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Wednesday, November 26, 2008

Examining FDR's Economic Record

To really examine FDR's economic record it would take much more space than merely a blog post, however a full examination of his economic record is critical now. That's because many pundits are pushing President Elect Obama to create a New, New Deal. Those pushing Obama in such a direction work under the assumption that FDR's New Deal was a shining beacon of success. FDR has properly been lionized as a President however with this lionization there comes a rather rose colored glasses look at his entire Presidency. In my opinion, FDR deserves a special place in our pantheon of Presidents, and that's because he lead the U.S. through WWII. Any wartime President will always be defined by their success or failure in war. I doubt anyone can tell me any part of Lincoln's record beside that of successfully prosecuting the Civil War. The Great Society has little place in LBJ's legacy because of the Vietnam War. The same is true of FDR.

Still, I firmly believe that FDR is given economic credit where frankly he doesn't deserve it. As such, FDR's policy of massive government spending, massive government expansion, and massive government intervention are all given historical precedent as being successful. I believe a firm examination of his economic record reveals something a lot more complicated.

First, FDR was given quite the economic malaise to begin his Presidency. He walked in with unemployment at 25%. It's important to examine his record in the context of the most extreme and difficult circumstances. It isn't a minor point though that unemployment was still double digits as we entered WWII . By any economic measure, if the economy is still in malaise eight years after taking over, it is not unfair to say that the President's economic platform was a failure. Reagan was given only a smaller mess when he entered office. He faced stagflation, and yet only three years later the economy was booming. FDR shrewdly continued to blame Hoover into 1940 for the continued high unemployment but history should not be so kind.
Clearly, as you can see from this chart, FDR certainly presided over an expansion of our GDP. Two things need to be kept in mind. First, our economy had been so crushed that it really had nowhere to go but up. Once, he stopped the proverbial bleedin with the 100 days and begin unadulterated spending, the economy was bound to start expanding. Second, I don't think anyone doubts that massive new government spending will expand the economy.
The question is at what price will that expansion come. The reason that FDR's economic expansion was largely a "jobless recovery" is in my opinion two fold. First, when it is government "creating the jobs", that creation largely doesn't spill over into the private sector. Second, he combined this massive new government spending with the introduction of several new taxes. The most corrosive was the introduction of the payroll tax, now known as Social Security. Beyond this, FDR raised the inheritance tax on more than occasion throughout his first term. Because FDR has been so lionized, most people never once point out the futility of these actions and how the stunted job creation. As such, we have a President that literally promised to raise some of the very same taxes in a similar economic donwturn and a country that bought this hook, line and sinker, even though history clearly shows that such moves stunted job growth.
What's rarely discussed about FDR's record is the long term corrosive effects of his policies on future generations. It was FDR after all that first introduced what I refer to as the Ponzi Scheme known as Social Security. We can all thank FDR for a program that takes an extra 7.5% of our incomes (up to $102,000), and will likely be bankrupt before most young people get a chance to enjoy its benefits. Yet, FDR also was responsible for the creation of Fannie Mae. FDR saw home ownership as far too vital for the free market so he created Fannie Mae to securitize loans. By doing so, he created a mortgage market that became monopolized. A lot of the current mortgage problems can be traced back to the structure that FDR created. He also created the Federal Farm Board. This was then a roughly $60 million program that would buy up crops from struggling farmers. The program has grown to north of $100 billion and continues to prop up failing farmers today. In fact, it was FDR that first set in motion the monster of ever increasing government.
So, now we must all ask some very important questions. Is it really such a good idea to allow our government to spend us out of a recession? Is allowing the government mass expansion the sort of thing that will do good or harm in the long run? Is raising taxes on the very rich really the right thing to do in an economic downturn? It is all of these quesitons that are largely overlooked because FDR has been so lionized. His economic record should be examined much more closely or we will face the fate of its second coming.


Anonymous said...

FDR was the architect of the Great Depression. He was absolutely clueless in the area of economics and he is the reason that a correction, or slight downturn in the economy was prolonged and made into a depression.

