Until Midterm Elections...

Scott versus Scott

Welcome to our blog. Here we will debate the days most serious topics and allow users the chance to discuss the topics as well. The range of topics will vary, but one thing will remain certain, the debate will rage on. Scott Lesinski is a proud conservative and Scott Jones is a proud liberal. However, the roles will switch on some topics. Stay tuned.

Scott Lesinski is currently an actuarial associate for a large human resources and insurance consulting firm in Saint Louis. He is also an avid student of US history and enjoys following current events, with an eye to their contextual relationship to the past. He is also, in fact, a former student of Mr. Scott Jones. Scott is working toward his FSA credentials, which is akin to earning a PHD in Actuarial Science.

Scott Jones is currently a high school social studies teacher at a high school in suburban St. Louis, MO. He teaches World History, AP American Government and Senior American Foreign Policy. He has a BS. Ed. (Secondary Social Studies) from the University of Missouri - Columbia and a M.A. (History) from Southeast Missouri State University. He is currently working on a dissertation in character education to earn a Ph.D. in Educational Psychology.

Wednesday, December 9, 2009

Obama’s Model: Franklin Delano Roosevelt – Paragon or Pariah?

Franklin Delano Roosevelt is revered by the liberals of today as the paragon of Democrat leadership and legislative prowess. Indeed, when Nancy Pelosi announced her 2,000+ page healthcare debacle had passed the House of Representatives, she invoked FDR along with LBJ as part of that historic example of the best Democrats had to offer.

Many liberals credit FDR with the recovery from the Great Depression of the 1930s. They point to such programs as the Works Progress Administration, the NLRA, the NIRA and others.

Many in the media and the pundit-class have likened Barack Obama’s presidency to that of FDR. Both replaced unpopular outgoing presidents and both entered the oval office amidst dark economic times. Granted, in FDR’s case, the Depression had been quite some time going, whereas with Obama, the recession was just gearing up, but I’ll agree, there certainly were similarities.

However, there are many flaws with this sort of hopeful thinking that Obama could bring about a second “New Deal”, not the least of which is that the first New Deal screwed this nation over for an additional 7-8 years. I’ve made mention before of the study done by Harold Cole and Lee Ohanian out of UCLA that shows that the Great Depression lasted 7-8 years longer than it should have otherwise because of FDR’s New Deal policies. I intend to explore that paper and analyze why what FDR did then, and what Obama is doing now, is the exact opposite of what we should be doing as a nation if we truly have as our goal economic recovery and job growth.

What was the New Deal?

The main tenants of FDR’s policies were two central acts: The National Industrial Recovery Act and the National Labor Relations Act. FDR thought that recovery was being stifled due to low wages and too much competition among industry. So, under the NIRA (1933 – 1935) antitrust laws were waived so long as industry increased their wages and allowed collective bargaining. Predictably, this resulted in stalled employment figures and high costs goods and services. A cartelization took hold of the country that affected nearly 80% of industry. Finally, in 1935, the Supreme Court ruled the NIRA unconstitutional, mainly having to due with this dismissal of antitrust law.

So, FDR decided to stack the court with liberal judges. He then passed the 1935 National Labor Relations Act which gave much more power to labor unions. Sit-down strikes became rampant. High wages and low employment continued. And despite the antitrust laws being in effect again, the FDR Department of Justice conspicuously failed to prosecute hardly any companies for restraint of trade procedures. It appears a certain union-cronyism had taken over the FDR administration.

Following this analysis of the cartelization, stagnant employment market, high wages and prices, and union cronyism, Cole and Ohanian determined that FDR prolonged the Great Depression up until the country got fully engaged in the war in 1941.

I need to stop here and explain the economics behind why this New Deal failed at bringing about true recovery.

In a naturally occurring economic recession, if left alone, things happen along these lines:

1. Consumers lose confidence and stop spending as much money.
2. Businesses have less revenue as a result and are forced to begin salary freezes/layoffs
3. Things spiral downward for a while, but as they go down, with fewer dollars in circulation and less demand for goods and services, businesses are forced to start lowering prices to encourage buying.
4. With a growing surplus of available labor due to rising unemployment, wages begin to decrease as there is a large supply of workers but little demand for their services. Employers can pick and choose and offer lower salaries and less benefits.
5. Since some work is better than no work, folks accept jobs at lower wages so that they can begin to earn an income again, no matter how meager.
6. As people get back to work, incomes rise, spending increases, and businesses experience higher demand for goods and services. They begin to expand their businesses, hire more workers, and invest in new projects/buildings, etc.
7. Economic growth returns to the strength it was previously and whatever bubble caused the original recession is ironed out by experience.

