‘Taxpayers… Bleeding at Every Pore’

Here I continue my review of Burton Folsom Jr.’s new book, New Deal Or Raw Deal? In Chapter 6, Burton describes employment payments and the Works Progress Administration (WPA). At the end I relate the history to modern events.

As I’ve reviewed, federal politicians generated the unemployment problem of the Great Depression through trade-killing tariffs, investment-killing Federal Reserve policies, and job-killing wage controls. On top of this, politicians imposed price controls and reduced crops of food and cotton, thereby increasing the costs of food, clothing, and all manner of other goods and services. Most of these controls resulted from the bipartisan efforts of Hoover, FDR, and Congress. And yet we are to take FDR as some sort of national hero for forcibly redistributing wealth to his victims. And how did that work out?

In 1932, Congress under Hoover passed a $300 million Emergency Relief Construction Act to provide money to states claiming to need it. Roosevelt increased the funding under his Federal Emergency Relief Administration. This had two main effects. First, state leaders had a strong incentive to claim need and to perpetuate need. Second, individuals had a strong incentive to stay on tax-funded relief. It turns out that rewarding people for staying in need tends to generate needy people.

Folsom quotes FDR’s concession of 1935 “that continued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fiber.” (This is one bit of advice I wish modern Democrats would heed.) FDR’s answer was to repeal the federal controls that had caused and worsened the Great Depression — we can only wish. Instead, FDR sought to nationalize various industrial projects under the WPA.

While the WPA boasted real achievements, Folsom reviews, it also fostered worthless make-work schemes. Moreover, the project became deeply politicized. Not only were the funds often directed regionally for political reasons, but individuals were “encouraged” to hold the right political views and make the right political donations to keep their tax-funded jobs.

The line about bleeding taxpayers came from Oklahoma Senator Thomas Gore, who alone voted against the WPA — and got trounced for it come election time. The country got a taste for interest-based politics.

Folsom curtly answers his main question posed as the chapter’s title: “Relief and the WPA: Did They Really Help the Unemployed?” Folsom argues that, prior to the New Deal, “charity had been a state and local function.” Critics will answer that the magnitude of the Depression demanded Federal action. Folsom proves that the programs were politicized; that doesn’t prove they didn’t also achieve their objective or that modern programs can be improved, his critics will return. Folsom rests his case with Henry Hazlitt, who points out that tax-funded projects necessarily come at the expense of the activities that otherwise would have been funded directly by those earning the money.

Public works seems to be the main part of the New Deal that President Elect Barack Obama hopes to duplicate. Obama also wants to expand forced wealth transfers to the unemployed and impose harsher wage controls (though the inflation Bush and Obama seem determined to unleash may make such wage controls superfluous).

It is inevitable that Obama’s make-work programs will be politicized; his “green” program is inherently so. No doubt the regions and firms with the best political connections will get the most dollars.

Yet, despite all this, do public-works projects help the economy? It is true that widespread malinvestment — such as that encouraged by the federal government relative to mortgages — requires a period of painful readjustment. But that’s not a problem that can be fixed through public works. Instead, increased federal spending — which must come from new taxes or deficits — will only divert resources critically needed elsewhere for recovery. As Folsom quotes Hazlitt, “for every public job created… a private job has been destroyed somewhere else.”

(The argument that various public works are justified because they are public goods — an argument that I find defective — properly has nothing to do with trying to spend our way out of a recession.)

Poor old Gore — who was blind, it turns out — saw clearly the problem of “taxpayers… bleeding at every pore.” Well, if Obama and his followers get their way, we ain’t seen nothin’ yet.

4 thoughts on “‘Taxpayers… Bleeding at Every Pore’”

  1. Is your reference to “inflation” in the fifth-to-last paragraph supposed to be “deflation”? Wage controls would be superfluous in a period of deflation, since prices would not be going up.

  2. Not correct. In an inflationary period, wage controls (wage floors) become irrelevant at a certain point, as the inflation drives up monetary wages above the wage floors. For example, a minimum wage of $3 per hour would have had a huge impact in 1900, but today it would have practically no impact.

    The Inflation Calculator indicates that a minimum wage of $3 in 1900 would be the equivalent of a minimum wage of about $74 dollars now. If the minimum wage were set at $100 per hour today, it would devastate the economy, unless the money supply were expanded at least several fold (which would create all sorts of other problems).

    In a deflationary period — such as the Great Depression — wage controls have an especially harsh effect, because monetary wages need to come down to achieve full employment, but employers are employers are legally forbidden from negotiating lower monetary wages.

    (As always, we must distinguish between real and monetary wages.)

  3. Oh. I need to look more closely at what Nixon “accomplished.” Both Hoover and FDR, though, were committed to keeping wages artificially high.

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