How government expansion worsens hard times

Posted: Oct 24, 2007 12:00 AM
How government expansion worsens hard times

For those Americans who know anything at all about the history of the Great Depression and the New Deal, the story line seems simple, dramatic, inspiring and familiar:

Capitalists and speculators went wild with greed in “The Roaring Twenties,” leading to a stock market crash and hard times. Banks closed, once prosperous workers sold apples on street-corners or became hobos in shanty-towns, while the Republican President Herbert Hoover did nothing for the destitute and suffering nation. Then FDR arrived on the scene, inspiring new hope with his golden words (“the only thing we have to fear is fear itself”) and a flurry of radical reform in his first hundred days in office. While conservatives squealed, this “new deal for the American people” improved the lives of everyone and got the economy humming again – just in time to face the challenges of World War II. No wonder a grateful nation rewarded Franklin Roosevelt with an unprecedented four terms – and a consistent ranking as one of our three greatest presidents (along with Washington and Lincoln).

Like most other Americans of my generation, I learned this story from my parents and grandparents, not just from history teachers in school. My grandparents on my father’s side, immigrants from Ukraine, became naturalized citizens in part to vote for Roosevelt: in their tiny home in a gritty neighborhood of South Philadelphia, they always kept a heroic black-and-sepia portrait of FDR over the mantelpiece, encased in a dime-store brass frame with a cracked pane of glass. My grandfather was a barrel-maker who managed to keep working throughout the Depression, so he never benefited personally from New Deal programs, but he revered the 32nd President for his general support for “the little guy.” My father recalled April 12, 1945, the day of Roosevelt’s sudden and shocking death from a cerebral hemorrhage, as one of the darkest occasions of his life: along with many other sailors at his base in San Francisco, he wept uncontrollably.

Unfortunately, the nearly universal canonization of Franklin Roosevelt has helped all succeeding generations learn false lessons about the right way to deal with hard times and poverty. These assumptions continue to shape political debate, especially at moments like the present day when some three-quarters of the people (according to recent polls) feel convinced that the economy’s in recession or headed in that direction. Democrats in particular love to invoke the Depression and summon the noble ghost of FDR: some 40 years after his death, Barbra Streisand thrilled a party fundraiser with her heart-wrenching rendition of Roosevelt’s campaign song, “Happy Days are Here Again,” which suggested that in the right hands, enlightened government could stop suffering and uplift the downtrodden. In the same spirit, in 1992, Bill Clinton declared that the first President Bush had left the nation with “the worst economy since the Great Depression” and in his First Inaugural Address suggested that even in the midst of January’s chill he meant to “force the spring.” In 2004, numerous Democratic candidates (Howard Dean, Dick Gephardt, John Kerry) made similar analogies between the presumed economic wreckage left by George W. Bush and the dark days of 1932, and we’ll undoubtedly hear similar alarmist rhetoric in 2008. In response to the presumed economic disasters and hardships which they always discern, liberals instinctively invoke FDR’s stirring words from his First Inaugural: “This nation asks for action, and action now.”

According to the conventional wisdom, Roosevelt proved that such governmental action – bold, aggressive, experimental, and sweeping – restored vigor to the economy and improved the lives of the suffering masses.

Unfortunately, such assumptions rest upon a foundation of myths, distortions, half-truths and outright lies. The truths about the New Deal, and all other notable attempts in the course of American history to use the power of the federal government to rescue the poor over the course of 230 years of American history, show the same disturbing results: higher tax burdens and a corresponding loss of liberty, with little gain (and sometimes serious damage) for the intended beneficiaries of bureaucratic largesse.

An understanding of this destructive and increasingly dangerous pattern in our politics must begin with an examination of the pernicious legend of Franklin Roosevelt as America’s savior.


In 1931, in some of the darkest days of the great depression and the middle of the Hoover administration, the national unemployment rate stood at 17.4%. Seven years later, after more than five years of FDR and literally hundreds of wildly ambitious new government programs, after more than doubling federal spending, the national unemployment rate stood at --- 17.4%! As economist Jim Powell, author of the devastating book “FDR’s Folly” points out: “From 1934 to 1940, the median annual unemployment rate was 17.2%. At no point during the 1930’s did unemployment go below 14%. Even in 1941, amidst the military buildup for World War II, 9.9% of American workers were unemployed. Living standards remained depressed until after the war.”

