Wednesday, April 29, 2015

FDR's policies prolong the great depression

FDR was Time man of the year in 1933
In 1932 Franklin Deleno Roosevelt was elected in a Landslide. While he was never able to end the Great Depression, he, via his great speaking ability, managed to restore confidence in the American people.

A theory by a great economist and thinker by the name of Maynard Keynes was growing in popularity at this time, and it was termed Keynesian Economics. He believed an economy becomes depressed because people stop spending money. Thus, there is no demand for the goods and services.

Since people stop spending, businesses and industries don’t make a profit. Many of them will lay off workers, many others will close their doors altogether.

To solve this problem, Keynes proposed that it was the role of government to increase demand for these goods and services. It was in this spirit that he believed it was acceptable to return to pre-Roaring 20s tax and spend policies (he created many government programs, and raised the top marginal tax rate back up to 90 percent during his term in office).

FDR, desperate to end the Great Depression, adapted Keynes economic policy. Thus, with the New Deal, he proposed several government programs that would increase government spending. In essence, FDR created Big Government. (He did not, however, intend on it becoming the beast it is today.)

The Great Depression dragged on for years until it ran out its course by the end of WWII. Some experts say it was FDRs policies, coupled with increased spending during WWII, that caused it to come to an end.  But others argue with this theory, noting that, had WWII ended it, then why did the government resort to rations and forcing people to sell their gold to the government.

A better argument is that the depression continued through WWII, only to come to an end as later presidents reduced taxes to encourage savings and investment.  Those who support this argument believe that Roosevelt's tax and spend policies are what turned a regular depression into the Great Depression.

Consider, for a moment, that there were many recessions and depressions prior to the one FDR inherited, and all of those lasted only a few years.  The reason they were short lived was because presidents prior to FDR believed it was the role of government to make minor tweaks to create a stable economic environment, but it was the role of individual businesses to fix the unemployment rate.

Two examples here are Grover Cleveland and the depression of 1893-95, and Warren G. Harding and the depression of 1920-21.  Grover Cleveland believed his role was to stay out of the way, and Warren G. Harding cut spending and taxes to get government out of the way.  In both these instances the depressions were short lived.

Despite this evidence, FDR (along with Herbert Hoover) chose to do the opposite.  He increased the scope and size of government, and to pay for these programs he raised tripled taxes.  While his programs may have helped the poor, they did little to spur economic growth.  By doing so, the argument is that FDR did nothing to end the depression, instead he prolonged it.

So, while Herbert Hoover's policies may have caused the Great Depression, FDR's policies prolonged it.  Yet considering the people were so desperate, and believed (or felt) that doing something (even something stupid) was better than doing nothing, FDR as a hero, and Time Magazine even named him Man of the Year in 1933.