Philip Cross: Anti-business policies hurt in the 1930s. They’ll hurt now, too

U.S. President Franklin D. Roosevelt delivers his first radio "Fireside Chat" in Washington in March 12, 1933. Photo by AP Photo

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In his new book False Dawn: The New Deal and the Promise of Recovery, 1933-1947, University of Georgia professor and Cato Institute senior fellow George Selgin elaborates the case that Franklin Roosevelt’s New Deal did not end the Great Depression, contradicting a fundamental tenet of Keynesian orthodoxy. On the contrary, FDR’s anti-business policies and rhetoric contributed to the anemic business investment that is key to understanding the length and severity of the Great Depression.

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New Deal programs prolonged the depression in several ways, Selgin argues. One was via the “high-wage doctrine,” which holds that legislating higher wage rates lifts consumer spending. FDR pursued this chimera by adopting a federal minimum wage, exempting firms from antitrust action if they raised wage rates, and making it easier for workers to unionize and go on strike.

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The high-wage doctrine ignores the basic law of supply and demand, which dictates that raising wage rates will reduce labour demand. A 1935 Brookings report concluded the Roosevelt administration never anticipated “that a high price for labour might restrict the amount used.” Selgin explains how the high-wage doctrine confuses the wage rate for individuals with the total wage bill paid by firms. Raising wage rates forces companies to control total costs by cutting employment.

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Another mistake is assuming firms will omnisciently ramp up production in anticipation of greater sales because of the higher wages paid by other firms. Boosting output before sales improved would have been especially risky in the 1930s, given that profits were non-existent and firms were struggling just to survive. One analyst likened the policy to trying “to squeeze blood from the turnip of business earnings.”

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Selgin agrees with the common view among economists (but not others) that in fact FDR never adopted Keynesian fiscal stimulus. For most of his peacetime years in office, federal spending never exceeded 8.0 per cent of GDP — though it did temporarily hit 9.5 per cent in 1934. And it’s often forgotten that FDR energetically raised many taxes, notably on corporations. This helped cap budget deficits around 5.0 per cent for most of the 1930s. Keynes himself criticized the lack of fiscal stimulus, both publicly and in private letters to the president. He was exasperated by FDR’s prioritizing reform over recovery through policies such as inflated wage rates, which he dismissed as a “fallacy,” instead of greater spending on public works and rebuilding business confidence.

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Keynesian pump-priming started in earnest after the U.S. entered World War II but was not the key to ending the depression, as became clear after the war when a sharply lower deficit due to drastically lower defence spending did not result in a slumping economy. Keynesians could never adequately explain why the unemployment rate remained below four per cent and stock prices surged despite the sudden withdrawal of fiscal stimulus and the higher prices following the end of wartime price controls. The answer is that post-war growth was sustained by an unprecedented boom in business investment.