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Principled Ideas from the Centennial Institute Volume 4, Number 9 September 2012

Publisher, William L. Armstrong Editor, John Andrews

OBAMA FOLLOWS FDR DOWN THE PATH OF ECONOMIC STAGNATION


By Burton Folsom, Jr.
How effective were Franklin D. Roosevelts New Deal programs of the 1930s? Did they help end the Great Depression? Conventional wisdom says yes. But Henry Morgenthau, FDRs personal friend and secretary of treasury, didnt think so at all.

buy refrigerators, new tires, telephones, or other products. What was gained in jobs on the WPA was business lost to General Motors, Firestone, or AT&T. The negative effects of federal spending went further, however. The higher tax rates on income and corporations stifled investment and stopped new industries from forming. The top income tax rate in the United States was 25% during the late 1920s, went up to 63% in 1932, 79% in 1935 (the year the WPA became law), and 90% later.

According to economist Henry Hazlitt, a contemporary of FDR, when personal incomes are taxed 50, 60, 75, and 90 percent, entrepreneurs cease to produce. People begin to ask themselves why they should work six, When unemployment hit 20.7% in April Roosevelts New Deal eight or ten months of the entire year for 1939toward the end of Roosevelts made things worse. the government, and only six, four or two months for themselves and their families. second termMorgenthau sadly Hazlitt concluded, The government spenders create the concluded: We have tried spending money. We are very problem of unemployment that they profess to solve. 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! Partisan Political Bonanza But there is even more damage that ripples across the economy from federal spending. Once money is centralized in Washington to be spent by politicians, that money quickly becomes politicizedit often goes to support partisan causes. For example, V. G. Coplen, a Democratic county chairman in Indiana, said, What I think will help is to change the WPA management from top to bottom. Put men in there who are...in favor of using these Democratic projects to make votes for the Democratic Party. James Doherty, a New Hampshire Democrat, was equally blunt: It is my personal belief that to the victor belongs the spoils and that Democrats should be holding most of these [WPA] positions so that we might strengthen our fences for the 1940 election. On the previous presidential election, Senator Carter Glass (D-VA) observed, The
Burton Folsom, Jr. (Ph.D., University of Pittsburgh) is the Charles F. Kline Professor of History at Hillsdale College. His books include Entrepreneurs vs. the State, New Deal or Raw Deal, and FDR Goes to War. This essay is based on his lecture at Colorado Christian University on April 13, 2012. Centennial Institute sponsors research, events, and publications to enhance public understanding of the most important issues facing our state and nation. By proclaiming Truth, we aim to foster faith, family, and freedom, teach citizenship, and renew the spirit of 1776.

The New Deal gives us the first taste in United States history of using massive federal spending to create jobs. And yet we had double-digit unemployment for more than eight years during the 1930s. Even relative to other nations, the United States recovery was a disaster. Government Cant Create Jobs According to a League of Nations survey, the United States had 19.8% unemployment in 1938, but the average of sixteen nations surveyed was 11.4%. The New Deal had failed. Why? Because the government cant actually create jobs. It can only transfer jobs from the private to public sectors. The WPA example may help explain why. In 1935, FDR was able to secure $4.8 billion in federal cash for his Works Progress Administration (WPA). The WPA would hire people to pave roads, build bridges, and improve Americas infrastructure. Millions would be employed, and FDR believed that would cut unemployment. The problem is that the $4.8 billion used to fund the WPA had to be taken from taxpayers. And when that money was taken from taxpayers, it could no longer be used to

federal spending and cut the high tax rates on corporations and personal income. With the top corporate tax rate chopped from 90 to 38%, Senator Walter George (D-GA), chairman of the Senate Finance Committee, expected it will...stimulate the expansion of business. Senator Albert Hawkes (R-NJ) further predicted such a cut may raise more revenue for the United States than would be raised if [high rates] were retained. As Hawkes concluded, you cannot get a golden egg out of a dead goose. The Revenue Act of 1945 passed the House and Senate in October 1945. J.J. Nance, vice president of Zenith Radio, was excited: We must create and sustain a desire for goods to steadily increase consumption. As business expanded, the stock market surged almost 20% in six months. By the end of 1946, unemployment was 3.9% and the United States had begun to have annual budget surpluses again. Entrepreneurs in post-war America were responding to freedomdeveloping all kinds of innovations from television to copy machines to motel chains. The Great Depression was over at last. Neither Party Learned the Lesson