Essentially, there is no government action necessary. The problem with the New Deal cartelization and union cronyism is that forced high prices and high wages prevented the economic “bottoming out” from ever happening, so everything stagnated. Employers feared to expand or hire since the rules being issued from Washington were constantly changing. Fortunately (for FDR) a world war broke out, which flooded the market with labor opportunities in the Armed Services and in factories producing war goods. As Ohanian and Lee point out, much of FDR’s New Deal NLRA agenda was discarded, as it was deemed oppressive. Sit down strikes were determined to be unconstitutional. Essentially, the government stepped out of the market in a regulatory way and only remained as chief buyer of the goods and services being produced by that market.

This is the kind of “economic stimulus” government can provide from time to time that can actually have a beneficial effect, unlike Obama’s “stimulus”, which I will discuss more later on.

So was there any redeeming quality to the New Deal? Well, FDR spent a whopping $11 billion on stimulus programs. One was the Works Progress Administration. This program did put some people back to work, and did accomplish some good things. Many roads and schools were built. Some folks benefited from that employment. Another very good expenditure by FDR was on a vast build-up of the Navy. Building ships for the primary purpose of employing lots of people ended up proving very advantageous when we used our newly minted fleet against the Japanese in WWII.

However, as a whole, the proposal that government spending would save the economy and bring back a strong economic recovery proved false. FDR entered office in March of 1933. The Stock Market Crash happened in October, 1929. By all accounts, the Depression should have already been over. So what happened? Well, Herbert Hoover passed the Smoot-Hawley Tariff of 1930, which crushed our export capabilities and caused Americans to have to pay higher prices for domestic goods. This tax increase directly led to a further stifling of the American economy and threw the nation into the worst Depression we’ve ever experienced.

So what can we learn from this history and apply today?

After Barack Obama’s inauguration, there were many people on both sides of the political spectrum that likened his new presidency to FDR for many of the reasons I listed earlier. This scared the crap out of me, because I already knew the failure of FDR and the doomed history it seemed we were bound to repeat. Alas, it appears we are doing so.

Amazingly, there are some on the liberal aisle who want Obama to go even further than FDR. Liberal economist Paul Krugman claimed that FDR’s policies were “too cautious”. He claimed in a piece that “there’s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse.” Apparently, the University of California – Los Angeles is part of this group of “right wing think tanks”. After that statement, by the way, Krugman offers zero evidence for his claim. I think I’ll stick with the UCLA economists, thanks much.

Unfortunately, Obama delivered what Krugman longed to see…a trillion dollar “stimulus” package that was designed, so they say, to stimulate job growth, free up credit, and get the economy rolling again. Also, and quite unfortunately, Obama is developing a pro-union cronyism much like the one in FDR’s administration. Andy Stern, president of the Service Employees International Union…a group that raised millions to get Obama elected, has been to the White House 22 times…far outpacing anybody else. We know Obama supports “Card Check”, a pro-union bit of tripe that is part of the “Employee Free Choice Act” (otherwise known as the “Employee No-Choice Act”), under which voting to unionize would not be done by secret ballot but by open voting, thus allowing the unions to know and identify who is opposing their takeover.

We saw that Obama took over as much of the auto industry as he could (thank God Ford played it straight and denied him access) and then promptly gave control of it to the United Auto Workers. GM recently fired Fritz Henderson as CEO because he wasn’t working fast enough…but I thought this was Obama’s guy for the job?

Obama’s stimulus package was supposed to bring about job growth…indeed he set up the success mark as “creating or saving 4 million jobs”. Sheesh, and Bush senior complained that Reagan had “voodoo economics”. WTF is a “saved” job? I still have my job, does that count? The problem with this stimulus package is that it has not spent money in the way FDR did, that is, on goods and services that actually produced value in a time of war. Rather, Obama has bailed out state governments, and the small percent of the stimulus has actually gone out for “shovel ready projects” has been haphazardly thrown at local governments to spend on whatever.

