During a townhall last Friday, President Barack Obama told a whopper of a lie. Ever the believer in revisionist history, he claimed that Franklin D. Roosevelt was a “fiscal conservative.” Huh, come again?
Of course, nothing could be further from the truth. Henry Morgenthau, who served as FDR’s Treasury Secretary, famously said of their efforts to combat the Great Depression, “We have tried spending money. We are spending more than we have ever spent before and it does not work.” Spending money on that level is obviously not what a fiscal conservative would do.
In 2004, a study by two UCLA economists found that FDR’s statist economic intervention, through his New Deal policies, prolonged the Great Depression by seven years, which was noted in this Reason TV video about how Obama hoped to follow in FDR’s footsteps after the 2008 financial crisis by pushing Keynesian economics:
During the presidential campaign Roosevelt railed against incumbent President Herbert Hoover’s big-spending, government-growing ways. He called for “immediate and drastic reductions of all public expenditures”; “abolishing useless commissions and offices, consolidating departments and bureaus, and eliminating extravagances”; and a “sound currency to be maintained at all hazards.”
Once in office, however, Roosevelt adopted Hoover’s approach and took it to dizzying heights. “FDR tripled taxes and spending more than doubled from 1933 to 1940,” Jim Powell, author of FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression, told CNSNews.com. “That was the biggest increase in peacetime spending in American history. Before that, the biggest increases in spending came during wars.” So much for FDR’s fiscal conservatism.
There are a number of fallacies in this line of reasoning.
First, as Powell pointed out, the economy hadn’t improved much by 1937; unemployment was still at 17 percent. Moreover, argues Jonathan M. Finegold Catalan, the seeming improvement in 1935 and 1936 was largely the result of credit expansion fostered by the Federal Reserve and thus was doomed from the start.
Second, FDR’s 1937 budget was hardly one of “very severe austerity.” Though the deficit had fallen by $2.1 billion since the previous year, federal spending had decreased by only $600 million; the difference was covered by increased tax receipts. Furthermore, while spending had taken a hit in 1937, it was still higher than in all years prior to 1936 — hardly the massive cutback Obama made it out to be.
Third, spending cuts did not cause the 1937 downturn. “Explaining Roosevelt’s recession by pointing at a decrease in government spending is severely dishonest,” writes Finegold Catalan. He observes that even the drop in deficit spending can’t explain the recession because the 1938 deficit was even smaller than the supposedly austere 1937 one, yet the economy rebounded from the downturn that year. He maintains that, in addition to the inevitable bust after a period of artificial expansion, the 1937 recession was caused by New Deal policies that “maintained high real wages in the face of stagnating productivity” and “made the stock market extremely volatile and susceptible to otherwise minor changes.”
Fourth, World War II did not pull America out of the Great Depression. Yes, it reduced the unemployment rate — but only by drafting 10 million young men into the armed forces. Real recovery, as Robert Higgs and other economists have shown, did not occur until after the war, when government spending shrank rapidly.
Lawrence Reed, president of the Foundation of Economic Education, has also authored a short book, Great Myths of the Great Depression, that explains in detail how FDR’s economic policies promoted heavy regulations on businesses and promoted the interests of labor unions at every possible chance.