In his celebrated Inaugural Address of March 4, 1933, FDR unequivocally declared: “Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously.” For the President and his economic planners, the task of putting people to work did remain an unsolvable problem –until world conflict led to sixteen million Americans leaving the work force for the military, and others finding new jobs in humming defense plants. Considering Roosevelt’s self-proclaimed priorities, the persistence of devastating unemployment rates (in an era when the typical family relied on only one wage earner and women for the most part remained uninvolved in the work force) should alone identify the New Deal as a wretched, ill-conceived failure. Other measures of recovery show similarly dismal results. After the stock market crash and the beginning of the Great Depression, the Dow Jones Industrial Average hit 250 in 1930 under Hoover (it had been 343 just before the crash). By January, 1940 the market had collapsed to 151 (remaining in the low 100’s through most of Roosevelt’s terms) and didn’t return to its 1929 levels until the 1950’s. At the same time, federal spending as a percentage of the Gross Domestic Product soared at an unprecedented rate: from 2.5% in 1929, to 9% in 1936 (long before the wartime spending began). In other words, the portion of the total economy controlled by Washington increased by a staggering 360% in the course of just seven years – without providing discernable benefit to the economy.

Such statistics look so disturbing, so incontrovertible, that they raise serious questions about the survival of the New-Deal-Fixed-the-Depression myth. How could reputable historians pretend that the vast expansion of government power between 1933 and 1941 somehow brought the nation out its persistent, nightmarish hard times?

Out of curiosity, I took from my shelf the college history textbook assigned to me at Yale in 1968. The relevant chapters had been written by Arthur Schlesinger Jr., the most acclaimed and authoritative of all New Deal historians. To my surprise, not even this fervent liberal and stalwart admirer of FDR attempted to pretend that his hero’s policies had solved the Depression. In “The National Experience,” published in 1963 (just 18 years after FDR’s death), Schlesinger wrote: “Though the policies of the Hundred Days had ended despair, they had not produced recovery…The New Deal had done remarkable things, especially in social reform, but the formula for full recovery evidently still eluded it.” He also wrote honestly about the devastating crash of 1937 – in the midst of “the Second New Deal” and Roosevelt’s second term. “The collapse in the months after September 1937 was actually more severe than it had been in the first nine months of the depression (or, indeed, than in any other period in American history for which statistics are available). National income fell 13 per cent, payrolls 35 per cent, durable goods production 50 per cent, profits 78 per cent. The increase in unemployment reproduced scenes of the early depression and imposed new burdens on the relief agencies.”

In the view of such acknowledged economic disaster after more than five years of vaunted reform, how can fawning historians still worship at the altar of Rooseveltian idolatry? Normal depressions or recessions last between one to three years; the Great Depression continued to depress living standards and impose severe hardships for more than a decade. A growing majority of economic historians now concede that the programs of the New Deal prolonged, rather than terminated, the Depression. David Kennedy, the former President of Stanford University, wrote a 1999 Pulitzer Prize winning account called Freedom from Fear in which he concluded: “Whatever it was, the New Deal was not a recovery program, or at any rate not an effective one.” In nearly all European nations, afflicted by the worldwide economic crisis as was the United States, the depression ended more quickly than it did in Roosevelt’s America; in the words of economic historian Lester V. Chandler, “in most countries the depression was less deep and prolonged.” Even at the time, experts understood the misguided nature of FDR’s policies. In 1935, the Brookings Institution (then, as now, a left-leaning think tank) produced a 900-page report considering the impact of the New Deal’s most ambitious and controversial program, the National Recovery Administration (NRA), and concluded, “on the whole it retarded recovery.”

To counter the brute facts about the persistence of crippling unemployment and pervasive poverty in the face of the huge increases in governmental spending and activism, New Deal apologists cite two positive results from the feverish emergence of new programs: the restoration of “hope” in place of despair, and the implementation of needed “reforms” that planted the long-term seeds of justice even if they failed to bring economic recovery.