1936 elections would have been much closer had my party not had a four billion, eight hundred million dollar relief bill as campaign fodder. Even welfare payments became politicized. In the Emergency Relief and Construction Act of 1932, which provided $300 million in federal money, Illinois, a key swing state, requested and received $55,443,721more than New York, California, and Texas combined. Massachusetts, whose Democratic governor, Joseph Ely, disapproved of FDRs spending, received zero federal funds for welfare. That meant that Massachusetts had to feed and clothe its own unemployed workersand contribute federal aid for Illinois as well. Whatever the justification for relief, Governor Ely said, the fact remains that the way in which it has been used makes it the greatest political asset on the practical side of party politics ever held by any administration. Freedom Restored Prosperity Politics aside, FDRs New Deal did not cure unemployment, and created some bad precedents along the way. What finally lifted the U.S. out of the Great Depression was not the New Deal, or even World War IIa temporary and destructive eventbut rather the freeing up of the American economy after World War II. After Roosevelt died, President Harry Truman permitted Congress to slash

But the battle of ideas had just begun. Most historians, and many politicians, learned the wrong lessons from the failure of the New Deal. They still believed that government intervention helped rather than hindered economic recovery. The writers of textbooks in You get no gold history and economics perpetuated this from a dead goose. myth. Thus, when the U.S. economy had problems in the 1960s and 1970s, Presidents Johnson, Nixon, Ford, and Carter compounded their difficulties by raising taxes and increasing the role of the federal government in economic policythrough price controls, special tariffs, and new taxes on oil. From 1965 to 1978, according to economist James Gwartney, taxes as a share of the taxpayers adjusted gross income increased from 19.4% to 29.5%. The results came to a head under President Carter: inflation hit 14%, unemployment 7%, and mortgage interest rates 21.5%. Much of Carters problem was that he looked to the New Deal for inspiration. When unemployment soared, he promoted the Humphrey-Hawkins billa modified WPAto put government in the job-creation business.

CENTENNIAL REVIEW is published monthly by the Centennial Institute at Colorado Christian University. The authors views are not necessarily those of CCU. Manager, Jeannie Edwards. Designer, Danielle Hull. Illustrator, Benjamin Hummel. Subscriptions free upon request. Write to: Centennial Institute, 8787 W. Alameda Ave., Lakewood, CO 80226. Call 800.44.FAITH. Or visit us online at www.CentennialCCU.org. Please join the Centennial Institute today. As a Centennial donor, you can help us restore Americas moral core and prepare tomorrows leaders. Your gift is tax-deductible. Please use the envelope provided. Thank you for your support. - John Andrews, Director
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When OPEC jacked up the price of oil, Carter followed FDRs approach during World War II: put price controls on oil and slap an excess-profits tax on U.S. oil companies. As a result, oil output in the U.S. dropped, imports increased, and the price of oil tended to remain high. Ronald Reagan defeated President Carter in 1980 in large part because Reagan argued that freedom, not more government, was the way out of our economic mess. Reagans first executive order was to lift the price controls on oil. Next came serious tax cuts on income, corporations, and capital gains. A Quarter-Century of Growth Sometimes the politics of freedom in those years required two steps forward and one step backward. But the direction was clear. In two years, inflation plummeted from 14.5 to 4%. Economic growth, which had been stagnant for so much of the 1970s, expanded by 3.5% in 1983, and a rollicking 6.8% in 1984. Reagans liberation of the economy from high taxes and price controls began a quarter-century of economic growth. In the 1990s, for example, with prodding from a Republican Congress, President Clinton cut the capital gains tax and signed a significant welfare reform bill. President George W. Bush further slashed the capital gains tax and also cut the marginal income tax rate. From 2003, when the tax cuts took effect, until 2007, the U.S. economy expanded by eight million jobs. The amount of income tax paid by millionaires from 2003 to 2006 more than doubled from $132 billion to $273 billion. Just as happened after World War II, cutting tax rates on the highest incomes was a way to create jobs and raise revenue for the federal government. Some of this is common sense. When Microsoft succeeded, for example, Bill Gates created an estimated 10,000 new millionaires who either worked for him or bought the companys stock. The rising tide lifted many boats. The quarter-century of almost continuous growth in the United States came to an end with the Great Recession in 2007. In large part, government policies launched this economic disaster. The housing collapse, for example, was triggered by the Community Reinvestment Act, which forced banks to make low-interest loans to unqualified borrowers. When the Federal Reserve dropped interest rates to nearly zero, that gave many people incentives to buy homes they couldnt afford. With so many shaky mortgages, many banks began to topple by 2008.

