Editorials

A ‘raw deal’ for America: High taxes, higher debt, no relief

HILLSDALE, Mich.

The New Deal — Franklin Roosevelt’s program for getting the U.S. out of the Great Depression — failed miserably. Throughout the 1930s, unemployment remained mired in double digits. In May 1939, with Roosevelt’s second term almost at an end, unemployment had jumped again to more than 20 percent. In frustration, Henry Morgenthau, the president’s trusted secretary of treasury, blurted out, “We have tried spending money. We are spending more than we have ever spent before, and it does not work. … We have never made good on our promises. … I say after eight years of this administration we have just as much unemployment as when we started. … And an enormous debt to boot.”

Why did FDR’s lavish New Deal spending, contrary to predictions by Keynesian economists, produce so few jobs? Because every job he created with federal dollars had to be paid for out of taxes (or with debt). Tax dollars were simply taken from private citizens, who could have bought tires, neckties or cheese sandwiches, and given to politicians, who spent it on road building at best or increased federal salaries at worst. Jobs, however, are created by private investment, not by government redistribution.

The rising taxes during FDR’s presidency illustrated massive federal spending at work. In 1932, the year Roosevelt was elected, the top marginal tax rate was 25 percent. By 1935, FDR secured a tax hike on the rich to 79 percent. By 1945, the year he died, rich people paid 94 percent on all income over $200,000. Most other Americans had begun paying taxes as well, and at rates similar to the 25 percent rate for rich people back in 1932. How can we expect entrepreneurs to invest in new jobs when more than half of what they earn must be given to Uncle Sam?

Under both Presidents Hoover and Roosevelt, we saw tax rates rise and revenue fall. In 1929, for example, revenue from income taxes was almost $1.1 billion, but by 1935 it had been cut in half to $527 million. The national debt, however, skyrocketed from $17 billion to $29 billion during these years. By the end of FDR’s second term (1941), our national debt was almost $50 billion. We had chased capital out of the economy and enlarged our debt. The resulting class warfare was the essence of FDR’s New Deal, and the reason it created so few jobs.

That is a general overview of the New Deal. What about specific programs? For farmers, FDR launched the Agricultural Adjustment Act. It “solved” the problem of low prices by paying farmers not to grow crops on part of their land. Consumers, of course, had to pay higher prices for food, and taxes had to be increased to get cash to the farmers to pay them not to produce.

For silver miners, FDR signed the Silver Purchase Act, which sharply raised the price of silver. Harold Ickes, the secretary of interior, asked two penetrating questions: “Why should we be buying silver way above the market (price)? And if we do this for silver, why shouldn’t we buy other products for what the producers want instead of paying what they are worth?”

For welfare, FDR continued and expanded Hoover’s Emergency Relief and Construction Act of 1932. But under that act, as I describe in “New Deal or Raw Deal?” those states that were incompetent in managing their money could request and secure more federal funds than states that were frugal and cautious. For example, Illinois, which had greatly mismanaged its relief money, received $55,443,721, and Massachusetts, which was well-run, received zero federal funds. Thus, the residents of Massachusetts paid for their own state’s relief and, through federal taxes, for part of Illinois’ as well.

The best-known New Deal program was probably the Works Progress Administration. The hugely funded WPA supported the building of roads and other infrastructure throughout the nation. Good roads are a national gain, but FDR and Harry Hopkins, the head of the WPA, often distributed the WPA cash not where it was most needed, but where it would win the most votes. For example, V.G. Coplen, the Democratic county chairman of Indiana, said bluntly, “What I think will help is to change the WPA management from top to bottom. Put men in there who are … in favor of using these Democratic projects to make votes for the Democratic Party.” James Doherty, a New Hampshire Democrat, agreed: “It is my personal belief that to the victor belongs the spoils and that Democrats should be holding most of these (WPA) positions so that we might strengthen our fences for the 1940 election.”

Academics became fascinated with the way FDR used federal funds to win votes. C. Roger Dunn, a popular statistician of the 1930s, published the Dunn Survey on elections, and he estimated that each person on the WPA was worth four votes at the polls for FDR. Just in case, however, the president hired a pollster to detail where federal funds were going and give the Democrats bragging points about them — so that voters in each state could be reminded that keeping the Democrats in power would keep the federal faucet running. FDR’s tantalizing use of federal funds, and the promise of more to come, explains how he could keep winning elections even without an economic recovery. “The Democratic majorities in Congress are accounted for by the government billions,” the Chicago Tribune complained. “One doesn’t shoot Santa Claus,” observed Norman Thomas, head of the Socialist Party.

Reporter Thomas Stokes investigated the Democrats’ misuse of federal funds and called it “a grand political racket in which the taxpayer is the victim.” He won a Pulitzer Prize for his writing on the WPA, but was sad that New Dealers denounced him. Stokes concluded about the New Dealers, “They sought refuge in the seductive philosophy that the end justifies the means and, under this philosophy, they condoned the political organization of relief workers.”

When opponents of FDR pushed back at him, he expanded federal power to strike at them. For example, FDR was, according to his son Elliott, the first president to use the IRS for political purposes. He helped launch tax investigations of Andrew Mellon, the secretary of treasury under Coolidge, and Moses Annenberg, editor of the main Republican newspaper in Philadelphia. But when the IRS investigated then-congressman Lyndon Johnson of Texas, FDR called it off because Johnson, a key political ally, asked him to.

Roosevelt used the New Deal and the enlarged power of the executive branch to help him win four elections for president, and solidify the Democrats’ hold on Congress. Future Democratic presidents ever since FDR have studied his tactics for wisdom on how to win votes, how to gain political power, and how to increase federal control.

Contact Folsom, professor of history at Hillsdale College and co-author (with Anita Folsom) of “FDR Goes to War,” at bfolsom@hillsdale.edu.

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