Myths of the New Deal
Did FDR's Legislation Really Help the
AUGUST 01, 2002 by BURTON FOLSOM
Filed Under : Government Spending, Taxation
A persistent myth in American history is that Franklin Roosevelt and the New Deal created jobs during the Great Depression and helped the poor “forgotten man” who was thrown out of work. Almost every American history text echoes this myth in its pages. Irwin Unger, for example, who won a Pulitzer Prize for a book on economic history, recounts it this way in his textbook These United States: “By 1935 millions of Americans had reason to thank the New Deal and the Democratic party for their compassion and help. Creative men and women were grateful for the opportunity under the WPA to do productive work. . . . Unemployed factory workers could thank the president for the relief that kept them from hunger.”
Let’s look carefully at the claims that the New Deal created jobs and that these jobs especially helped poor people. It’s true that the New Deal, through the WPA, the PWA, and the CCC, did put many Americans to work building bridges, paving roads, and planting trees. But this didn’t necessarily create jobs. As Henry Hazlitt reminded us in Economics in One Lesson, “Every dollar of government spending must be raised through a dollar of taxation.” Hazlitt elaborated, “[F]or every public job created by [a] bridge project a private job has been destroyed somewhere else.” In the textbooks we see the bridge, the workers toiling, and government spending seemingly creating jobs. “But there are other things that we do not see,” Hazlitt noted, “because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from the taxpayers. All that has happened, at best, is that there has been a diversion because of the project.” No wonder unemployment during FDR’s second term was almost as high as it was when he took office.
The New Deal, however, did more harm than just shuffling workers out of textile mills and car factories and into government jobs. Because of the inevitable political manipulations, the tax dollars collected during the New Deal were skewed in their distribution. Who got what government money depended not necessarily on need, but on where you lived, whom you knew, and which party you supported.
The whole welfare program was often a grab bag for whichever politicians could make the strongest case for bringing federal money to their states. For example, the first federal relief program, started under President Hoover and expanded by FDR, put up $300 million. Illinois received $55.4 million–almost 20 percent–and Massachusetts got zero. In other words, if you were destitute, but lived in a Democratic congressional district in Illinois, you had a much better chance of receiving federal help than if you were similarly destitute but lived in a Republican district in Massachusetts.
The politicization of government spending needs more emphasis. Those politicians (for example, Boss Kelly in Chicago and Boss Pendergast in Kansas City) who were Democrats and supporters of Roosevelt received disproportionately large amounts of government jobs for their districts. And those people who received these jobs often had to prove their loyalty to the Democratic party. In 1938 in 32 counties in Kentucky, WPA workers had to pledge to support Alben Barkley, the Democratic Senator, or lose their jobs. Pennsylvania Democrats were even bolder. The Democratic chairman of Indiana County, Pennsylvania, sent the following letter to a woman employed as a government worker on a sewing project:
I am very much surprised that you have not responded to our previous letter requesting your contribution in the amount of $28.08 to Indiana County Democratic Campaign Committee, as I was sure that you appreciated your position to such an extent that you would make this contribution willingly and promptly. I must, however, now advise you that unless your contribution in the above amount is received promptly it will be necessary to place your name on the list of those who will not be given consideration for any other appointment after the termination of the emergency relief work, which as you know will terminate in the near future.
Whether the “forgotten man” was helped by the New Deal, then, often depended on how willing he was to use his time and the little money he had to help Democratic candidates.
What about the story the textbooks neglect, the story of how the tax dollars were extracted so that they could be sent to Boss Kelly in Chicago or to Indiana County? In a real sense, the New Deal created special hardships for the “forgotten man.” During the 1930s Roosevelt shifted the tax burden from hitting the rich almost exclusively (through income taxes) to hitting mainly middle- and lower-income groups (through excise taxes). In 1929, the income tax only affected the top 2 percent of earners; they paid almost $1.1 billion in income taxes that year. Excise taxes, which were mainly imposed on tobacco, were less than half that, or $539 million. In other words, if you didn’t smoke and you were not a corporate officer, what money you earned was yours to keep.
During the 1930s (starting under Hoover and expanded by FDR), a host of new excise taxes were passed on such popular consumer items as alcoholic beverages, movie tickets, telephone calls, bank checks, telegrams, gasoline, cars, car tires, and even grape concentrates. In 1936, after FDR helped raise the top income-tax bracket to 79 percent, the revenue collected from income taxes dropped to $674 million, as rich investors withdrew their capital from taxable investments. The excise taxes, which hit the middle- and lower-income groups with full force, were over $1.5 billion. These new excise taxes, much more than income taxes, were helping fund the New Deal programs. In other words, the “forgotten man” who pumped gas into his car and drove it to a theater to smoke a cigarette and watch a movie paid four new taxes (and one old one) to pay the WPA worker in Chicago to build a bridge and the wheat farmer in Kansas to take his land out of circulation (so that the farmer could then receive a higher price for wheat, which translated into more expensive bread for the “forgotten man”).
When we study why the New Deal failed, we can better appreciate the alarm of James Madison in Federalist No. 51: “In framing a government . . . you must first enable the government to control the governed; and in the next place oblige it to control itself.”