Smith Faculty Opinion Article
The 30 Seconds Outlook
April 15, 2010
“The Great Depression was over, no thanks to FDR. Yet the myth of his
New Deal lives on. With the current effort by President Obama to emulate
some of FDR’s programs to get us out of the recent deep recession, this myth
should be laid to rest.”
- Burton Folsom, Jr. and Anita Folsom, Wall Street Journal, April
12, 2010
One of the greatest and most enduring myths is that President Roosevelt “got
us out of the Depression.” I heard that statement growing up, usually meaning
that this was the only good thing he did while in the White House. Roosevelt was
a polarizing figure, much like Obama. Roosevelt was beloved my many for his
social programs, such as WPA and TVA, and hated by many for his big government,
big spending, and super high taxes. It does appear that Obama favors the
Roosevelt approach: huge deficits, increased size of government, replacing
private sector providers in government programs, healthcare that is
unsustainable, and higher taxes.
Burton and Anita Folsom ask if the various “alphabet soup” programs created
by Roosevelt ended the Depression? Not if you look at unemployment figures—20
percent in the U.S. (1939) contrasted to 12 percent in Europe (1938).
Roosevelt’s New Deal raised taxes at the cost of reduced entrepreneurship. The
War provided a temporary respite with 10-12 million soldiers overseas and
another 10-15 million civilians working in defense plants.
Roosevelt believed another revival of the New Deal would be necessary after
the War, and plans for another “stimulus” were made—subsidized housing and more
“alphabet soup” and employment programs. With the death of Roosevelt, President
Truman advocated enactment of Roosevelt’s plans.
However, Senator Walter George and the Democratic Congress (much different
than the current one) took a much different course. No increases in minimum
wages and Social Security benefits were approved, and spending on entitlements
favored by the New Deal were reduced.
And this is where “supply side” economist Arthur Laffer’s grandfather must
have been involved. The top marginal tax rate on income over $200,000 was
reduced from 94% (yes, the number is correct) to 86.45 % (still outrageous). The
lowest marginal tax rate was reduced from 23% to 19%. And some 12 million tax
payers became former tax payers. Corporate income tax rates were reduced and
“excess profits” taxes and war time price controls were eliminated. The
effective corporate tax rate dropped from 90% to 38%.
The Folsom’s conclude: “He [Senator George] was prophetic. By the late 1940s,
a revived economy was generating more annual federal revenue than the U.S. has
received during the war years, when tax rates were higher. . . . . The U.S.
began running budget surpluses.
Congress substituted the tonic of freedom for FDR’s New Deal revival and the
American economy recovered well. Unemployment, which had been in double digits
throughout the 1930s, was only 3.9% in 1946 . . ..”
John A. Haslem