Concerning the notion of FDR’s alleged conquest of fear, Amity Shlaes (in her brilliant history of the Great Depression “The Forgotten Man”) points out that he achieved this change of mood through an old-fashioned vote-buying scheme in the style of the venal ward-heelers and big city bosses who still dominated the Democratic Party. She cites the nakedly political emphasis on the PWA, or Public Works Administration, under the control of Secretary of the Interior Harold I. Ickes. This federal operation laid the groundwork for the current Washington mania for “earmarks” –in which Congressional power-brokers arrange for buildings, bridges, and other facilities to gratify constituents across the country. With more than 3,000 counties in America, the PWA provided at least one project for all but 33 of them. The scale of spending startled even the responsible parties: with $3 billion in its first few years, at a time when the total federal budget in any given year was barely $6 billion. Secretary Ickes himself wrote concerning the expenditure for his program, “It helped me to estimate its size by figuring that if we had it all in currency and should load it into trucks, we could set out with it from Washington, D.C., for the Pacific Coast, shovel off one million dollars at every milepost and, at the end, still have enough left to build a fleet of battle ships.”

The other defense of Roosevelt’s programs, beyond their success in brightening the national mood (and insuring his perpetual re-election) involves their inherent justice: Schlesinger and others suggest that even if the reforms failed to bring the promised recovery, their inherent “justice” (concerning the empowerment of labor unions, the regimentation of agriculture under federal control, tighter supervision of banking, and countless other “improvements”) made them nonetheless worthwhile. Regarding this argument, no less a leftist hero than the British economist John Maynard Keynes offered a tart response. He wrote FDR a letter published on December 31, 1933 in the New York Times in which he warned that “even wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action.”

In other words, he perceived at the very beginning of the New Deal its most damaging aspect: treating the nation’s capitalists as an enemy --“the unscrupulous money changers” FDR called them in his inaugural, who “have fled from their high seats in the temple of our civilization.” With new, unpredictable government regulatory schemes and law suits and political attacks emerging every week, business leaders found it difficult to prepare the long term planning that alone could restore investment and entrepreneurial energy and put Americans back to work.


The Great Depression hardly constituted the only economic collapse in US history. The nation endured major reverses and sharply increased unemployment in 1815, 1837, 1873, 1893, 1920, 1958, 1979 and many other occasions. The record shows consistently that leaders who cut government to revive the economy succeeded far more quickly and painlessly than the New Deal.

The punishing Panic of 1837 wrought havoc for American commerce and cost President Martin Van Buren his chances of re-election in 1840, but Jim Powell points out that Van Buren responded in precisely the appropriate way: he cut federal spending from $37.2 million to $24.3 million and sharply reduced taxes (mainly tariff revenue). He determined “to make government cheaper and stay out of the way of the private sector.” As a result, the young nation roared back to recovery and resumed its spectacular economic growth shortly after Van Buren left office.

Another serious downturn, the Depression of 1893, produced four million unemployed, violent strikes and a colorful march on Washington by the dispossessed of “Coxey’s Commonweal Army” who marched en masse from Ohio behind a banner with an image of Christ and the legend “HE IS RISEN!! BUT DEATH TO INTEREST ON BONDS!!!” The marchers demanded interest free advances from the government and a new program to hire the legions of unemployed to build highways across America, but the Democratic president, Grover Cleveland, refused to see them or to consider their pleas. Instead, he determined to reduce burdens on taxpayers, cutting tariffs and blocking an income tax. He even vetoed a bill (among more than 300 “relief” measures he stopped) to distribute $10,000 in seed grain to drought-stricken Texas farmers. In his veto message, the President wrote: “Federal aid in such cases encourages an expectation of paternal care on the part of the Government and weakens the sturdiness of our national character.” By the end of 1894, depressed income figures began to turn upward and the entire depression ended within two years.