Mark Belling (sitting in for Rush Limbaugh on Friday’s show) told a story of his hometown in Michigan. A small town receives $1M of stimulus. They have nothing to spend it on, so they decide to widen the main thoroughfare of town. So they call in the ditch diggers and concrete and asphalt layers, the line-painters, etc. They put a few people to work for a few months. Afterwards, what have they got? Nothing but a road that’s wider now than it was before. No net jobs created. But there’s more to the story…a restaurant/bar and caterer in town who is located along this road that’s being widened has no parking lot for his customers…they park along the road. But as a result of that road being widened; now there’s no shoulder and no parking for several blocks! So this caterer is going out of business! So the net result of $1M of stimulus is an unnecessarily wide road and fewer jobs than before! How’s that hope and change working for you?

This previous story is about something that actually happened, but have you not heard of the millions of dollars spent and hundreds of jobs saved all across this country in congressional districts that do not exist?
(http://biggovernment.com/2009/11/18/surprise-recovery-gov-has-a-credibility-problem/)

Now Obama is out toting 1.6 million jobs “created or saved” since his stimulus was passed. Uh, excuse me, but we’re still LOSING jobs each month! We’ve lost over 3.3 million jobs since the damn thing was passed in February.

I expect Obama will report he’s saved or created another 3-4 million jobs by Christmas, and maybe as many as 10-12 million by the 2010 elections.

I’m being glib because I just demonstrated that the policies of this president are antithetical to economic recovery: We know they won’t work and as evidence, I submit the 7-8 years of unnecessary Great-freaking-Depression that we lived through as a country because of the same kinds of policies. But we also know what WILL work…as demonstrated first by JFK and later by Ronald Reagan and George W Bush…cut individual taxes, deregulate business, cut corporate taxes, slash government spending on entitlements and make all of these policies permanent. Were these things to happen on a national scale, we might actually be able to report 10-12 million new jobs by the elections of 2010. What’s such a shame is that our president does not want such a thing to happen; if he did, he’d be listening to folks on my side of the aisle, and acting on what we say.

http://hlcole.bol.ucla.edu/NewDealucla.pdf
http://www.nytimes.com/2008/11/10/opinion/10krugman.html?_r=1
http://www.americanthinker.com/2009/02/is_obama_another_fdr.html

12 comments:

  1. I'm sure the liberals here will be inflamed that I would dare insinuate that Obama is hurting our economy on purpose, so I won't insinuate it:

    Obama wants our economy in turmoil so he has a greater chance of bringing about the socialization of America through Cap and Trade and Universal Healthcare.

    What better way to get the masses clamoring for government healthcare than to get them all fired from their jobs?

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  2. Scott, according to your logic (and the charge has been made) that Reagan wanted economic turmoil at the beginning of his term in order to wage his war on entitlements. Unfortunately, according to the argument, the economy recovered by 1984 so that he had to change campaign strategies.

    But I digress...

    FDR is an interesting case. Many historians rank him as one of our greatest Presidents, which considering he was re-elected despite a terrible economy and successfully led our country in WWII, isn't necessarily unwarranted.

    The issue here is what did FDR do for the economy. I agree with the notion that many of the popular programs were not job creation. However, FDR never meant them to be such. The three "R"s of the New Deal were relief (temporary), recovery (real jobs creation), and reform (keep this from happening again).

    Too much of the discussion centers on the relief aspect such as the WPA and CCC. Social Security was originally designed as temporary relief, but the post war Congress bipartisanly turned social security into a long-term program.

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  3. The real genius of FDR was the reform aspects of the New Deal. He correctly identified banking weakness as the cause of the economic catastrophe. From this standpoint, the creation of the FDIC to guarantee bank deposits singlehandedly stopped bank runs, which ruined banks and started further panics. See all of the great economic disasters and you'll see the banks as a major cause. In the last banking crisis, you saw 0 bank runs. Credit the FDIC and other government insurance programs for the banks.

    The second major reform was the Glass-Steagal Act, which prevented banks from using depositers money to speculate in the markets. This act meant depositer and lending banks could not overspeculate. However, the Republicans in 1999 forced Clinton to repeal the law in exchange for protections against FHA cuts.

    Beginning in 1999, depositer institutions such as Bank of America began selling home loans as securities, which had been prevented before 1999. Just a few short years later, banking collapse followed by economic collapse.

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  4. On this topic, Obama could do well by following FDR's example and getting a new version of Glass-Steagal through Congress to prevent another banking disaster.

    On this topic, Obama and the Congressional Democrats have been too silent. It seems they also focus too much on the wrong part of FDR's New Deal.

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  5. On the recovery aspecct of the New Deal, we could argue all day as to the effectiveness of this.

