FDR and the Depression

Franklin Delano Roosevelt was an iconic president. Elected to office an unprecedented four times, his New Deal program laid the ground work for the massive and intrusive federal government we have today. It also has served as a blueprint for our dear comrade leader’s expansion of government. One of the great myths of the FDR presidency is that “he got us out of the Great Depression.” The truth is that he only did this by dying shortly after the start of his fourth term. (story here from the Wall Street Journal)

‘He got us out of the Great Depression.” That’s probably the most frequent comment made about President Franklin Roosevelt, who died 65 years ago today. Every Democratic president from Truman to Obama has believed it, and each has used FDR’s New Deal as a model for expanding the government.

It’s a myth. FDR did not get us out of the Great Depression—not during the 1930s, and only in a limited sense during World War II.

Let’s start with the New Deal. Its various alphabet-soup agencies—the WPA, AAA, NRA and even the TVA (Tennessee Valley Authority)—failed to create sustainable jobs. In May 1939, U.S. unemployment still exceeded 20%. European countries, according to a League of Nations survey, averaged only about 12% in 1938. The New Deal, by forcing taxes up and discouraging entrepreneurs from investing, probably did more harm than good.

The outbreak of WWII eased unemployment when millions signed up for the military and the country ramped up wartime production. But this was only temporary as these conditions would reverse once the war was over. To make matters worse, the government increased deficit spending to unsustainable levels to cover the costs of the war. There would be huge problems as wartime production abated and millions of men returned to the labor pool. FDR knew this but his proposed solution was to return to the New Deal. Fortunately, after Roosevelt died, cooler heads prevailed.

No one knew this more than FDR himself. His key advisers were frantic at the possibility of the Great Depression’s return when the war ended and the soldiers came home. The president believed a New Deal revival was the answer—and on Oct. 28, 1944, about six months before his death, he spelled out his vision for a postwar America. It included government-subsidized housing, federal involvement in health care, more TVA projects, and the “right to a useful and remunerative job” provided by the federal government if necessary.

Roosevelt died before the war ended and before he could implement his New Deal revival. His successor, Harry Truman, in a 16,000 word message on Sept. 6, 1945, urged Congress to enact FDR’s ideas as the best way to achieve full employment after the war.

Congress—both chambers with Democratic majorities—responded by just saying “no.” No to the whole New Deal revival: no federal program for health care, no full-employment act, only limited federal housing, and no increase in minimum wage or Social Security benefits.

Instead, Congress reduced taxes. Income tax rates were cut across the board. FDR’s top marginal rate, 94% on all income over $200,000, was cut to 86.45%. The lowest rate was cut to 19% from 23%, and with a change in the amount of income exempt from taxation an estimated 12 million Americans were eliminated from the tax rolls entirely.

Corporate taxes were reduced (the top marginal rate went from 90% to 38%) and FDR’s “excess profits” tax was repealed. The economy responded by not only absorbing the returning soldiers and the loss of wartime production, but expanding and returning more to the treasury than during the war when taxes were higher. Unemployment dropped to 3.9% by 1946.

By the late 1940s, a revived economy was generating more annual federal revenue than the U.S. had received during the war years, when tax rates were higher. Price controls from the war were also eliminated by the end of 1946. The U.S. began running budget surpluses.Congress substituted the tonic of freedom for FDR’s New Deal revival and the American economy recovered well. Unemployment, which had been in double digits throughout the 1930s, was only 3.9% in 1946 and, except for a couple of short recessions, remained in that range for the next decade.

The Great Depression was over, no thanks to FDR. Yet the myth of his New Deal lives on. With the current effort by President Obama to emulate some of FDR’s programs to get us out of the recent deep recession, this myth should be laid to rest.

Yet we now have the second coming of the New Deal with our dear comrade and current congress. Those who ignore history are bound to repeat it…

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