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January 21, 2009

Get Over It: New Deal Didn't Do the Job

By and

"We have tried spending money. We are spending more than we have ever spent before and it does not work."

Sound like Rep. John Boehner of Ohio, or perhaps another exasperated Republican stalwart, lamenting President Barack Obama's inclination this week to try to spend our way out of the recession?

Listen again:

"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."

Sound more like a liberal Democrat -- say, Harlem's Rep. Charlie Rangel -- pushing Obama to "create" jobs?

How about this:

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

Surely this must be House Speaker Nancy Pelosi denouncing the Bush administration's economic policies.

Wrong. Wrong. And wrong again.

The words came from none other than Henry Morgenthau Jr. -- pal, lunch companion and loyal secretary of the Treasury to President Franklin D. Roosevelt.

Morgenthau made this "startling confession," as historian Burton W. Folsom Jr. calls it, during the seventh year of the New Deal he helped FDR create to combat the rampant unemployment of the Great Depression.

It was May 9, 1939, and Morgenthau was appearing before powerful Democrats on the House Ways and Means Committee.

"In these words, Morgenthau summarized a decade of disaster, especially during the years Roosevelt was in power. Indeed average unemployment for the whole year in 1939 would be higher than that in 1931, the year before Roosevelt captured the presidency from Herbert Hoover," Folsom writes in his new book,"New Deal or Raw Deal?: How FDR's Economic Legacy Has Damaged America."

Indeed, Morgenthau confessed what so many keepers of FDR's flame won't admit: The New Deal failed. Massive spending on public works programs didn't erase historic unemployment. It didn't produce a recovery.

And neither will a "new" New Deal.

Some of the most desperate defenders of New Deal doctrine are getting a little shrill about this. But it's an important truth, nevertheless, especially because the same characters insist President Obama must push through a "bold" economic stimulus that depends on hundreds of billions in new government spending to create or "save" jobs.

Budget and financial experts at The Heritage Foundation caution that Obama ought not to repeat Roosevelt's mistakes. In one such effort, Heritage last week distributed a chart showing that FDR's programs didn't succeed in pushing unemployment below 20 percent.

Some observers -- not just hysterical big government junkies but also dispassionate policymakers and news editors -- took issue with the unemployment data. They cited lower numbers.

"Leading FDR slanderers," David Sirota hyperventilates on Huffington Post, "base their claims that unemployment during the New Deal didn't go below 20 percent by counting government workers as unemployed."

Sirota, who calls himself a "political journalist," adds: "And those claims are being echoed by right-wing rags like the National Review and fringe think tanks like The Heritage Foundation."

Ouch. If Heritage and our conservative principles are "fringe," then FDR's trusted Treasury secretary was what -- a duplicitous traitor?

What to make of a "journalist" who argues that folks on public assistance must be considered employed -- much less "government workers"?

For the record, Heritage plotted New Deal unemployment using widely accepted Census Bureau data (Page 6, Series D, column 10), the "official" numbers that were compiled at the time.

They didn't count Civilian Conservation Corps workers, prisoners or anyone else who got only "three hots and a cot" as a government employee. Neither does Heritage.

"[I]f we counted people on work relief as employed," as George Mason University economist Alex Tabarrok writes, "then eliminating unemployment would be very easy -- just require everyone on any kind of unemployment relief to lick stamps."

So why the different sets of numbers?

Over the years, economists and academics working in good faith calculated "alternative series" of unemployment statistics in hopes of painting a more accurate picture. All begin with census data. The alternative numbers, generally showing somewhat lower levels of unemployment, are available from the Bureau of Labor Statistics.

Thing is, the statistics preferred by Sirota and other FDR acolytes still reveal the New Deal didn't drive pre-World War II unemployment below 17 percent in any year except 1937 (estimate: 14.3 percent).

These estimates (developed by economist Stanley Lebergott) show joblessness peaking at 24.9 percent in 1933, dropping over the next four years and -- under New Deal, Part 2 -- shooting back up to 19 percent in 1938. Unemployment then decreased to 14.6 percent in 1940 at the advent of a wartime economy and to 9.9 percent with America's entry into World War II the following year.

The point, as the chart shows, is that the alternative numbers track the census estimates in showing unemployment during the New Deal remained the worst our nation has seen. World War II ended the run.

The current recession likely will be deep. It could turn out to be more severe than any economic downturn since the Great Depression. Call it the "Great Recession." Still, the economy and financial markets are working through the difficulties, and eventually will stabilize and strengthen on their own.

Amid the current economic pain, Heritage has urged Obama and the new Congress to agree on a stimulus that actually will work by softening the recession and speeding recovery. Here's how:

  • Extend the 2001 and 2003 tax reductions for as long as possible - at least through 2013 -- to prevent tax increases. Better yet, make the tax cuts permanent.
  • Reduce tax rates on individuals, small businesses and corporations through 2013 by lowering the top rate by 10 percentage points and reducing rates by similar amounts for taxpayers with lower income levels.

Heritage's analysis shows this approach would mean 500,000 more jobs this year and a million jobs in 2010, on the way to creating 3.6 million jobs through 2012. Federal tax receipts would fall by $670 billion over five years.

These aggressive changes in tax policy, plus intensive activities by the Federal Reserve, are the best combination of federal actions to end or shorten a recession. In contrast, tax proposals being urged for the Obama stimulus would have almost no effect on the economy. House Democrats' plan for $550 billion in new spending, in part for infrastructure projects, would do even less for recovery.

Don't listen to Heritage if you don't want to. Listen to Henry Morgenthau: "We are spending more than we have ever spent before and it does not work."

William W. Beach is director of the Center for Data Analysis at the Heritage Foundation and Ken McIntyre is the Marilyn and Fred Guardabassi Fellow in Media and Public Policy Studies at The Heritage Foundation.

First appeared in Human Events

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