Somewhere in the ether this morning a commentator reported the Obama Administration’s desire to avoid FDR’s mistake of 1937 of restraining deficit spending too quickly. According to this theory, reduced federal spending reversed the previous four year’s progress and resulted in the Recession of 1937, throwing another four million Americans out of work.
So instead they want to raise taxes?
It’s a superficial view of history, in any case. The anti-growth policies started earlier than 1937. Roosevelt had demonized business, won passage of the anti-employer Wagner Act, and had vastly expanded federal regulation of the economy through the National Recovery Administration.
Amity Shlaes, author of the essential Depression Era history, “The Forgotten Man,” provides more details in a Wall Street Journal column, “How to Make a Weak Economy Worse“:
The attacks started with taxes. In 1935, well before the “hatred” speech, FDR led Congress in passaging a law that replaced a flat rate on corporate income with a graduated rate—itself a penalty on larger firms. Personal income taxes went up, as did other rates. In 1936 FDR signed into law the undistributed profits tax, which aimed to force reluctant firms to disgorge cash as dividends or by paying higher wages. This levy too was graduated, with a top rate of 27%.
The 1935 Wagner Act was a tiger that makes today’s union law look like a pussycat. It favored unions over companies in nearly every way, including institutionalizing the closed shop. And after Roosevelt’s landslide victory in 1936, the closed shop and the sit-down strike stole thousands of productive workdays from companies, punishing earnings and limiting ability to hire.
Utilities also became a target of legislation that made it difficult for them to raise capital.
See any modern parallels? There’s the excoriation of business as a “special interest,” the Employee Free Choice Act (Wagner Act II) and the health care and cap-and-trade proposals to bring more of the private sector — and daily life — under government control.
The 1930s story suggests not that any individual reform is wrong per se. It reminds us rather that frustrated presidents are inconsistent, that antibusiness policies are cumulative, and that hostility yields more damage than benefit. Presidents can choose between retribution and recovery. They cannot have both.
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