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I don't expect the Obamalites to get any benefit from this but maybe some of you who understand what is really going on and some of you that have an attention span capable of reading this will have a little light go on and may just bristle a bit.


Why the New Deal Failed

Speech given by Burt Folsom at Conservative University 2002


The following are remarks excerpted from Dr. Burt Folsom's lecture at AIA's Conservative University on why Franklin Roosevelt's New Deal failed.

How many of you in your history courses have talked about Franklin Roosevelt, the New Deal, the Great Depression, and the 1930s? How many of you had your professor speak about Roosevelt in a very positive sense, that he was a good president?


Well, I have thirty minutes to try to change your minds.

I realize that in the 1997 Schlesinger poll-conducted by a prominent historian-Franklin Roosevelt was ranked even ahead of Abraham Lincoln and George Washington, both. He was ranked number one. This is surprising because under FDR we're going to have unemployment that's going to reach almost 25 percent. It's going to linger throughout his first two terms. It's a dreadful time in American history.


Now before we get into the specifics of Franklin Roosevelt and the New Deal, which was the name of his government program, I wanted to begin by announcing some of the results from a Fox News poll that was done over a year ago. The poll asked, "When the government spends money for programs, does it get the money from taxpayers, or does the government have an independent source of revenue?"


Let me start with the answer this way. Eleven percent weren't sure. They were undecided. Forty percent said government gets its money from taxpayers. Forty-nine percent said they have an independent source of revenue. So the answer to the poll was 49 percent said government has an independent source of revenue that it uses to spend money for programs; 40 percent said no, every time it spends a dollar on programs it has to get the dollar from taxpayers; and 11 percent were undecided.


Can you see why after this poll, when we have government programs that fail, it does not result in throwing those who perpetrated the program out of office? You have one group that gets a sizable vote-forty percent-that is mad about it. But there are others who say: "Hey, it's not my money. It's the government's money. At least they tried."


Keeping that poll, and the results of that poll in mind, let me go over a fallacy of economics that was well developed by Henry Hazlitt. He wrote a book called Economics in One Lesson. It's a very readable book in economics, which is saying something. Now what he did in that book was to describe the broken window fallacy. Let me modify it, and present it to you this way. Let's say that we have a nice suburban area sort of like we have here in Washington, DC, out in Chevy Chase. And we have some guy there who has a nice picture window, and some kid goes by, a hoodlum, and throws a rock through that window, breaks it. And let's say that it costs $500 to replace that window. Well, our first reaction might be: What a horrible thing. Let's catch the perpetrator." But what if somebody else came up and said, "Wait a minute. The window's been broken, some time has elapsed, we haven't caught the guy, but maybe we shouldn't catch him to throw him in jail. Maybe we should catch him to pat him on the back. Because I've observed what's happened in that house and what's happened is this: He broke the window, but the guy who had the window broken called up the glassmaker and the glassmaker put the window in and installed it for $500. Then the glassmaker took that $500 and bought a DVD player. He also bought a couple DVDs. And then he bought a reclining chair to sit back and watch the movies, all with that $500. So that broken window has generated business and now we have more DVD sales, more reclining chair sales, and it's generated business all around town. So isn't this a good thing?"

Where's the problem with this argument? The valid point here is that the guy whose window was broken also might have wanted to buy a DVD player and a reclining chair. Or he might have wanted to buy a suit of clothes and some insurance. So that guy, and the tailor, is out $500 because instead of buying a suit and a shirt, he now had to pay for the window. You never generated real business because the guy who had the window broken is out $500 and the guy who had replaced the window is up $500, but the guy who had the window broken would have also been spending $500. So there's really no net gain. Hazlitt called this the broken window fallacy.


Do you see the linking of the Fox News poll and the broken window fallacy? If you have a government program, the taxpayers pay for it. You never actually generated a job with that program; you merely transferred dollars from the taxpayers to the government. The taxpayer would have bought radios, or TVs, or DVD players with that money. Or he could have put it in the bank and it would have gone out for a loan to someone. See, the point is it would have been put to use, but instead it was taken from him, given to someone else who now has a job. But the only thing that you see is the job that was created. If you understand those principles, you can understand why the New Deal failed.