Most striking of all, the reviled President Warren Harding proved himself a masterful manager of the sharp recession that followed the conclusion of World War I and which he faced when he came to power in 1921. Nobel prize-winner Milton Friedman identified the decline of the money supply “as the largest percentage decline” up to that time, and the largest in American history other than the Great Depression. As the great British historian Paul Johnson (“A History of the American People”) writes: “Harding inherited from the comatose Wilson regime one of the sharpest recessions in American history." By July, 1921 it was all over, and the economy was booming again. Harding and Treasury Secretary Andrew Mellon had done nothing except cut government expenditure by a huge 40 percent from Wilson’s peacetime level, the last time a major industrial power treated a recession by classic laissez-faire methods, allowing wages to fall to their natural level. Benjamin Anderson of Chase Manhattan was later to call it ‘our last natural recovery to full employment.’ The cuts were not ill-considered but part of a careful plan to bring the spending of the monster state which had emerged under Wilson back under control. The result of these cuts, and of even sharper tax cuts under Harding’s successor Coolidge, was the long period of growth and rising living standards associated with the “Roaring Twenties,” interrupted only by the prolonged Depression made worse by governmental meddling by both Hoover and Roosevelt.

Reagan enjoyed similar success by cutting taxes dramatically to cope with the crippling and stubborn Carter legacy of “stagflation,” and Eisenhower and both Presidents Bush managed to make other recessions short-lived without ambitious new government programs. Rather than depending on government programs to cushion us from the impact of inevitable economic downturns, the American people have benefited far more reliably by the proper instinct to cut government and stimulate the economy in times of slow or negative growth.


The Democratic-Republican Party of Thomas Jefferson, which evolved into the Democratic Party of Andrew Jackson (hence the “Jefferson-Jackson Dinners” that today’s Democrats still celebrate) argued for less government involvement in the economy, not more. Their opponents, Federalists and later Whigs, favored a more activist government that would assist business interests in building prosperity. For more than a hundred years, the chief intrusion of government policy into economic activity involved tariffs and other restrictions on free trade--- generally supported by Federalists, Whigs and later Republicans – designed to benefit business interests even while increasing costs for the consumer. At least through President Cleveland (who left office in 1897) the Democrats, who claimed as they do now to represent the “working man” and “the little guy” favored small government, low taxes, low tariffs and the disentanglement of business from bureaucracy as the best way to assure that ordinary citizens escaped the destructive impact of governmental favoritism for big business.


Despite the absence of federal programs to “help” the poor and downtrodden, the nineteenth century in America remained an unprecedented era of social and economic mobility. The Horatio Alger stories that became bestsellers and inspired the nation reflected reality, and the unprecedented ability of American families (including those of newly arrived immigrant masses) to rise from abject poverty to middle class status (or above) in one, two or three generations. Social programs didn’t power this escalator to prosperity: economic growth did. In their 1963 book “A Monetary History of the United States, 1867-1960,” Milton Friedman and Anna Jacobson Schwartz write: “The final two decades of the nineteenth century saw a growth of population of over 2 percent per year, rapid extension of the railroad network, essential completion of continental settlement, and an extraordinary increase both in the acreage of land in farms and the output of farm products. The number of farms rose by nearly 50 per cent – despite the price decline. Yet at the same time, manufacturing industries were growing even more rapidly, and the Census of 1890 was the first in which the net value added by manufacturing exceeded the value of agricultural output. A feverish boom in western land swept the country during the eighties.” Meanwhile, with government consuming a smaller portion of the Gross Domestic Product than other industrial powers (Britain, Germany, France) the United States emerged as the most open and mobile society on earth, providing opportunities for the penniless that more bureaucratic nations couldn’t match.


As Ronald Reagan famously declared, “We had a war on poverty. And poverty won.” Charles Murray’s ground-breaking 1984 book “Losing Ground” asks an obvious question about the era of the “Great Society” and its aftermath: what caused the obvious and painful increase in poverty, illegitimacy, crime and social dysfunction at the same time that government spending to address these pathologies vastly increased? He concluded that the well-intentioned and monumentally expensive programs of the period contributed to the problems, rather than to their solutions.

