David Sirota praises the New Deal in an article for the Denver Post.
Sirota devotes the majority of his article to ad hominem attacks, empty assertions, and appeals to authority. Sirota starts on the wrong food by tagging critics of the New Deal as “conservative,” even though many critics of the New Deal are not conservatives and many conservatives praise FDR. Sirota refers to criticism of the New Deal as “abject insanity,” “ridiculous,” and “not… remotely serious.” He claims that “mainstream economists” laud modern bailouts, ” the vast majority of Americans think the New Deal worked well,” and professional historians agree the New Deal was swell.
What Sirota scrupulously avoids is any evaluation of the arguments and claims made by critics of the New Deal.
Sirota claims that the economy grew, and unemployment fell, during FDR’s first two terms. But this ignores a number of critical facts. Critics of the New Deal lambast not only FDR but his predecessor, Herbert Hoover, who destroyed the economy with his tariffs, wage controls, and other economic controls. Critics of the New Deal also point out that Federal Reserve policy played a major role in causing and prolonging the Great Depression.
FDR did not take office until March 4, 1933. I reviewed the basic unemployment figures of the era back in October. The unemployment rate in 1929 was 3.2 percent. By 1932, it was 23.6 percent. Unemployment hit its peak in 1933, the year FDR took office, at 24.9 percent. So Sirota’s point, then, is because FDR did not manage to throw more than a quarter of the nation’s population out work, he was therefore a great president whose policies are vindicated. However, FDR never oversaw remotely normalized employment rates prior to the WWII. From 1931 through 1940, the lowest unemployment reached was 14.3 percent in 1937. And this is the basis on which we are to praise FDR?
Sirota does manage to slip in two arguments among his logical fallacies. The first pertains to the worsening conditions of 1937 and 1938:
[T]he right bases its New Deal revisionism on the short-lived recession in a year straddling 1937 and 1938. … [T]he fleeting decline happened not because of the New Deal’s spending programs, but because Roosevelt momentarily listened to conservatives and backed off them.
As Nobel-winning economist Paul Krugman notes, in 1937-38, FDR “was persuaded to balance the budget” and “cut spending and the economy went back down again.”
Notably, Sirota declines to specify which “cut spending” might plausibly have harmed the economy.
Meanwhile, Sirota ignores the major causes of the economic problems of those years, specifically wage controls and constrictive Federal Reserve policies.
Richard Vedder and Lowell Gallaway write in their book, Out of Work:
The Wagner Act [of 1935] provided the stimulus for several AFL unions to form the CIO in order to organize the mass-production industries. Significant organization attempts did not begin until the end of 1936. In the first half of 1937, the major automobile companies, excepting Ford, capitulated and recognized the United Auto Workers. Other important industries, most notably steel, were either unionized (U.S. Steel) or avoided unionization by paying union-scale wages. (Page 139, footnote omitted)
Using regression analysis, the authors estimate that, during 1937 and 1938, unionization increased the unemployment rate by about five percent (page 141). The authors also note that Social Security, passed in 1935, also increased the cost of labor and thereby increased unemployment (page 141).
The authors acknowledge that, in 1937, income tax receipts were up “at a time when absolute federal spending was declining” and “the federal deficit contracted sharply” (page 143). Let us grant that it’s stupid to raise taxes during a depression. It is true that changes in federal spending can harm the economy, simply because many businesses must adjust their behavior accordingly, and that takes time. But the notion that less forced wealth redistribution somehow damages the economy is absurd. Sirota commits the basic eonomic fallacy of looking at the seen — the government spending — and ignoring the unseen — the business activities that don’t exist because resources are forcibly transferred away from them. So Sirota’s story of the economic troubles of 1937 and 1938 doesn’t bear scrutiny.
On the other hand, there is a straightforward and obvious link between wage controls and unemployment. Especially during a time of (federally induced) deflation, artificially high wages are disastrous. They artificially increase the monetary wages of some at the expense of throwing others — in the case of the Great Depression, many others — out of work.
Sirota’s second argument is that (even) Milton Friedman praised “the New Deal’s Federal Deposit Insurance Corporation.” But critics of the New Deal point out that the Federal Reserve is a major cause of the Great Depression to begin with. So let us put Sirota’s claim in context.
Vedder and Gallaway point out:
Monetary policy was clearly restrictive. On three occassions between August 1936 and May 1937, the Federal Reserve Board raised reserve requirements, flexing new regulatory muscle provided by the Banking Act of 1935. The doubling of reserve requirements led banks to scramble for reserves, and to rebuild previously existing excess reserves. This, to monetarists such as Milton Friedman, led to a decline in the stock of money and a resulting economic contraction. (Page 144)
Again, contractive monetary policy plus heightened wage controls is a bad mix.
Perhaps in a future article Sirota would care to actually enter the debate rather than restrict his discussion to name-calling, platitudes, and appeals to authority. FDR’s policies demonstrably worsened the Great Depression caused by Hoover and the Federal Reserve. The sort of economic ignorance promoted by Sirota only threatens to subject the modern economy to similar turmoil.