The New Deal consisted of a set of programs initiated by Franklin Roosevelt and the Democrats in Congress. Those programs transferred assets from taxpayers, centralized them in the federal government, and dispersed them supposedly to create new jobs. However, every time you see a New Deal program, you need to see that money leaving a taxpayer's hand. Once you mentally see that shift taking place, you're alert that a job was never actually created. What I want to do is to go through some specific programs and then I want to go through some statistics to demonstrate the point. I'm going to hit some of the best-known programs.


The Works Projects Administration was set-up under Roosevelt with his good friend Harry Hopkins. They created, to use their rhetoric, over five million jobs. We had unemployment of eight or nine million people and this agency all by itself created five million jobs. People were building roads, putting gravel on roads, sometimes asphalt and cement, all over the country. They built courthouses in different counties. They built football stadiums for high schools around the country. Sometimes they built bridges, but mostly roads. The point is they did those kinds of projects. The people were given money. Taxpayer dollars paid for the projects. They were completed. Supposedly they created five to six million jobs. But where did the $10 billion come from that supported them? Did the government have an independent source of revenue? No, they had to get it from somewhere. I will talk after awhile about what happened to the tax rates and the taxation in this country to support these programs. But right now, just see that the $10 billion to create these five million jobs came from tax dollars that had to be raised.

Another New Deal program was the AAA, our first serious government program in farming. Typical farms back in the thirties were about 160 acres. Sometimes they were larger. But let's just say that we have a typical 160 acre farm. What the AAA did under the Agricultural Adjustment Act was to allow farmers to take one-quarter of their land out of circulation and pay them to do it. The idea here was we had overproduction of crops, so the prices were low. So you paid farmers not to produce. So a farmer takes his acreage out of production. He is often paid $10 an acre to do that. Then he grows food on the other three-quarters of his land. Did we get the ten dollars an acre from an independent source of revenue for the government to pay for this? The textbooks almost never tell you where it comes from but of course it comes from the taxpayers.


I'm working on a book on the New Deal and I'm trying to piece all of this together. The WPA and the AAA are two of the best-known programs. It's interesting that the word boondoggle was first applied to the WPA. I'm looking at this in the most charitable way. I'm assuming that a lot of what the WPA did was worthwhile. A lot of these roads were so poorly built and constructed, and were slowly built because the more slowly they were built the longer people could get paid to build them. Right? And the WPA had so many poorly built roads that other WPA workers had to come to redo those roads. It's also very interesting that so many of these were created in Democratic congressional districts. And it is very interesting also that so many of the people who got the jobs were people who were appointed to their jobs by the Democratic precinct chairman in the area. And it's also interesting how when all that money became available, many Congressmen decided to start voting more with Franklin Roosevelt so that they could get money coming in to their district. So you see the political motivation.

Let's look at AAA for a minute. In 1934, the year after AAA, one of the only industries that really prospered was the fertilizer industry. It prospered because in record numbers farmers took their $10 an acre and bought fertilizer to increase their yield on the other three quarters. When we look carefully at what farmers were doing, they were told they could take a quarter of their land out of circulation. Many of them took their swamp out of circulation. Some had a forest, or heavily treed area and they took that out of circulation. And the bureaucrats found furthermore, that some farmers were secretly growing crops even when they were paid not to do so. Isn't human nature disgusting? And so the government sent agents around, to measure the land to make sure they were taking the proper amount out. Now as a young college professor many years ago, the first time I encountered my chairman of the tenure committee and got a chance to have a long talk with him, he told me his first job was with the AAA, measuring land. And like a silly untenured professor, I said: "Oh, did you get bribes and payoffs?" And the stupidity of that occurred to me because then I thought that if he says yes, then he may expect me to give him a bribe for tenure. He was a charming Southern gentleman, and said, "Well, yeah, but the best offers I could get were a pair of new tires, but I never got too many good ones; other people got the good ones." I think you're getting the drift of my story. People were hired to measure the land, and some of them were corrupt, and so we had to pay people to look in on the people who were measuring the land. By the way, is the funding for this from an independent source of revenue that the government has, or is it from taxpayers?


