Obama, FDR, and the Great Depression

by Austin Raynor

There is a tendency in a time of economic recession for the public to cry out for the government to “do something.” This tendency is perpetuated by the misconception that government spending is capable of stimulating the economy, rather than simply redistributing wealth. There also exists the pervasive myth, perpetuated in public schools and held generally by those unfamiliar with economics, that Franklin Roosevelt ended the Great Depression through his unprecedented expansion of federal government. But an examination of history tells a different story.

If one traces the gradual collapse of the American economic system in the 1930s while also examining federal spending programs, it becomes clear that government intervention actually spurred unemployment. In November 1929, one month after the stock market crash, the unemployment rate was five percent, according to Vedder and Gallaway statistics. By December it had peaked at nine percent, and by June of the next year it had dropped back to 6.3 percent. At that point the Smoot Hawley tariff, a populist piece of legislative protectionism, was passed, and within five months unemployment had topped ten percent.

Contrary to public opinion, Herbert Hoover was not a supporter of the free market. Between 1929 and 1932, he increased government expenditures by 50 percent—the largest increase ever during peacetime. In 1932 Franklin Roosevelt was elected, and promptly embarked on the most reckless program of governmental expansion in American history. Not coincidentally, starting in February 1932 unemployment rose to over 20 percent and remained there until 1935, when it dropped to 19 percent!

There are various factors at work here. Every dollar spent by the government is a dollar taken away from the private sector. Thus, it is incorrect to classify government spending as wealth “creation” when it is really nothing more than wealth redistribution. In this case, money that could be spent by professional private investors is instead spent, less efficiently, by government bureaucrats. In addition, government spending is typically accompanied by increased taxation; high levels of taxation reduce the incentive to work at the same time that high capital gains taxes discourage investment. It is interesting to note that this variety of government policy, now pursued by Obama, is nearly identical to the strategy enacted by Japan’s government, which has kept that country mired in economic malaise for decades.

Furthermore, continued government “stimulation” of the economy prohibits the market from structurally realigning itself to allocate resources appropriately. The price system in a free market conveys a wealth of nuanced information about resource availability, consumer demand, and the costs of production. Government interference in this system—through wage controls, price ceilings, asset purchase, or inflationary policies—distorts the transmittance of information and thus prevents economic agents from making sound investment decisions.

President Obama, despite the failures of government intervention in the past, seems intent on repeating the mistakes of Hoover and FDR. Bush, too, deserves a good deal of blame in this area: it was under his watch that the first, $700 billion bailout package, the Emergency Economic Stabilization Act, was passed last October. This February Obama passed another massive government spending package, totaling just under $800 billion: the American Recovery and Reinvestment Act. An examination of unemployment statistics over this period of time proves illuminating.

In September 2008, before the first bailout, unemployment was 6.2 percent. The bailout was passed and unemployment climbed steadily until January of this year, by which time it had reached 7.6 percent. In February Obama passed his bailout package. By March, unemployment had risen to 8.5 percent. It continued to rise and by October had reached 10.5 percent. To summarize: two government bailouts, a four percent increase in unemployment.

Sadly, the free market system is often chosen as the scapegoat for the current financial mess. Rarely, if ever, is the role of government addressed. The easy credit doled out by the Fed and the unavoidable results of the Community Reinvestment Act (which forced banks to loan to low-income citizens who otherwise would not have been able to secure a loan) caused the recession, and government intervention is prolonging and worsening it. Apart from the bailouts, Obama has demonstrated a frightening and pandering protectionist tendency not dissimilar to the tendencies of Hoover and FDR, as evidenced by his imposition of steep import duties on Chinese tires.

Economic ignorance and political pandering are the two great enemies of financial recovery. Politicians must have the integrity to see beyond the ill-advised pleas of their constituents and reject government expansion on the basis of history and economics. The mistakes of the past are evident, and it is our task merely not to repeat them. Sadly, the current administration seems content to lead us down the road to economic disaster, justifying at each stage further government expansion only by citing problems created by government intervention in the first place.