR's New Deal postponed the recovery...and actually extended the misery.

What's amazing about the New Deal is how many progressives give credit to FDR for his foresight in creating this huge central government, when in reallity, FDR was doing nothing more than copying what was already going on in socialist Europe at that time. FDR's administration (Brain Trust) was filled with utopian social-ites, such as his chief economic advisor (Rexford Tugwell) who openly praised communism for being "able to produce goods in greater quantities than capitalism, so as to spread such prosperity as there is over wider areas of the population." When liberals talk about the "tripling" of the deficit under Reagan, they should immediately be reminded of FDR's administration, whose New Deals created far more debt. When FDR entered the WH, the deficit was around $2.2 billion (1933); within 10 years that deficit would increase to $57.4 billion. While WWII can take some responsibility for these numbers, this deficit was substantial even before the war began.

The fact is, FDR's New Deals did nothing more than control and restrict the competitive sector while the government practically subsidized the entire labor force through "work programs" and HUGE marginal tax rates. Such a threat to free enterprise where these programs that even reknowned Democrats of the day objected to them. William Green, President of the AFL, declared that FDR's Civilian Corps "smacks of Facsism, of Hitlerism, of a form of Sovietism." Grace Abbott to the DNC Labor leader, John L. Lewis told the NAACP in 1940 that, "Mr. Roosevelt made depression and unemployment a chronic fact in American life." Even Gottfried Harberler, Professor of Economics at Harvard and President of the American Economic Association called the failure of the New Deal a policy disaster "unparalleled in other countries."

It was Churchill who summed it up nicley in 1937 when he said, "the Washington administration has waged so ruthless a war on private enterprise that the US is actually leading the world back into the trough of depression." And Churchill was right as by 1938 the country was experiencing a recession within a depression with unemployment climbing back up to 20%. If FDR's New Deal was responsible for ending the Depression, it sure wasn't working...and even by the end of the decade, with the war ecomomy reving up, unemployment was still as high as 17.2%. Compare any of the economic indicators from when FDR first took office to the end of the decade and you will see that the New Deal not only didn't help the economy, it stalled it, creating the longest depression in this country's history.

[what's up]

Interesting synopsis. However, didn't Churchill go along with socialistic programs in England after WWII? Social security comes to mind.

I may be wrong...seems to me I heard it somewhere?

[tacticalogic]

Commerce Clause bump.

[cwb]

I'm not too familiar with what Churchill did in England after the war with regards to SS. I think his opposition at this time was with what FDR was doing with the NRA, AAA and the every other alphabet program that was intent on controlling productivity and wages. They had been fighting this depression for years now, and FDR just continued to go in the same direction...even while at odds with the USSC. By the time Churchill made this comment, this new recession was just starting (Spring 1937) and in full swing by October.

[kylaka]

It is an excellent book that I'd recommend to anyone. Unfortunately, those who need to read it won't. One thing the author does not cover, is what kicked off the recession that led to the Great Depression, because it happened under Hoover's watch. They raised the top income tax bracket from 25% to 65% in one fell swoop. You won't learn any of this in gradeschool folks... college either for that matter.