Reason Foundation

Reason Foundation

Soundbite: The Raw Deal

Damon W. Root
April 29, 2009

In his provocative new book New Deal or Raw Deal? (Threshold), Hillsdale College historian Burt Folsom takes aim at the iconic legacy of President Franklin Delano Roosevelt. Drawing on his own research and that of economists such as Milton Friedman and Robert Higgs, Folsom provides compelling evidence that FDR prolonged the Great Depression and permanently damaged America’s political and economic landscape. Associate Editor Damon W. Root interviewed Folsom in February.

Q: You argue that the New Deal actually harmed the poor.

A: Roosevelt secured more revenue during the 1930s from excise taxes than from income taxes. For example, we had a sixcent tax on cigarettes, and that hits poor people disproportionately hard. When we look at a lot of New Deal programs, we see direct subsidies to special interest groups paid for heavily by excise taxes.

Q: Nobel laureate economist Paul Krugman says FDR didn’t spend enough.

A: It’s a clever argument: If you keep spending and it doesn’t work, that means that you need to spend more, and then when you spend more and it doesn’t work, that means that you need to keep spending even more. One of the ways to look at the New Deal is that as we acquired more debt and the income taxes went up and the excise taxes went up, there was less reason for people to have any confidence in the economy.

Forbes, Fortune, and other publications began to poll businessmen and ask them, “Do you have confidence in the economy?” They would say, “No, I don’t, and I have no intention of expanding because I don’t have confidence.” Therefore we don’t get expansion and therefore unemployment stays high. Right after World War I, we had tremendous unemployment and the income tax was up to 73 percent. So when Calvin Coolidge came in, his strategy with Treasury Secretary Andrew Mellon was to cut taxes and cut spending. We cut the income tax down to 25 percent, and we had budget surpluses every year of the 1920s. We cut one-third of the national debt off. The result from the tax cuts and the budget surpluses was an enormous stability and expansion of investment. We got radios, vacuum cleaners, refrigerators. B.F. Goodrich and others began to buy zippers and apply them to clothes in the 1920s. Scotch tape was invented in the 1920s. Sliced bread was invented in the 1920s. Air conditioning was applied to movie theaters. You get all of this expansion in the American economy when we told entrepreneurs, “You get to keep most of what you have invested in.”

Q: If the New Deal was really so awful, why was FDR overwhelmingly re-elected in 1936?

A: Roosevelt’s federal funding catered to special interests, and then the special interests delivered the vote. For example, silver miners got a multibillion-dollar subsidy with the Silver Purchase Act, when Roosevelt says, we will buy silver at 64.5 cents an ounce even though the world market price is 40 cents an ounce. You think, well, silver miners aren’t that big a group. But they were dominant in seven Western states. Roosevelt was able to put together a coalition of those special interests. The subsidies were not improving the prosperity of the economy. Yet because of those subsidies, those special interests had an incentive to support the Democratic Party.

Q: Does the New Deal hold any lessons for today?

A: Massive spending simply does not reduce unemployment. It merely redistributes wealth. A massive stimulus package did not work at all to remove unemployment in the 1930s, and it is unlikely to do so today. We consistently had double-digit unemployment in the ’30s. And the programs, once they’re started, will always be with us. Roosevelt’s secretary of the treasury, Henry Morganthau, said it himself in 1939: “We have tried spending money. We are spending more than we have ever spent before, and it does not work.”

Damon W. Root is Senior Editor

Print This