Adolf Hitler solved the depression. Roosevelt was saved by the actions of a madman. His kool-aid drinkers have lionized him for 'curing' the depression... one that lasted for the duration of his inept Presidency.

mike volpe said...

Let's set the record straight here. First, FDR came into office with 25% unemployment. He inherited a Depression. The correction turned into a depression because Hoover raised taxes and Smoot/Hawley cut off free trade, both Republican policies.

I agree that FDR's policies prolonged the Depression far longer than it needed to be. That said, he wasn't inept. He lead America through WWII. He alligned with Stalin against Hitler. That was one of the greatest foreign policy coups of all time.

Anonymous said...

The common consensus is FDR brought the U.S. out of the great depression. He is widely regarded as one of the great U.S. presidents. It is a vindication of Keynesianism economics.

Your interpretation is nothing but conservative revisionism.

The low taxes for the rich economic strategy has been in place by Bush for the last 8 years. Tell me, how is the economy dong right now???

Your approach doesn't work for a number of reasons. Essentially the wealth doesn't "trickle-down". Companies outsource labor and invest overseas. The rich get richer, the middle class shrinks, and the poor get poorer.

This is the legacy of supply-side economics under Bush. A different approach is now needed.

[From another blog]

The economy has just about come to a standstill – not so much because credit markets are clogged as because there’s not enough demand in the economy to keep it going. Consumer spending has fallen off a cliff. Investment is drying up. And exports are dropping because the recession has now spread around the world.

So are we about to return to Keynesianism? Hopefully. Government is the spender of last resort, which means the new Obama administration should probably be considering a stimulus package in the range of $600 billion, roughly 4 percent of national product -- focused on building and repairing the nation’s crumbling infrastructure, providing help to states to maintain services, and investing in new green technologies in order to wean the nation off oil.

But between now and late January, when the stimulus package will be voted on, we're likely to be treated to a great debate over the wisdom of Keynesianism. Fiscal hawks will claim government is already spending way too much. Even without the stimulus package, next year's budget deficit is likely to be in the range of $1.5 trillion, considering the shrinking economy and what’s being spent bailing out Wall Street. The hawks also worry that post-war baby boomers are only a few years away from retirement, meaning that the costs of Social Security and Medicare will balloon.

What the hawks don’t get is what John Maynard Keynes understood: when the economy has as much underutilized capacity as we have now, and are likely to have more of in 2009 and 2010 (in all likelihood, over 8 percent of our workforce unemployed, 13 percent underemployed, millions of houses empty, factories idled, and office space unused), government spending that pushes the economy to fuller capacity will of itself shrink future deficits.

Conservative supply-siders, meanwhile, will call for income-tax cuts rather than government spending, claiming that people with more money in their pockets will get the economy moving again more readily than can government. They're wrong, too. Income-tax cuts go mainly to upper-income people, and they tend to save rather than spend.

Even if a rebate could be fashioned for the middle class, it wouldn't do much good because, as we saw from the last set of rebate checks, people tend to use extra cash to pay off debts rather than buy goods and services. Besides, individual purchases wouldn't generate nearly as many American jobs as government spending on infrastructure, social services, and green technologies, because so much of we as individuals buy comes from abroad.

So the government has to spend big time. The real challenge will be for government to spend it wisely -- avoiding special-interest pleadings and pork projects such as bridges to nowhere. We’ll need a true capital budget that lays out the nation’s priorities rather than the priorities of powerful Washington lobbies. How exactly to achieve this? That's the debate we should be having between now and January 20 or 21st.

mike volpe said...

First of all, low taxes for the wealthy have nothing to do with the current crisis, and they got us out of what could have and should have been a much longer recession at the beginning of his term.

Second of all, whatever he is or isn't credited for, it is largely unearned regarding the economy. He has been lionized but as far as his economic performance it is largely undeserved. We were still in the Depression when WWII hit, so what exactly is he getting credit for.