Most importantly, the programs of the Great Society went far beyond the New Deal in erasing the distinction between the “deserving poor” and the “undeserving poor”—making all struggling citizens eligible for the same programs, regardless of the respectability or destructiveness of their behavior. This approach stemmed from the assumption that the poor bore no responsibility for their status – creating a culture of helpless victimhood and presumed powerlessness that undermined the confidence and self-discipline needed to escape poverty. An individual who bears no responsibility for his situation exerts no control over it – and must depend on outside forces (in this case the federal government) for his redemption. By removing the stigma previously associated with accepting “the dole,” anti-poverty programs encouraged a culture of dependency and discouraged self-reliance. The very concept of “Welfare Rights” (eagerly promoted in the 1970’s) worked against the old idea that the “honest poor” who refused hand-outs and insisted on toiling for their own advancement deserved special respect and encouragement.

The ultimate vindication for Murray’s arguments came with federal welfare reform in 1996 which succeeded in cutting the number of dependent individuals by more than half and corresponded with a period or rapidly declining poverty.


A paper by Daniel Hungerman of the National Bureau of Economic Research demonstrates the precipitous decline in church-based private charity to benefit the needy as government aid expenditures increased more than six-fold from 1933 to 1939. In “Faith-Based Charity and Crowd Out During the Great Depression” he shows that in 1926, congregations invested vastly more ($150 million) on these charities than federal, state and local agencies combined ($60 million at most). With the rise in New Deal expenditures, each dollar of government-relief spending in a state led to between three-and-seven cents less church spending. Since overall federal investment dwarfed the charitable investment (by a ratio of more than 10 to 1) this meant a significant reduction – an estimated 30% -- in the amount devoted by churches to helping the poor.

In “The Tragedy of American Compassion” (1992), Marvin Olasky of the University of Texas explores numerous reasons that private charities function more effectively to uplift the poor. For instance, “A century ago, when individuals applied for material assistance, charity volunteers tried first to ‘restore family ties that have been sundered’ and ‘reabsorb in social life those who for some reason have snapped the threads that bound them to other members of the community.’ Instead of immediately offering help, charities asked, ‘Who is bound to help in this case?” This approach of course discouraged the extension of poverty as a semi-permanent status passed on from one generation to another. As Olasky maintains, faith-based and private aid organizations also maintained the crucial ability to make distinctions between “deserving” and “self-destructive” poor. “Charities a century ago realized that two persons in exactly the same material circumstances, but with different values, need different treatment. One might benefit most from some material help and a pat on the back, the other might need spiritual challenge and a push.”

One of the great difficulties of all bureaucratized and governmental interventions, no matter how well intentioned, is the official difficulty in making such distinctions, or helping to repair or encourage the family relationships so essential to escape from poverty and dysfunction.


With rapid upward mobility still a prominent factor in American life, many families feel proud to exaggerate their own past destitution and somehow prefer to identify government as the source of their progress rather than business. A few years ago I saw this principle at work when speaking to a Jewish Temple in Florida. An angry questioner denounced my conservative politics by insisting that Jews in America owed our prosperity exclusively to liberal programs: were it not for the unions and the radical organizers and for the leftists and their compassionate initiatives, we’d all still be toiling in sweat shops and living in tenements. In response to his impassioned declaration, I asked for a show of hands in the crowd of some 700 people. I asked how many came from families in which labor unions played an important role in economic advancement. A few hands shot up, proudly—at most two or three dozen. Then I asked how many people in the audience came from families who had arrived in the middle class because of federal welfare programs. Members of the crowd looked at one another nervously, but only three people raised their hands in the entire Temple. Finally, I asked the most telling question: how many in that crowd had come to their current state of comfort and opportunity because someone, a parent or a grandparent or the individual himself, had worked hard in business and achieved some measure of success? At this, the overwhelming majority of the audience lifted hands, laughed and applauded in recognition.

Whether the crowd happened to be Jewish, or Irish, or Italian, or Mexican-American, or black, the response wouldn’t have been much different. The vast expansion of the Middle Class that occurred in the 1950’s involved productive work in the private sector and only one prominent form of governmental assistance: the GI Bill, which helped countless veterans (like my father) pay for education and housing and the launching of businesses. The GI Bill – providing long-term reward for military service – hardly constituted a something-for-nothing welfare program.

America has always been a compassionate society, finding various means – mostly private but occasionally involving state and local funds – to provide help to those who required it. “Rugged individualism” never meant isolation from neighbors, family, or fellow congregants. In that context, attempts by left-leaning commentators to credit government alone for social and economic progress remain strained and unpersuasive.