Voi ces of CCU

DEBUNKING THE FALLACY OF ENTITLEMENTS by Bill Mesa


Entitlement thinking isnt acceptable, nor is conventional wisdom reliable. We impress this on CCU students in every class, citing thinkers from Thucydides in ancient times to Burton Folsom today. We push our students to take ownership of their education rather than assume they are entitled to As and a diploma. They get to put theory into action with an actual business or non-profit organization. As the student actively engages information and people, he or she learns by doing. Experimenting with a variety of solutions requires students to own what they develop. Ambiguity abounds when dealing with a dynamic organization competitively engaged in a marketand nothing cures entitlement thinking like having to navigate through ambiguity to achieve results. CCU business professors act as personal trainers, coaching students to question conventional wisdom and discover wisdom that reflects reality. By gaining insight into the nature of markets, organizations, and the appropriate role of government, the student comes to see the fallacy of entitlements. A Colorado Christian University education demystifies the notion that governments can create jobs and wealth through excessive taxation and debt. Perhaps the federal government would be interested in having our students consult for them on how to run their organization.
Bill Mesa is assistant professor of accounting and management in the School of Business and Leadership at Colorado Christian University. He holds a Ph.D. from Colorado Centennial Technical University, a masters from New Mexico Institute State, and is a CPA with many years experience Colorado Christian University in Fortune 500 corporations.

Reagan finally righted the ship.

Bipartisan Blunders Both Presidents Bush and Obama looked to the New Deal for guidance. First, Presidents Bush and Obamalike FDR with his WPAsupported stimulus packages in an effort to plow federal funds into the economy. Obamas stimulus package was larger than Bushs, but in both cases unemployment, contrary to their promises, began rising, not falling.
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Centennial Review
September 2012

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Obama Follows FDR Down the Path of Economic Stagnation


By Burton Folsom, Jr.

Repeating the debacle of Franklin Roosevelts New Dealan economic failure that made political hayBarack Obamas stimulus policies and bailouts are letting Americans down. Both were Democrats, but the GOP also often gets it wrong. Reagan got it right.

Second, Bush and Obama both tried federal bailouts. FDR (and Herbert Hoover) had used the Reconstruction Finance Corporation (RFC) as their bailout device, and they lost billions of dollars very quickly.

arguing they should pay their fair share. His critics point out that the top 1% of taxpayers currently pay almost 40% of all revenue from the income tax; the bottom 50%, by contrast, pay less than 2% of all income tax revenue.

President Obama followed FDRs lead in using federal Talking about tax policy during the 2008 campaign, Charlie intervention to secure partisan political goals. In the bailout Gibson of ABC News said to Mr. Obama: Bill Clinton of General Motors, for example, Obama maneuvered signed legislation that dropped the capital gains tax to 20 to make sure the United Auto Workers percent...and George Bush has taken received cash before the bondholders. Solyndra of today is it down to 15%. And in each instance, His Cash for Clunkers program also like WPA in 1930s. when the rate dropped, revenues from helped his union buddies in the auto the tax increased; the government took industry. Furthermore, the Obama stimulus package was in more money. loaded with aid to construction unions to build highways Obama responded, Well, Charlie, what Ive said is that I and infrastructure. would look at raising the capital gains tax for purposes of Union leaders had a revolving door to the White House, and even tried to get President Obama to help stop Boeing from moving business from Washington to the rightto-work state of South Carolina. The politics spread to corporate subsidies for the right kinds of corporations. Solyndra, for example, which made solar panels, received more than $500 million in federal aid, but went broke from inefficiencythough not before making financial contributions to the Democratic party. Solyndra was, in a sense, like the old WPA of the 1930s where the WPA director of New Jersey answered his phone, Democratic Headquarters. As for economic results, unemployment under President Obama increased from less than 7% to almost 10% the national debt skyrocketed from about $10 trillion to $15 trillion, and American homeowners lost almost one-third of the value of their homes. Whats Fair about Confiscatory Taxation? President Obama, like FDR, is now running for re-election not on his record but on class warfare. From 1932, the year FDR was elected, to 1945, when FDR died, the top federal income tax rate increased from 25% to 94%. President Obama is also trying to hike the tax rates of the rich,
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fairness.

With ideologues of the left such as FDR, the issue is their sense of fairness, dictating that those most well-off need to pay more to support more government programs. To practical men of both parties such as Senators George and Hawkes, President Reagan, and even Presidents Clinton and Bush, the issue was increasing freedom if that increase helped create jobs and prosperity. Will the views of Presidents Roosevelt and Obama prevail in 2012?

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