Well, the next thing that happened was that even the people checking on the people couldn't be trusted. And so the government now bought a fleet of airplanes and drove over the land to do aerial photographs of the land to see if anybody was planting something where they shouldn't be and getting illegal payments. Some people finally said, "What are we doing? The government now has pictures of all of our lands and our houses and everything like that." Once you ask for the government aid, the government controls come shortly thereafter.


Now, I'm not even going to go into some of the sillier programs other than just to mention them. The Silver Purchase Act took the price of silver-the going price of silver was 40 cents an ounce-and paid silver miners 64 and a half cents an ounce for their silver. Anybody could turn in silver and the government would pay 64 and a half cents. Key Pittman, senior senator from Nevada, was chairman of the foreign relations committee and so now after passing the Silver Act Roosevelt would be able to get some of his foreign policy enacted because Pittman insisted upon getting his silver subsidy first. So you see now what you get into once the government is into the game. Also of course, what you have is unintended consequences. Sixty-four and a half cents an ounce for silver and the world price is 40 cents. Can anybody think of some ways to make money here? How about going south to Mexico, picking up some 40-cent silver and bringing it back here and selling it to the treasury. These are the types of things we are in to once we get these programs.


Some of you may say: "Well, what about welfare? I mean there are people hungry, there are people starving." I want to comment on that.

Our first federal welfare program came during this time period. It actually came the first year Roosevelt ran for president and then was expanded once he was elected. The first federal aid for relief was $300 million. That was given to the states, and the state governors would tell him, "My gosh we need money." They would tell what they needed and as long as we had $300 million, we'd give it to them because there were people who were hungry. I have down here a list of all the money that every state got. Massachusetts got zero. And the reason they got zero is because they didn't apply for it. They said, "Hey, we can do it."


Back then the Atlanta Braves were in Boston, they were the Boston Braves. We'd have the Red Sox and the Braves play an exhibition game and the proceeds went to charity. John D. Rockefeller gave a large amount to local charities. They would raise it among local textile entrepreneurs and others. We can solve our own problems here in Massachusetts. So they got zero out of $300 million. The state of Illinois, especially Chicago where Al Capone ran sway for so long, was very inefficient in its operations in government. They asked for and received out of that $300 million, $55,443,721. I like that because if they said, "Hey Uncle Sam, we need $55 million." Well there's something about that, but how about, "We have come to the conclusion that we need $55,443,721." Doesn't it have that aura? The precision makes it plausible. They received it. Illinois received over $55 million of that pot, more than any other state. That is more than twice what New York received and five times what California got. They received $55 million, Massachusetts got zero. So what I want you to see is the taxpayers of Massachusetts are not only paying for their own welfare, but for Illinois as well. Where did we get the $300 million? We're getting it from taxpayers, and some of them were from Massachusetts, which means they're not only paying for their own way. Should it be any surprise that when Roosevelt expanded the amount of money that could be used, the next time Massachusetts said, "Now we have some needs." Their next request was over $114 million in federal funds.

We changed in that short period of time from being a country of states, private charity, and solving our own problems, to a country of people who tried to get the most out of the government. In fact, the more poorly you run your city, the better case you have for getting the most out of the government. The poorly run states and cities have the best case for getting the most money.


Now, what I want to do is talk about the other side, the side the textbooks almost always omit. How did we paid for this? We have to look at the taxes. The textbooks say, "Oh, Roosevelt was trying. He had programs to help people." And then they'll mention these government programs. Well, where'd the money come from? The textbooks are quiet. Well, I am not going to be so quiet.


In 1929, when the Great Depression hit, the top marginal tax rate was 24 percent. That was the rate on top incomes. The bottom rate was one-half of one percent. In other words, the taxation started at one-half of one percent. There was an exemption, too, and the exemption was high enough to keep 98 percent of all Americans off the income tax rolls. But we had a small federal government back then.


