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No deal is the best deal.

THE NEW DEAL probably has been the greatest political force in the U.S. during the last 100 years, and Franklin D. Roosevelt probably has been the most influential president during this time. In our current economic crisis--which some have compared with the Great Depression--many critics are calling for more Federal programs and a "New New Deal." There are three reasons the country should dread such a deal from Pres. Barack Obama, although these fears already are being realized as the Administration implements its stimulus plan while attempting to prop up banks, insurance companies, and automakers, among others.

First, the Federal programs in FDR's New Deal did not lower unemployment. Sure, the Works Progress Administration (WPA) built roads; the Tennessee Valley Authority put up dams; and the Civilian Conservation Corps planted trees. However, every dollar that went to creating a Federal job had to come from taxpayers, who, by sending their cash to Washington, lost the chance to buy hamburgers, movie tickets, or clothes and create new jobs for restaurants, theaters, and tailors.

What is worse, some New Deal programs had terrible unintended consequences. The Agricultural Adjustment Administration, for example, overhauled agriculture by paying farmers not to produce on part of their land. After farmers took the Federal dollars, the U.S. developed shortages of the very crops taxpayers were paying farmers not to produce. By 1935, the U.S. was importing almost 35,000,000 bushels of corn, 13,000,000 bushels of wheat, and 36,000,000 pounds of cotton. Simultaneously, we had an army of bureaucrats in the Department of Agriculture to inspect farms (via, in some instances, aerial photography) to ensure farmers were not growing the crops we were importing into the country.

Second, the taxes to pay for the New Deal became astronomical. In 1935, Roosevelt decided to raise the marginal tax rate on top incomes to 79%. Later he raised it to 90%. These confiscatory rates discouraged entrepreneurs from investing, which prolonged the Great Depression.

Henry Morgenthau, FDR's loyal Secretary of the Treasury, was frustrated at the persistence of double-digit unemployment throughout the 1930s. In May 1939, with unemployment at 20%, he exploded at the failed New Deal programs. "We have tried spending money," Morgenthau noted. "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!"

Third, the New Deal divided and politicized the country in tragic ways. Those who lobbied most effectively won subsidies and bailouts even if their cause was weak. Others, who had greater needs, received nothing. Walter Waters, who led a march of veterans on Washington, D.C., lobbied successfully for a special bonus for veterans, whether they had been in battle or not. When asked why veterans--instead of longshoremen or teachers--should receive a special bonus of taxpayer dollars, he said, "I noticed, too, that the highly organized lobbies in Washington for special industries were producing results: loans were being granted to their special interests.... Personal lobbying paid, regardless of the justice or injustice of their demand."

In the case of the veterans, in 1936 they won a $2,000,000,000 Federal bonus--a sum exceeding six percent of the entire national debt at the time. Teachers, by contrast, were less effective lobbyists and won almost no Federal subsidies. Silver miners, led by Sen. Key Pittman (D.-Nev.), won a subsidy that paid almost $300,000 a day each day for 14 years, but coal miners were left out.

In another example, under Pres. Herbert Hoover and Roosevelt, Illinois lobbied effectively and won $55,443,721 under the first Federal welfare grant, while Massachusetts received zero Federal dollars. Without Federal money for welfare needs, Massachusetts valiantly raised its own funds to secure what Illinois extracted from Washington. The Boston Civic Symphony repeatedly gave concerts to benefit the jobless. City officials and teachers raised money and took pay cuts. Massachusetts Gov. Joseph Ely believed that no state should receive Federal aid and that private charity was the best charity, that Federal relief ruined both taxpayers and those in need. "Whatever the justification for relief," Ely pointed out, "the fact remains that the way in which it has been used makes it the greatest political asset on the practical side of party politics ever held by an Administration." Ely added that "millions of men and women ... have come to believe almost that there is no hope for them except upon a government payroll."

Federal dollars always become political dollars, and the Democrats moved to use Federal money to gain votes at election time. In Pennsylvania, Joseph Guffey, the successful Democratic candidate for U.S. Senate in 1934, ran a campaign ad that said, "Compare this $297,942,173 contributed by Pennsylvania to the U.S. Treasury with the cash and credit of $678,074,195 contributed to Pennsylvania by the Roosevelt Democratic administration." Vote Democrat, Guffey and others proclaimed, and the Federal faucet will keep running. James Doherty, a New Hampshire Democrat, said, "It is my personal belief that to the victor belong the spoils and that Democrats should be holding most of these [WPA] positions so that we might strengthen our fences for the 1940 election." One WPA director in New Jersey--a corrupt, but candid, man--answered his office phone, "Democratic Headquarters."

If history is a guide, we have every reason to believe that, if Pres. Obama continues to institute a New New Deal, then universal health care, Federal bailouts, and jobs stimulus programs will be costly, will be politicized, and will be failures.

Burton W. Folsom Jr. is the Charles E Kline Chair in History and Management at Hillsdale (Mich.) College and author of New Deal or Raw Deal? How FDR's Economic Legacy Has Damaged America. This column is adapted from a speech delivered at a Constitutional Studies and Citizenship seminar; manuscript courtesy of Imprimis.
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Title Annotation:ECONOMIC OBSERVER; New Deal programs
Author:Folsom, Burton W., Jr.
Publication:USA Today (Magazine)
Geographic Code:1USA
Date:May 1, 2009
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