PrintSeptember 27, 2009
Stimulating Our Way to Depression
In 1932, FDR had an opportunity to change the conventional way that governments deal with a recession. His predecessor, Herbert Hoover, who also had a tendency towards central planning, had started the process. Instead of allowing markets to correct themselves as they had in all the previous panics, as depressions were then called, both men instituted programs of government intervention.
Hoover signed the Smoot Hawley tariff even after many of the leading economists of the time personally implored him not to sign it. A tariff would help improve farm prices, which was a cornerstone of the progressive movement. He asked businesses not to lower wages, as had been done in previous panics. Wages remained high but unemployment soared.
Although Roosevelt had campaigned on a platform of balanced budgets, once in office things changed. Many of his advisors were college professors and writers from within the progressive movement. Very few were trained economists, but several had been to Russia and seen Stalin's central planning first hand. Others had an admiration of Benito Mussolini's nationalization of industry in Italy. Once FDR was in office they were determined to apply what they had seen in America.
The utility industry had been one of the most highly leveraged industries to be affected by the Stock Market Crash, and was essential to industrial production. The newly developed utilities were grossly overvalued similar to the internet companies of the 1990's or the housing industry of early last year. By 1932, utility stocks were worth a mere fraction of their 1929 value. FDR began to plan how the government would replace private utilities as a large scale electrical power producer. This would also enable him to take credit for providing thousands of construction jobs and control energy production. The first government utility was the Tennessee Valley Authority. It would provide power in the Appalachian region rather then allow private industry to electrify the area.
To prevent wages from going down in response to the demand for labor, FDR instituted the National Industrial Recovery Act, which allowed large business to form cartels in exchange for allowing unionization of their plants. This helped large businesses that had lower costs absorb the additional costs of unionization but was very damaging to small businesses. Wage rates were 25% higher than they should have been, but so was unemployment. Prices for goods were also 25% higher then they should have been.
When unemployment failed to go down as the result of the NIRA programs and the associated unionization, FDR instituted numerous make work programs through out America. These programs employed not only construction workers but also actors, artists and writers. These programs also greatly increased government expenditures and the national debt.
FDR and his progressive advisors generally resented those people that earn more then their college professor salaries, especially industrialists. They blamed industrialists for not hiring more people to reduce unemployment. This gave progressives justification to raise the marginal tax rates on the wealthy from 26% to above 90%. The wealthy responded by investing in other types of investments and their share of the total tax revenue actually fell during the Depression.
Even though the ideas and programs that FDR and the progressives instituted were not effective in preventing the stock market crash of 1929 from turning into the Great Depression, they were effective in creating a loyal voting base. By demonizing the wealthy, FDR was able to take credit for the government jobs his programs created at the expense of jobs in private industry that the provisions of the NIRA took away. FDR learned by 1935 that a crisis should never go to waste.
If this narrative sounds familiar, it should. The progressives of the 1920's that had been shut out of politics since Wilson's administration needed a crisis to return to power and institute their ideas of central planning in America. Today liberals are trying to do the same. Progressives of the 1930's stifled industrial production with regulation and unionization and today they want to do the same. During the Depression, progressives wanted to control the production of energy, today they propose cap and trade to do the same thing.
Socialists then and now rely on the writings of the economist, John Maynard Keynes to justify large government spending programs to stimulate the economy. However, Keynes himself wrote to FDR in 1938 questioning his spending programs and why FDR would use only one aspect of his economic theories. The answer is very simple: government programs create the illusion of improving the economy. People only see the jobs created by government programs, never the jobs that are lost in the private sector to create them. Programs focus on the benefits that will be provided to a particular segment of society, never to who pays for those benefits. Progressive solutions buy votes but not economic prosperity.
