Thomas Sowell on The Great Depression and Economic Recovery

Sowell writes:

Guess who said the following: "We have tried spending money. We are spending more than we have ever spent before and it does not work." ...

It was Henry Morgenthau, Secretary of the Treasury under President Franklin D. Roosevelt and one of FDR's closest advisers.

He added, "after eight years of this Administration we have just as much unemployment as when we started. . . And an enormous debt to boot!"...

Far from pulling the country out of the Great Depression by following Keynesian policies, FDR created policies that prolonged the depression until it was more than twice as long as any other depression in American history. Moreover, Roosevelt's ad hoc improvisations followed nothing as coherent as Keynesian economics...

It is not a pretty story. But we need to understand it if we want to avoid the ugly consequences of very similar policies today.

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Unemployment: FDR v. Obama

In March 1933, when the Great Depression had driven the U.S. economy to rock bottom, the unemployment rate stood at 25 percent. One out of every four Americans who had had a job in 1929 was queuing in a bread line rather than working on an assembly line.

The unemployment rate remained at historically high levels throughout the following decade. Despite massive increases in federal spending under President Franklin D. Roosevelt's New Deal, 14 percent of the labor force still was unemployed in 1941...

Didn't the alphabet soup of work-relief programs the president subsequently launched - the Civilian Conservation Corps, the National Youth Administration, the Federal Emergency Relief Administration and especially the Works Progress Administration, to name just a few - create jobs for hundreds of thousands of unemployed Americans, providing them with sorely needed incomes without forcing them to suffer the stigmas of the dole?

The answer: The United States in the 1930s recognized that government-funded make-work jobs were not the same as real jobs...

The employment and unemployment statistics of the 1930s excluded people who would not be employed in the absence of public largesse.

People at that time recognized that someone who holds a job only because Congress has appropriated money for the position is not creating wealth but is merely the recipient of an income transfer. Those who at the time derided the WPA as "We Piddle Around" recognized the wasteful consequences of public profligacy.

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Did FDR End the Depression?

Burt Folsom says no:

'He got us out of the Great Depression." That's probably the most frequent comment made about President Franklin Roosevelt, who died 65 years ago today. Every Democratic president from Truman to Obama has believed it, and each has used FDR's New Deal as a model for expanding the government.

It's a myth. 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.

What about World War II? We need to understand that the near-full employment during the conflict was temporary. Ten million to 12 million soldiers overseas and another 10 million to 15 million people making tanks, bullets and war materiel do not a lasting recovery make. The country essentially traded temporary jobs for a skyrocketing national debt. Many of those jobs had little or no value after the war.

No one knew this more than FDR himself. 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...

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. FDR's top marginal rate, 94% on all income over $200,000, was cut to 86.45%. The lowest rate was cut to 19% from 23%, and with a change in the amount of income exempt from taxation an estimated 12 million Americans were eliminated from the tax rolls entirely...

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.

The Great Depression was over, no thanks to FDR. Yet the myth of his New Deal lives on. With the current effort by President Obama to emulate some of FDR's programs to get us out of the recent deep recession, this myth should be laid to rest.

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Crisis of 2008

People ask me if the current mess feels like 1929. But the right comparison is 1932, when Herbert Hoover was desperately trying anything, anything at all, to get the economy going. The stock market had crashed. The economy was starting to follow it down. So what did Hoover and his fellow policy makers do?...

Today, President George W. Bush plays the role of Hoover, the so-called free market ideologue who is trying anything to avert disaster. He signs a $700 billion bill putting Treasury in charge of buying troubled assets. A week later, the money is used to partially nationalize the banks. Some companies, like Bear Stearns, are bailed out. Others, like Lehman Brothers, are not. Some companies are sold. Some are allowed to fail. There is no plan, no rules, nothing to count on...

A recession is coming (or has already arrived) no matter what happens in Washington. The question is whether the attempt to forestall it is going to make it worse and turn it into another Great Depression...

Unfortunately, there is no consensus about a preferable alternative. The economists are almost as clueless as the politicians. At such a time, inaction may be the wisest course of action.

read the WSJ article

FDR Prolonged the Depression

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years...

"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," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."

read the article

Book Review: The Forgotten Man

A Review of The Forgotten Man: A New History of the Great Depression by Amity Shlaes
reviewed by George Leef

“The Depression hit the country because capitalism has a tendency to sometimes collapse, but luckily Roosevelt was elected and his brilliant New Deal policies got the economy moving again.”

That view is not just mistaken – it’s a key component of the statist mythology in America…

With her new book, The Forgotten Man, Amity Shlaes has dealt a shattering blow to that mythology. Her lucid and highly readable book leaves the reader with the understanding that capitalism got a bum rap in the 1930s and that the New Deal, far from being brilliant, was a nightmare…

Three years of interventionist policies under Hoover – Shlaes makes it clear that Hoover was anything but the dogmatic laissez-faire advocate he is usually said to have been – and five more under Roosevelt had turned America into a country where a nearly omnipotent government was everywhere, controlled by people who admired Stalin and Mussolini as models of forward-looking leaders…

As an aside, one can’t help wondering what the United States would be like today if, instead of turning to coercive, statist “remedies” for the Depression, Americans had drawn the correct conclusions and turned away from the bad policies they already had, especially high tariffs and central banking. America would be a much freer and more prosperous country today but for the intellectual blunders of the 1930s…

Roosevelt and his subordinates tinkered and tampered constantly with the liberty and property of Americans. The federal budget grew and grew and regulations on business mushroomed, but the economy remained in the doldrums. It never dawned on the New Dealers that coercion is counterproductive…

read the full review

A must read for those who think FDR "saved capitalism" and ended the Great Depression.