Tuesday, November 23, 2010

New Deal or Raw Deal (Book Review)

Book Review, New Deal or Raw Deal by Burton Folsom, Jr., 2008 Threshold Editions (Davison of Simon & Schuster). 270pp plus notes and index

Conventional wisdom among many historians and educators is that Franklin D. Roosevelt's New Deal brought an end to the Great Depression of the 1930s. Those who look at the data realize that is not the case. However many have fallen back on less conventional but still popular “wisdom,” namely that World War II ended that depression. This book disputes both conclusions and in my opinion should be required reading in our schools. As many of our current politicians attempt to duplicate the New Deal we should inform ourselves about what really happened during FDR's administration.

Briefly Folsom shows, with copious notes and data, that the New Deal actually worsened and extended the depression. Furthermore though the war did reduce unemployment, major effects of the depression persisted until Harry Truman dismantled much of the anti-business climate FDR had created.

The book describes FDR's background which may have been the cause of his lack of understanding of business and economics, as well as his dishonest ways. His family on both sides demonstrated a lack of business sense. His father James inherited a fortune but barely maintained it, making a series of poor investments. On his mother's side his grandfather made money selling opium illegally to the Chinese. When he tried honest business he did so poorly that he returned to that illegal business. FDR was raised without being taught basic budgeting or anything else that would have prepared him to deal with financial problems.

FDR was a mediocre student, having a C to C+ average at Harvard. He concentrated on the social-political world of clubs, debates and journalism and ignored subjects like economics that might have prepared him better for his future career. At the same time he regularly misled his parents with out and out lies, claiming to have performed better than he actually did in sports and other events. For example after doing poorly in a race he told his parents he came in forth. He knew his parents would see the school newspaper which listed only the top three finishers. That disregard for truth was also manifest later when he would categorically deny having made certain statements he had in fact made.

The result of all that seems to be a future president who did not like business and did not understand economics. He was, however, very charismatic and persistent. Those characteristics governed his presidency.

The next section of the book discusses the causes of the Great Depression, why what might have been a short-lived economic downturn became the epitome of an economy in trouble. While those causes are complex the three major causes were the Smoot-Hawley tariff bill which caused retaliation from trading partners, very poor decisions by the federal reserve which cut back on the money supply at the worst possible time to do so, and refusal of other countries to repay debts incurred during World War I. (Smoot-Hawley contributed to refusal to pay those debts since debtor countries used that also as retaliation.) Though those causes happened before he took over, Roosevelt did not understand the causes so it is no wonder that his corrective measures missed the mark.

Roosevelt's response to the depression was to crack down on the very businesses that needed to do well in order to increase employment. One of his first measures was the National Industrial Recovery Act, NIRA, later shortened to NRA. That encouraged price fixing and even allowed major players to set prices with the force of law. Some smaller competitors went to jail for undercutting prices so determined. That drove many companies out of business, worsening unemployment.

Other measures such as the Agricultural Adjustment Act had similar effects. By law farm prices were set high with the resulting loss of business to farmers. Particularly bad was the undistributed profits tax which discouraged business investment.

While damaging the economy, FDR managed to gain power and get re-elected. That was due not only to his charm and charisma but also to the way he used the federal budget to influence (many would say buy) votes. States firmly in his favor or firmly against him got little federal money. Swing states were saturated with federal relief money and FDR's people made sure they knew where it came from. They also hired 300,000 WPA workers just before the 1936 election, then dismissed 300,000 soon after that election. Only someone with FDR's charm and charisma could have pulled that one off.

The result was that the depression continued at least until the start of World War II. Unemployment remained high and business was terrible. The war reduced unemployment by putting over 12 million men in the armed forces and many more to work building war materiel. However stock prices remained low and other economic indicators also failed to recover. That changed only when Truman became president and allowed the business climate to improve.

The last two chapters describe why historians have missed the mark on the New Deal, and how it continues to affect us today. Basically historians have mostly favored statism and have indulged in groupthink. Any historian deviating from the conventional wisdom will be dismissed as irrelevant. Meanwhile, the New Deal legacy of big government, high taxes, and distrust of business continues to harm us today.

I strongly recommend this book. There are eerie parallels between what FDR did and what many Democrats want to do today. We should study the effect of the New Deal before trying to repeat it.


Bobkatt said...

How do you explain the fact that many of the "scholars of the Great Depression" seem to repeat the mistakes and many "Constitutional Scholars" don't seem to understand it's meaning?

Hal Lillywhite said...

How do I explain those things? Two things, first groupthink and second many have what Sowell calls the vision of the anointed.