Consider, for example, the argument offered by comedian, talk-show host and Minnesota Senate candidate Al Franken concerning his wife, Franni. In his stump speeches, he often re-tells “Franni’s Story” in these terms:

“When she was seventeen months old, her dad – a decorated veteran of World War II – died in a car accident, leaving her mother, my mother-in-law, widowed with five kids.

“My mother-in-law worked in the produce department of a grocery store, but that family made it because of Social Security survivor benefits....Every single one of the four girls in Franni’s family went to college, thanks to Pell Grants and other scholarships… And my mother-in-law got herself a $300 GI loan to fix her roof, and used the money instead to go the University of Maine. She became a grade school teacher, teaching Title One kids- poor kids- so her loan was forgiven. “My mother-in-law and every single one of those five kids became a productive member of society. Conservatives like to say that people need to pull themselves up by their bootstraps – and that’s a great idea. But first, you’ve got to have the boots. And the government gave my wife’s family the boots.”

It’s a moving tale, but it’s hard to believe that without federal programs Franni’s family, with its obvious motivation and intelligence, would have found no way to become “productive members of society.” Especially as the survivors of a decorated veteran, assistance would have been available – if not through the VA, then certainly through local or private agencies. Would the University of Maine truly (or properly?) deny scholarship aid to a widow of a war hero who’s trying to raise five kids? The recent e-bay auction of an angry Senatorial letter to Rush Limbaugh has now raised more than four million dollars (with Limbaugh’s matching contribution) for a private charity that provides scholarships for the children of fallen warriors in the Marines and in law enforcement. This prominent story should serve as a reminder that acts of kindness, decency and generosity are hardly limited to the politicians and bureaucrats in Washington, D.C.


That’s the problem with the underlying assumption that the poor can only advance in this nation with the assistance of the federal government: it not only dismisses (and undermines) the self-help potential of the needy, but ignores all those other sources of assistance beyond the Beltway.

In this sense, it’s instructive to go back one last time to Franklin Roosevelt’s First Inaugural Address. Everyone recalls its reassuring opening: “This great Nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself…” Unfortunately, the rest of the speech includes chilling language reminiscent of the Fascist dictatorships simultaneously taking shape in Europe. “….if we are to go forward,” the new President declared, “we must move as a trained and loyal army willing to sacrifice for the good of a common discipline, because without such discipline no progress is made, no leadership becomes effective. We are, I know, ready and willing to submit our lives and property to such discipline.”

Was the audience at this point supposed to raise arms and shout “Sieg Heil”?

“With this pledge taken,” FDR continued, “I assume unhesitatingly the leadership of this great army of our people dedicated to a disciplined attack on our common problems…It is to be hoped that the normal balance of executive and legislative authority may be wholly adequate to meet the unprecedented task before us. But it may be that an unprecedented demand and need for undelayed action may call for temporary departure from that normal balance of public procedure.”

Is it any wonder that conservatives gravely feared a grievous suspension of Constitutional rule?

Roosevelt baldly announced: “I shall ask the Congress for the one remaining instrument to meet the crisis – broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.”

In giving some indication just how he might employ that power, Roosevelt spoke (in the speech’s single most shocking (and altogether forgotten) passage of the need for a relocation program that might have pleased Mao, Stalin or Pol Pot: “Hand in hand with this we must frankly recognize the overbalance of population in our industrial centers and, by engaging on a national scale in a redistribution, endeavor to provide a better use of the land for those best fitted for the land.”

Fortunately, the New Deal never included a new alphabet agency to correct “the overbalance of population in our industrial centers” by driving people by bayonet into the country, but the mere suggestion illuminates the mentality behind FDR’s initiatives and all other sweeping liberal “reforms” over the years.

Under this thinking, the government and its planners make the crucial economic decisions for the people they command --- the enlisted men in the “trained and loyal army” who are “willing to submit our lives and property to such discipline.” The very idea that bureaucrats and politicos can direct economic advancement more reliably than individuals making millions of small decisions for themselves has not only reduced liberty, but invariably threatened prosperity in the process.