As Good as Gone
Are government stimulus projects a trillion dollar hole?

For those who are old enough to have parents raised in the Great Depression it is almost impossible to not have positive memories of FDR. Not only did he steer the country through the Great Depression and World War II, he was also elected an unprecedented four times.

Many of our parents felt deep affection for the president they knew through most of their formative years. Maybe that’s why, some 60 years later, when former Wall Street Journal editorial board member Amity Shlaes released her critical reassessment of FDR’s presidency, “The Forgotten Man: A New History of the Great Depression,” initial reader response may have been lukewarm.

However, as the economic news of 2008 went from recession to possible depression, Shlaes’ book has become instructive as a look back on the 1930s, a re-examination of FDR’s real economic record, and a tutorial on what lessons need not be borrowed from that era’s economic policymakers.

Conventional wisdom recalls that President Herbert Hoover deepened the Depression by a) contracting the money supply, b) insisting on a balanced budget at a time when business activity had stopped, and c) signing into law the protectionist Smoot-Hawley Tariff Act. A historical side note: One of the act’s authors, Willis Hawley, represented Oregon’s first congressional district.

Roosevelt, on the other hand, gets credit for stopping the run on the banks through the establishment of the FDIC program and for creating an alphabet soup of new agencies through the National Recovery Act, which led to massive federal spending on infrastructure projects. Timberline Lodge and New York’s Lincoln Tunnel are just two of many government projects built during this time.

Roosevelt also expended great effort micromanaging the economy and the nation’s money supply, which included removing the dollar from the gold standard. And of course, Roosevelt gets tremendous credit for lifting the country’s spirit with his “Fireside Chats.” His historic words at his first inauguration, “We have nothing to fear but fear itself,” brought hope to a frightened nation.

But, historians and Americans alike have mixed their emotional response to FDR with the cold reality of his economic results. His strong, successful leadership through the darkness of World War II will forever color FDR’s legacy. But it should not be confused with his impact and success managing the struggling American economy at that time.

As Shlaes points out in her book, a look back at the economic data of that era suggests that instead of helping matters, Roosevelt deepened and prolonged the Great Depression through his policies of heavy government intervention. Last summer in a WSJ op-ed Shlaes laid out her book’s premise:

The real question about the 1930s is not whether it is wrong to scrutinize the New Deal. Rather, the question is why it has taken us all so long. Roosevelt did famously well by one measure, the political poll. He flunked by two other meters that we today know are critically important: the unemployment rate and the Dow Jones Industrial Average. In his first inaugural address, Roosevelt spoke of a primary goal, “to put people to work.”

Unemployment stood at 20% in 1937, five years into the New Deal. As for the Dow, it did not come back to its 1929 level until the 1950s. International factors and monetary errors cannot entirely account for these abysmal showings.

So what does account for FDR’s poor economic record? Shlaes sees two factors: FDR’s erratic policy behavior and his reliance on government-sponsored infrastructure projects to create jobs and wealth. Shlaes believes that the government’s heavy-handed approach to the economy slows private sector recovery in several ways.

Shlaes’ comments regarding Roosevelt’s expansionary fiscal policy (What is the Fiscal Cliff?) could portend bleak results for President-elect Obama’s proposed stimulus package. “The year 1936 saw a deficit of 2.6 percent of the economy, compared with say, a surplus in 1930. The economy did grow in those years. But it never got back to its old 1929 level. As soon as FDR stopped doling out the cash (in 1937, after the election) the economy crashed again. The stock market plummeted. Five years into the New Deal, in the winter of 1937-1938, two in 10 were again unemployed.”

Shlaes notes the failure of FDR’s infrastructure projects to stimulate the economy and compares their allure to today’s thinking. “With each point that unemployment rises, [the Democrats’] proposal to create jobs by building bridges, roads or buildings looks more attractive. Again, the New Deal is the model here … The states, too, lavished cash to create infrastructure jobs in the 1930s. Many structures that were built were solid. But they didn’t bring recovery, either. Evidence from that period suggests that government was crowding out the private sector … For every state-relief job created, about half a private-sector job was lost.”

If it is true today, as it was in 1933, that the primary goal is “to put people to work,” then both state and federal elected leaders will need to avoid emotional responses, partisan deals, and old party platform strategies. And if it is true today, as history shows it was during the Great Depression, that government infrastructure projects are insufficient to stimulate the economy and may in fact do harm, then all parties must find new approaches.

The first priority will be to take into account one simple fact: 60-68 percent of net new jobs created in the last decade were generated from small business.

Therefore, putting people to work in any lasting, meaningful way will require massive stimulus to small business. Not big government projects, though they may have a small, short-term place in the plan. Not handouts or bailouts, though they too may be required on a short-term, low-level basis.

Shoveling a trillion taxpayer dollars into a hole of government spending is not the answer. If infrastructure projects and handouts are the focus of Obama’s stimulus package, the money is as good as gone. Real economic recovery will only come from small business stimulus. And no doubt it’s time for thinking outside the box that goes well beyond standard direct payments or traditional tax cuts — though these too may play a role.

America needs economic leadership. That being said, it would be wise to heed another of Shlaes’ observations on FDR. “There is evidence, however, that FDR’s very strength was a negative, because he used it to give himself a license to do true experimenting. In his second inaugural address, FDR said that he sought ‘an instrument of unimagined power for the establishment of a morally better world.’ No one knew what it meant, and markets were terrified … Businesses refused to invest.”

Despite FDR’s incredible charismatic leadership ability, small businesses did not recover until the 1950s. And unfortunately, most of the jobs created during FDR’s tenure were in the armed services of World War II.

If President-elect Obama’s economic recovery plan fails to acknowledge these realities, Americans must press for a better plan. We cannot afford to wait 20 years for recovery, we cannot afford another trillion dollars of debt, and we certainly cannot afford a world war, no matter how charismatic our new leader appears to be.


Valley Forge: George Washington and the Crucible of Victory Writing team Gingrich and Forstchen follow up the success of To Try Menís Souls (2009) with another novelization of a seminal episode in the history of Revolutionary-era America. Once again, George Washington provides both the narrative focal point and the moral core of the story, as he and his fledgling Continental Army struggle to survive the bitter winter of 1777 at Valley Forge.



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