    A solid argument can be made that real economic progress had been made by 1938.

    Another solid argument can be made that it wasn't until Pearl Harbor that FDR could get real job creation underway.

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  6. SJ,

    Many of your points about the reform aspects of FDR's legacy are somewhat true. FDIC insurance has certainly helped to prevent the crazed bank-run scenario that led to the crash in 1929. Other parts I would argue have hurt more than helped. I am talking about Social Security.

    Before you go bananas on me, let me say this: Social Security does a very mediocre job of providing retirement security in our old age. The problem is that it is but one of several methods for achieving such security and in my humble opinion, it is the least effective and most expensive.

    The present value of unfunded liabilities (that is, benefits that the government has promised to pay out but for which they have no funding) due to Social Security alone is a number you cannot fathom. Former Comptroller General David Walker puts that number around $55,000,000,000,000.

    Had the government truly done what Algore said they did, that is, put the social security taxes in a "lock box" (i'd prefer individual accounts invested in very secure long term corporate bonds and US treasuries) and then pay us back at retirement, it would be so much better and allow for much more individual freedom and control.

    So as for the reform aspect, FDR had the wrong perspective by putting too much of the responsiblity on government for providing for the people rather than putting the responsibility on the people to provide for themselves, with perhaps a little encouragement (in the form of the forced savings for retirement that I've discussed here).

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  7. As for relief and recovery, it appears you are blinded by your love of FDRs legacy. I have just laid out a clear argument that trashes both the relief and recovery aspect of FDR's policy and your reply is "a solid argument can be made that things were doing just fine" (paraphrasing).

    It was not until 1941 - when we entered the war - that unemployment dropped below double digits. There was no real recovery until then. Wages and prices were stagnate and too high, but people could not find work.

    How anybody could label that time period as recovery or relief blows my mind. FDR got lucky (from an historical perspective) that a war broke out to break the USA out of the funk that his policies were perpetuating. I firmly believe that had we not been at war, FDR would be remembered today as one of the worst presidents in US history, right up there with Jimmy Carter and I believe someday, Barack Hussein Obama...mmmmm, mmmmm, mmmmm!

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  8. "I have just laid out a clear argument that trashes both the relief and recovery aspect of FDR's policy and your reply is "a solid argument can be made that things were doing just fine" "

    Scott, I guess you can't see that others - many of them exceedingly smarter than I - have laid out the argument countering yours. See The Lion and the Fox," by James MacGregor Burns, which is the best biography on the man.

    Many of your claims about FDR would be both supported and countered within the biography. Of course, Burns is part of the academia that conservatives hate.

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  9. Scott has asked to further the defense of FDR from previous comment.


    Scott,

    There is nothing wrong and of itself with your argument about FDR. In fact, I had a professor in my Master's program that referred to FDR has the "boss among bosses," referring to the political machines like Tammany Hall. What I was referring to was Burn's main argument in volume 1 of his biography, which was that FDR attempted both relief and reform in a pragmatic way as opposed to an ideological way.

    Essentially, in your argument, you said that FDR's ideology was flawed. Yet, according to Burn's, this did not exist. He inherited a problem of 40% unemployment with almost 100% suffering from a decrease in income, a 75% foreclosure rate, 95% of banks were unsound, and a mandate from the people to help. This is what he attempted to do. Relief of the people's pain and an attempt at recovery. Most of what you attacked were no more than relief measures. From a recovery aspect, he used John Maynard Keynes' "prime the pump" means to get spending restarted. The NLRB and other "labor-friendly" policies were no more than an attempt at increasing people's income so that they would spend again.

    This was the second worst economic crisis in American history - the depression from 1836-1844 was most likely the worse. However, the depression inherited by FDR was an urban depression, which was new for America. Was FDR perfect? Burns lays out arguments similar to use to point out flaws. However, the statistics do speak to some success.

    While you agree with the supply-side theory of economic recovery, the "prime the pump" demand side is just as sound. Both have flaws that each side likes to point out, but the both can work if given the time.

    By 1936, unemployment was down to 18%, the foreclosure rate was down to a 25% rate and the banks were sound again (numbers are approximate - I can't remember off the top of my head). These statistics point to some success. Pragmatic success - not ideological success. Yes, it was government intervention that led to these numbers, but so was WWII.

