Burton Folsom

New Deal or Raw Deal

In the Panic of 1893, U.S. unemployment briefly hit what was then the all-time high of 18.4 percent, but the panic was over in a little more than five years. In the mini-recession of 1921, unemployment reached 11.7 percent, but hard times lasted less than two years. In both of these economic downturns, Presidents Cleveland and Harding cut federal expenses and, in the case of Harding cut the income tax rate as well. Soon investments in business became attractive again, capital slowly flowed back into the American economy, and it bounced back. In recessions before 1893 and 1921, presidents followed roughly the same plan and the crises were short-lived.

In 1929, however, after the stock market crash, President Hoover did the opposite of Cleveland and Harding. Hoover increased federal spending-through the Federal Farm Board, the Reconstruction Finance Corporation, and public works. Then in 1932 he agreed to sharply increase both income and excise taxes to help pay for his costly programs. With the top income tax rate hiked to 63 percent, and with almost all Americans paying some excise taxes for the first time in U.S. history, private investment did not bounce back and unemployment reached 25 percent. Thus Roosevelt had an especially difficult task when he entered the White House. Some of his emergency measures—the banking holiday and taking the United States off the gold standard (to stop the outflow of gold)—may have been in order. His New Deal, however, is another story because there he applied ideas from underconsumption theory.

What if, instead of expanding Hoover's programs and starting many new ones of his own, Roosevelt had kept his campaign promises to cut spending, reduce taxes, and lower the Smoot-Hawley tariff immediately? In the Democrat Party platform, and in speech after speech during the campaign, Roosevelt promised these three things.

On taxes, for example, Roosevelt seemed to understand that lower taxes would attract business investments. On the campaign trail, he said, 'Taxes are paid in the sweat of every man who labors because they are a burden on production and are paid through production. If those taxes are excessive, they are reflected in idle factories, in tax-sold farms, and in hordes of hungry people, tramping the streets and seeking jobs in vain.' In Sioux City, Iowa, Roosevelt announced that if elected president, 'I propose to use this position of high responsibility to discuss up and down the country, in all seasons and at all times, the duty of reducing taxes, of increasing the efficiency of Government, of cutting out the underbrush around our governmental structure, of getting the most public service for every dollar paid in taxation. That I pledge you, and nothing I have said in the campaign transcends in importance this covenant with the taxpayers of the United States.'

In describing his 'covenant' with the taxpayers, Roosevelt often became specific. He pledged to 'reduce the cost of current Federal Government operations by 25 percent.' The Democrat Party platform also promised Americans 'a saving of not less than 25 percent in the cost of the federal government,' and Roosevelt viewed that platform as a binding document. In Pittsburgh, Roosevelt announced, 'Before any man enters my Cabinet he must give me a two-fold pledge:

1. Absolute loyalty to the Democratic platform and especially to its economy plank.

2. Complete cooperation with me, looking to economy and reorganization in his Department.'

He further said he would 'eliminate from Federal budget-making during this emergency all new items except such as relate to direct relief of unemployment.'

These pledges, this 'covenant with the taxpayers,' freed Roosevelt to attack the 'reckless and extravagant' spending of the Hoover administration. 'It is committed to the idea that we ought to center control of everything in Washington as rapidly as possible—Federal control.' If, as president, Roosevelt had used his influence to cut spending and then cut the tax rate on top incomes from 63 percent back to about 25 percent, that would probably have encouraged investors to seek returns on new capital ventures. When Harding and Coolidge introduced such tax cuts during the 1920s, that helped the American economy go from 11.7 percent unemployment in 1921 to an average of 3.3 percent unemployment from 1923 to 1929. If Roosevelt had slashed tax rates, many Americans could also have given more to private charities; states and cities would have had more room to ask wealthy citizens for contributions to assist the hungry people in their cities. Governor Joseph Ely of Massachusetts, as we have seen, fully embraced that line of reasoning. In fact, Roosevelt himself seemed to be making these connections during the campaign.

The tariff needs discussion as well. In Seattle, Sioux City, and elsewhere, Roosevelt blasted the 'outrageous rates' of the Smoot-Hawley tariff. He showed a keen understanding of the dynamics and unintended consequences of Hoover's signing the highest tariff in U.S. history. 'Now, the ink on the Hawley-Smoot-Grundy tariff bill was hardly dry before foreign nations commenced their program of retaliation,' Roosevelt observed. And the Hoover administration 'had reason to know that would happen. It was warned. While the bill was before Congress, our State Department received 160 protests from 33 other nations, many of whom after the passage of the bill erected their own tariff walls to the detriment or destruction of much of our export trade.' What's more, Roosevelt observed that American manufacturers responded to foreign retaliation against American-made products by relocating their American businesses—and jobs—to friendlier foreign countries. Americans had established '258 separate factories' in other parts of the world from 1930 to 1932 to escape retaliation. Lost American factories and diminished American business was not the only harm.

Farmers were most hurt by the Smoot-Hawley tariff because so much of American agriculture was exported. Forty nations, Roosevelt noted, had set up high tariffs against U.S. imports.