Tuesday, June 8, 2010

Episode I: The FDR Menace

Pictured above: Darth Ru Sa Velt

From classrooms to newsrooms, the popular narrative of the Franklin Delano Roosevelt presidency is one in which FDR energetically pulled the United States out of the Great Depression with the bold implementation of reform and recovery measures. Implied in this narrative is that the long economic depression continued in spite of his administration's wise reform and recovery measures. Undoubtedly the intentions of the intelligent, inspired men and women of his administration were to foment economic recover, however few Americans seriously explore what the real economic consequences of his policies were, instead choosing to focus the oratory and inspirational power that Roosevelt held for countless Americans.

In the book FDR's Folly How Roosevelt And His New Deal Prolonged The Great Depression, Jim Powell presents a clear and compelling argument that many of FDR's policies and programs may have actually extended the duration and deepened the severity of the Great Depression. Not only were the benefits of these policies highly questionable, but at times they posed a great cost in terms of individual liberty. On more than one occasion, American citizens were fined and imprisoned for charging less than what the government price control boards mandated. And perhaps even more troubling, Mr. Roosevelt's showed an utter disregard for the constitutional safeguards put in place to limit the power of the executive via his court packing scheme.

While reading this work, I was struck by the many similarities between Obama's and FDR's vision of economics, recovery and governance. Because of these similarities and because he laid the groundwork for out troubling economic and political trajectory, I have dubbed his presidency Episode I: THE FDR Menance. What is most troubling about the popular narratives of the FDR Administration is that they have led too many of his contemporaries, including Obama, to pursue the same flawed approaches to economic reform and recovery.

Much like Obama FDR greatly expanded government spending; between 1933 to 1940, he doubled it from $4.5 billion to $9.4 billion. Even before the military build up began, spending soared across the board, mainly on public work's programs. Even FDR's faithful Secretary of Treasury, Henry Morgenthau was forced to admit that a vast expansion in public works and government spending did not ease unemployment:

"We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. 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."

The fundamental problem was that each dime spent by the federal government had to come from the private sector in the form of higher taxes. Between 1933 to 1940, federal income taxes more than tripled from $1.6 billion to $5.3 billion. This was most felt by the wealthy, whose taxation rate rose up to 75% in 1935. In addition, taxes increased on a multitude of goods and services that were primarily consumed by poor and middle class Americans. The predictable effect of this was a sharp decrease in business investment, as well as general consumption.
The increased fiscal burden on the private sector lowered their capacity to create new jobs or even sustain already existing employment. So, while public works certainly created government jobs, they ultimately resulted in a net loss of employment.

Many of the key figures in the FDR Administration believed that excessive competition, low prices and low wages had helped bring about the Great Depression. Accordingly, the National Recovery Act empowered labor unions to draft industry wide codes to raise wages above market rates. In addition, the cost of labor was raised by the imposition of social security taxes on employers. While these policies may sound positive to the layman, any economist will tell you that by raising the cost of a good or service you will lower the demand for it. In other words, by forcing wages up during a severe economic downturn, the FDR Administration exacerbated the already high level of unemployment. This was accompanied by a sharp spike in then number of strikes and violent labor clashes, which further discouraged investment that could have created new jobs. Powell also noted that since most unions excluded African-Americans, the government mandated expansion of unionization locked many African-Americans out of the labor market.

One very important, but little discussed aspect of the NRA was the fact that trade organizations colluded with the government to draft a multitude of industry wide codes. And not surprisingly these 550 new codes, 200 supplementary regulations and 11,000 administrative orders largely benefited well established business owners by limiting the entry of new companies into the market place. These codes mandated virtually every aspect of every industry, including outright price controls. One of the most shocking examples was seen in April of 1934 when 49 year old immigrant Jacob Maged of Jersey City, NJ was jailed for three months and fined for charging $0.35 to press a suit, rather than the $0.40 mandated by the NRA dry cleaning codes. And in 1934 a Rochester, NY grocer was convicted of selling two bottles of milk for less than the $0.09 cents per quart ordered by the Milk Control Board. Clearly, preventing prices from falling to market rates were not in the interests of the general public, depressed demand and impeded a general economic recovery. Thankfully, the NRA was struck down as unconstitutional in 1935 by the Supreme Court, but similar policies reemerged in different forms throughout the FDR Administration.

The drive to foment economic recovery by increasing prices was most strongly felt in the agricultural sector via the Agricultural Adjustment Act of 1933. The federal government sought to achieve this by imposing strict production quotas and even by mandating the destruction of agricultural products. This led to some truly appalling episodes, such as when the federal government paid farmers to slaughter 6,000,000 pigs and rather than utilize this to help feed the millions of Americans who were malnourished, upwards of 90% were discarded or turned into fertilizer. In addition, farmers were paid for each acre of land they took out of cultivation, which naturally benefited the most wealthy farmers, much today's agricultural subsidies do. A true recovery would have entailed farmers responding to market forces by shifting capital and production to goods and even economic sectors that enjoyed a greater demand. Of course this economic correction would have entailed short term pain, but it may have lessened the duration of the economic contraction felt in the agricultural sector.

In the opinion of Powell, as well as the Chicago Freedom Forum, one of the unsung heroes of American history was the Supreme Court that presided during the FDR Administration. On numerous occasions they thwarted FDR's unprecedented push to expand the power of the federal govern, by ruling against various policies and programs were in violation of the letter and spirit of the United States Constitution. During a case that challenged FDR's challenged some of the aforementioned agricultural policies, Justice Roberts summarized the root of the ongoing conflict:

"The question is not what power the Federal Government ought to have, but what powers, in fact, have been given by the people...The federal union is a government of delegated powers. It has only such as are expressly conferred upon it and such are reasonably implied from those granted. In this respect, we differ radically from nations were all legislative power, without restriction or limitation, is vested in a parliament or legislative body subject to no restriction except the discretion of its members."

Roberts and even some relatively liberal judges challenged FDR's excessive use of the general welfare clause and interstate commerce clause to justify his attempts to greatly expand the power of the federal government. Not surprisingly, FDR sought to counter this barrier to increasing his power by reorganizing the courts. In the Judiciary Reorganization Bill of 1937, FDR sough to grant the president the power to appoint an additional Justice to the U.S. Supreme Court for every sitting member over the age of 70½, up to a maximum of six. This would have allowed him to pack the court with passive Justices that would not rule against his policies. If this truly radical bill had passed it would have substantially eroded the separation of powers that forms the basis of the American Republic. This compelling book will challenge the positive narrative that most school text books and professors present of FDR. Most importantly, by fully understanding this dark chapter in our economic and political past, we are far less likely to repeat the errors that contributed to the length and severity of the Great Depression.








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