    Sure, it took WWII to get what you call a recovery, but FDR did not. He saw it as recovery through government spending again, which was not his goal. The goal of his recovery was that private industry could sustain full employment again and that safeguards (i.e. reform) would allow for this to be sustainable employment.

    The problem, and this is something we agree on, is that FDR has become a liberal ideologue, which was not his plan. His actions do not support this either, except in the area of using demand-side economic policy to solve the problem of restoring faith in the American economy.

    He was a pragmatist. I think conservatives would be better off explaining how the current economic crisis does not call for the same strategies as FDR used.

    I do think to call FDR one of the worst President's of all time is a little extreme. After all, he consistently scores as a top 2 in historian rankings all the time. Did he handle the problem as you would've wished? No. Did his policies allow for the people to re-elect him not once, but twice before the start of WWII? Yes. In 1940, the Republican Wendell Willkie was soundly defeated on his claim that FDR did not adequately bring an end to the pain and suffering of most Americans.

    I would also argue that most of FDR's program (other than the recovery measures) were temporary fixes while the economy recovered that could be phased out. WWII did not allow him to do this and the job was left to Truman and Eisenhower, both of whom did not stick to the goals of FDR's New Deal of making relief and recovery temporary measures - see Social Security.

    Add to this his ability to gain the trust of the American people after the economy had completely destroyed most people's hopes and dreams. To call him the equal of Jimmy Carter is most offensive.

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  10. A couple of further comments:

    First, I did not outright call FDR one of the worst ever...I commend his efforts during the war, once we did get in. I think his presidency was saved by the war.

    I'm not sure where 40% unemployment came from, but every account I can find says 25% in 1933 - still terrible. I agree that when he took over, things were thoroughly in the tank and people were screaming for some help...any help.

    I think FDR could have done things differently and seen much swifter and far greater success. You call 18% in 1936 a success, but that was a local minimum...the unemployment rate for both 1937 and 1938 were higher than 1936. As I pointed out, this prolonged high unemployment was caused by his actions due to his pro-labor union cronyism.

    FDR inherited a crap economy from Hoover, which was made that way largely by the Smoot-Hawley tariff in 1930. I believe that had FDR immediately dropped that tax, cut income taxes, and encourage a more pro-business outlook instead of the pro-labor union outlook he chose, we wouldn't even learn about the "Great Depression". We'd only know about the Crash of 1929 and then FDR would be remembered as the most brilliant economic-minded president in history.

    I still maintain that he chose a pro-labor stance as opposed to a pro-business stance because of ideology. FDR was a liberal progressive and he believed, as does Obama, in the power of the federal government.

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  11. Sorry, I was working off the top of my head. The 40% number refers to unemployment in certain areas. Ohio had a 45% unemployment rate in 1933.

    I also confused the number with the statistic that those who still had jobs were making only 60% (40% drop) of what they had made in 1928.

    The explanation for the increase in unemployment in 1937 was Roosevelt's attempt to withdraw government spending, which was actually one of his goals - despite what conservatives argue. Roosevelt admitted in 1937 that recovery wasn't happening because the economy was still dependent on government spending. It wasn't until 1947 that was under control.

    I often wonder why one has to be either pro-labor or pro-business. The two work together. What is good for labor - high wages - is good for other businesses because those wages create spending. What is good for business - high profit - is good for employees because it can create more jobs and/or higher wages.

    When a policy focuses on only one of the aspects, it leads to abuse. That is why supply-side and demand-side economic policy only works in a vacuum.

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  12. "The explanation for the increase in unemployment in 1937 was Roosevelt's attempt to withdraw government spending, which was actually one of his goals"

    This thoroughly explains the "government doping" problem of welfare and "make work" jobs.

    He tried to withdraw some spending, but that was the only thing employing people, because the private sector was still being locked in stasis due to his labor-union cronyism. Forced high wages and cartelization was the problem. It wasn't until the war that Congress dumped those policies and got everyone back to work.

    Again, Scott, this analysis of labor and business cuddling together doesn't make sense.

    Business seeks profits, so they'd prefer lower wages. I understand what you're saying, that more wages = more spending at the businesses, but like I keep pointing out, when you arbitrarily set the wages above the market clearing price, the whole market for jobs and goods and services goes all wonky. This is what I mean.

    I argue that pro-business policies with respect to regulation and taxation ARE GREAT for workers because those types of policies encourage expansion, which leads to greater demand for workers, which leads to higher wages. You can't force the two to meet through top-down command and control, but if you let business loose, the wages and jobs will grow.

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