Wednesday, May 27, 2009

Obama and the New Deal

President Obama's economic policies, while vastly different from what most Americans have seen, are not new. Many of the president's policies are very similar to the policies of another American president. Much of what is in the news today is eerily similar to President Franklin Roosevelt's New Deal policies of the 1930s.

First, the New Deal focused on heavily regulating the US economy. Many of President Roosevelt's advisors were influenced by the apparent success of communist central planning in the Soviet Union and fascism (national socialism) in Italy. They hoped that an American version of a centralized economy would help lift the United States out of the Great Depression.

The Democratic congress of the 1930s passed a succession of acts that regulated the US economy. FDR's belief was that keeping wages high was the key to restarting the economy. To that end, the federal government enacted laws that made it easier for employees to form unions. As unions formed, they negotiated wages that were above market rates. The federal government also set minimum wages for workers. To help enable companies to pay these high wages, the government also set minimum prices.

Ironically, these policies hurt many of the people that they were intended to help. The price controls kept prices high and made many products unaffordable to the millions of Americans who were unemployed. FDR's administration went so far as to destroy food to keep prices high at a time when millions of Americans were going hungry. John Steinbeck protested this policy in his novel The Grapes of Wrath.

High wages also provided an incentive for companies to automate and eliminate jobs. Minorities such as blacks were hurt because they were not allowed in many of the unions. This kept them out of the highest paying jobs and limited them to unskilled labor at low wages.

While the Obama Administration has not enacted wage and price controls, they are providing employees with incentives to unionize. The Employee Free Choice Act, if passed, would allow unions to form without the traditional secret ballot elections. The United Auto Workers also got favorable treatment in Chrysler's bankruptcy, including a seat on the board and a better settlement than Chrysler's secured creditors.

The Obama Administration is moving in the direction of central planning. Obama is exerting a large influence on bailed out industries such as auto manufacturers and banks. The president's new auto standards requiring auto companies to build cars that are lighter and more efficient are the best example. Consumers have rejected these cars in the past because they are typically smaller and less safe in an accident.

More central planning is likely to come soon. Two pieces of legislation that are coming are healthcare reform and carbon cap-and-trade. Healthcare reform would drastically increase regulation in the medical fields and would likely eventually lead to a government monopoly on health insurance. Cap-and-trade would regulate and tax much of the economy through taxes on carbon use, which would include practically all energy production and use in the United States.

FDR also focused on public works projects as a means of getting people back to work. The Civilian Conservation Corps (CCC) and the Public Works Administration (PWA) are two of the best-known New Deal make-work programs. These programs paid above market wages so they directly competed with private employers for labor. Additionally, the PWA primarily used skilled tradesmen, such as architects, and did little to help poor unskilled laborers.

President Obama's stimulus program had a similar goal and only lacked acronyms. The stimulus bill passed February 2009 contained vast amounts of money for "shovel-ready" construction projects. These projects were intended to provide jobs to reduce unemployment.

In reality, FDR's job programs were ineffective. Unemployment reached a high of over 25% in 1933. Even though the unemployment did fall after that, it never fell below 10% until after the entry of the US into WWII ( In contrast, the unemployment rate prior to the onset of the Depression was only 4.2% ( FDR's make-work policies did not appreciably reduce unemployment rates and President Obama's stimulus program will most likely have the same result.

The New Deal also dramatically increased federal spending on entitlements. The Social Security Act created the Social Security program in 1935. This did not help the poor of the 1930s however, since payments were not scheduled to begin until 1942 even though withholding began immediately. The act was later amended to begin payments in 1940. The initial consequence of Social Security was to take even more money from the paychecks of those workers who still had jobs, as well as their employers.

At its inception, Social Security benefits were to be paid from the Old Age Retirement Account. This account was depleted in 1940, however, and Social Security became a pay-as-you-go program where working taxpayers directly supported retirees. As Baby Boomers retire, the trustees of the Social Security program say that its current unfunded liability is greater than $25 trillion. This means that Social Security is expected to have a negative cash flow by 2017 and be insolvent by 2041 (

Medicare, another entitlement began by President Johnson, is in even worse shape. Medicare's unfunded liability is $74 trillion. Medicare's hospital trust fund is already in the red and will be insolvent by 2017 ( To resolve the issues, benefits will have to be cut or the taxes that fund these programs will have to be dramatically increased. The government can do this because there is no contract that guarantees contributions or benefits for either program.

To this debt, President Obama proposes to add a new healthcare entitlement. The cost for this massive new bureaucracy will be added to Obama's already staggering deficit spending. It will also require a large infusion of tax dollars. As government healthcare becomes a reality, it will invariably crowd private insurers out of the marketplace, costing more jobs.

That brings us to another parallel between the New Deal and President Obama. FDR presided over some of the most draconian tax increases in the history of the United States to fund his social programs. The Revenue Act of 1936 included a variety of new taxes including higher income taxes, dividend taxes, estate taxes, and taxes on undistributed profits. FDR also limited the deductions available on corporate and personal income taxes. By the end his term, the top personal tax rate was 91%. The state tax burden also doubled with increases in state income, corporate and sales taxes. The Social Security Act added social security withholding to the tax burden.

Barack Obama has already announced his intention to allow the Bush tax cuts to expire for the wealthiest five percent of Americans. It is unlikely that the other 95% of Americans will escape the taxman unscathed. President Obama has already signed a sixty-two cent increase to the federal tobacco tax. This tax will disproportionately affect lower income people, a segment of the population that Obama had vowed to not tax more " even one dime" (

Congressional Democrats seem intent on raising taxes on all Americans even further. Already there have been proposals to increase taxes on soft drinks, snack foods, employer-paid health insurance, an increase to the estate (death) tax, as well as cap-and-trade tax on energy. Obama has also followed in FDR's footsteps by eliminating corporate tax deductions. This is effectively a tax increase on corporations.

In following the example of the New Deal's increases in both spending and taxes, President Obama is likely prolonging the current recession. Tax increases remove money from the economy that could be better spent and invested by individuals and businesses. Increasing taxes paid to the government will guarantee that consumers have less money to spend and that businesses have less money to expand, hire workers, and keep their doors open.

President Roosevelt's onerous regulations, heavy-handed taxation, and unfriendly business climate prolonged the Great Depression rather resolving it. His methods have been tried and failed numerous times in the years since including in Japan, Michigan, and California. As President Obama repeats these same mistakes, we can only hope for different result.


FDR's Folly, Jim Powell, Crown Forum, New York, 2003.

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