In 1932, the marginal tax rate went up to 63 percent on top incomes. In 1935 Roosevelt pushed it up to 79 percent, and we started at five percent, and the exemption was lowered, so more people were paying taxes. But it starts at five percent and it goes up to 79 percent. Now, you could see why, right? All these programs had to have a payment. But here's something that is not explained. What about the work ethic of those people in those top brackets? In 1929, you were telling them, you get to keep three-fourths of whatever you make. Now you're telling them you give more than three-fourths to the government. What's your work ethic going to be with a 79 percent tax? Tax-exempt bonds, stamp collections-that was Roosevelt's personal exemption, he had a good stamp collection-coin collections, foreign investments, Swiss banks, anything to shelter that money. But do you see why the depression is prolonged? Who's going to invest to create the jobs to get us out when you're being taxed 79 percent? Do you think the revenue then is going to go up when the tax rate is 79 percent? Very good thinking, we have some supply-side thinking in the crowd. We raised in 1929 over $1 billion. It was almost $1.1 billion in income tax revenues. In 1935 when the tax rate was 79 percent, our take for the government on income tax was $527 million-less than one-half of what it was in 1929. Did you catch that? Twenty-four percent of something is something, and seventy-nine percent of nothing is nothing-because the high tax rates chased capital into tax-exempt investments.


Therefore in order to get money, Roosevelt had to tax poor people, so he instituted excise taxes-especially on whiskey and tobacco. Prohibition ceased to be law. He explicitly said I want that whiskey in there so we can tax it. Disproportionately middle-class and lower-class people drink. Roosevelt wanted their money. We therefore had a high excise tax on whiskey and tobacco. We instituted for the first time in our history a federal gasoline tax. See, the income tax hits the rich back in the twenties, now we are putting in excise taxes because we have to fund the New Deal. The money has to come from somewhere, and the rich people just sheltered their investments. We had other excise taxes on cars, taxes on tires, on telephone calls, telegrams, movie tickets, and bank checks. And they wanted to do it on soft drinks, but Coca-Cola was too strong a lobby, so they settled for grape concentrates. The revenue from excise taxes in this country went from $500 million in 1929 to $1.36 billion in 1935.

What I want you to see is these programs-WPA, AAA, and Silver-are funded by excise taxes on middle-class, lower-class people drinking, smoking, driving cars, going to movies. That is where much of the funding for the New Deal came from.


Now, with Roosevelt you say, "My gosh! How could he win elections?" Roosevelt went on the campaign trail in 1936 and said, "You poor people are doing your share, but the rich are avoiding the taxes. We should make them pay." And he recommended a tax to congress, on all income over one hundred thousand dollars. His recommendation in 1941 was for a 99.5 percent tax on all income over one hundred thousand dollars. And when the budget director said, "What!" Roosevelt's comment was, "Why not?"

When congress refused to pass that bill, Roosevelt was furious. Therefore he instituted a 100 percent income tax, by executive order, on all income $25,000 or more. I repeat, Roosevelt instituted an executive order on April 27, 1942 for a 100 percent income tax on all income over $25,000. How many of you knew about that? Oh good, somebody did. Actually, the Republicans won the next election and voted it out, and Roosevelt had to settle for 90 percent. He had to settle for a 90 percent marginal tax. Here's a quotation from Roosevelt, it was during World War II, "Discrepancies between low personal incomes and very high personal incomes should be lessened." Oh, and he used the war as a crisis, you see. "And I therefore believe that in this time of grave national danger, when all excess income should go to win the war, no American citizen ought to have a net income after he's paid his taxes of more than twenty-five thousand dollars."


I have made this offer to teachers and students around the country. You show me an American history textbook that tells that Roosevelt had a 100 percent tax. I would think that if you're going to rank him the number one president in American history, and he did that, that ought to be mentioned somewhere. You show me where it's mentioned in any U.S. history textbook, and I will eat the textbook. I only ask that they bring me mustard and salt. I must say that I've had a textbook free diet for every year since I've been making that offer. I have never seen a textbook bring up that fact.

Why did the New Deal fail? It never could have done anything else. You are simply transferring resources from lower and middle-class Americans on excise taxes, to programs that were doomed to fail from the first. And therefore, you're not going to increase employment.


I will finish with a quotation from Roosevelt's secretary of treasury, Henry Morganthau. He admits, the whole thing failed. Again, the quote, you will never see in a textbook, but I have it right here. I went to the Roosevelt Library and dug this one out. Henry Morganthau, Secretary of Treasury, in May, 1939, years after the New Deal, said, "We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. 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 enormous debt to boot." That is the secretary of treasury in charge of the money disbursement and statistics collection during the 1930s, making that statement. When we understand the Fox News poll and the broken window fallacy, we realize that the New Deal had to fail.

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