Wednesday, October 01, 2008

Book Review: 'FDR's Folly' by Jim Powell

The ongoing financial crisis is being compared to the early warning signs of the great depression. Alarmingly, today's political leaders are proposing the largest act of Federal economic intervention since the New Deal. Barack Obama has repeatedly called for "21st century regulations" on hedge funds and commodity speculators throughout his campaign. John McCain routinely likes to blame "greed", be it from CEOs or investors, for contemporary financial woes. This leaves no doubt that both candidates share the same toxic premise in their proposed economic reforms: more government involvement.

Tragically, a common and fatal historical misconception is that FDR's New Deal rescued the United States from the Great Depression. This is often cited as motivation for great government involvement on Wall Street today. Given that this argument is so common and so virulent, it is crucial that Objectivists familiarize themselves with the real history of the Great Depression and the New Deal so that arguments can easily be defeated.

To this end, I highly recommend FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression by Jim Powell. In FDR's Folly, Powell, a CATO Institute historian, examines the long-term results of the New Deal and persuasively argues that they crippled the U.S. economy. Although Powell does not present a compelling moral argument against the New Deal, Powell's attention to detail is impressive and his compilation of facts is extensive. In this respect, his book is of enormous value.

In this detailed book, you will learn about the numerous programs the FDR administration brought about, including the following:

  • Programs that inundated private businesses with unprecedented waves of regulations, such as the Agricultural Adjustment Administration, the National Recovery Act and the Securities and Exchange Commission.

  • Programs that redistributed wealth from producers to consumers, such as the Federal Emergency Relief Act and the Reconstruction Finance Corporation.

  • Programs that nationalized industries, centrally planned infrastructure or created makework projects to increase employment such as the Civilian Conservation Corps, the Public Works Administration and the Tennessee Valley Authority. Powell argues that these programs typically led to poorly planned infrastructure that was more expensive than what could have been acquired in a free market.
The economic results of FDR's programs were devastating. For example, consider the Agricultural Adjustment Administration (AAA). The price and production controls of the AAA led to perverse practices such as millions of tons of domestic oat and corn being burned while the U.S. simultaneously imported oat and corn, millions of peaches being left to rot and millions of "excess" pigs being needlessly slaughtered while lard was being imported from overseas. The extent of economic regulation under the FDR Administration reached such absurd levels, there was even a government board organized solely to control the production and pricing of milk!

This book will also detail the oppressive controls on income and wages under the FDR administration. Under FDR, scores of private sector jobs were eliminated through minimum wage laws, personal income taxes hit 91% for certain brackets and it was a stated part of FDR's platform that nobody should have an annual income in excess of $25,000.

Powell reveals how all of FDR's programs are based upon the fatally flawed premises of Keynesian economics, including the following:

  • That government spending is always good for the economy, even if it is engaging in pointless ventures such as building pyramids.

  • War is good for the economy.

  • Gold (as a standard of currency) is a "barbarous relic" that prevents economic growth.

  • A capitalist economy will inevitably slow to a halt without periodic bolsters from centralized planning.

  • Consumption (i.e., the destruction of wealth) not production, drives the economy. Thus, government should redistribute wealth from those who would invest it to those who would spend it.
From reading this book, you will also learn that many of FDR's earliest programs, such as the AAA and the National Recovery Act, were originally ruled as unconstitutional by the U.S. Supreme Court. Unfortunately FDR stayed in office long enough to appoint 7 of the 9 sitting supreme court justices, which eventually opened the floodgates for New Deal reforms. Thus, is the unforeseen danger of having a President serve more than two terms.

Powell has done a fantastic job with this work. I am not surprised that FDR's Folly has been enthusiastically recommended by famed free market economists such as Milton Friedman and Thomas Sowell. I highly recommend this book for anyone interested in free market capitalism and learning the real history of the Great Depression.

Two other great resources on the history of the Great Depression include Richard Salsman's lecture: The Cause and Consequence of the Great Depression and Burton Folsom's forthcoming book New Deal or Raw Deal?: How FDR's Legacy Has Damaged America, which I am confident will be an amazing read.

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    Anonymous said...

    Murray Rothbard
    Amity Shlaes
    Gene Smiley

    - all in print & widely available in many different libraries. for comparison.

    Beth said...

    FYI: The link to your review goes to the wrong review.

    Doug said...

    Beth, thanks for the heads up. I just fixed the permalink.

    Anonymous has suggested some interesting books. Although I have not read it, my understanding is that Amity Shlaes' book The Forgotten Man is based on the Monetarist (i.e., Milton Friedman's) view. With regards to the stock market crash of 1929, the Monetarist view is that this was caused by the Federal Reserve, but could have been avoided had only the Fed not been as aggressive with their deflationary policy. There probably is truth that this particular deflationary policy was disastrous. However, it ignores the larger issue that it is practically impossible for the Fed to set interest rates without detrimental repercussions in the long run. Nevertheless, I am sure that Shlaes' book contains a plethora of facts concerning the disasterous New Deal policies in the aftermath of the 1929 stock market crash. In this respect, my guess is that Shlaes' book should be worth reading.

    Murray Rothbard's book takes an Austrian perspective. First of all, Rothbard's book focuses on the Fed's inflationary policies of the 1920s, the crash of 1929 and the subsequent economic interventionism of the Hoover Administration, which devastated the economy. Rothbard's book does not address the New Deal, although we can all rest assured that Rothbard despised the FDR Administration.

    I have only flipped through Rothbard's book; I have not read it. However, if I remember Richard Salsman's lecture on the cause and consequence of the Great Depression correctly, Rothbard argues that the economic growth during the Roaring Twenties was merely a "boom". Since "boom" is a pejorative term, Salsman argues (convincingly in my opinion) that Rothbard and many other Austrians overlook the prodigious amount of real wealth creation that transpired during the Roaring Twenties, even if it was coated with a Fed-induced inflationary boom. Thus, although Rothbard's book might be great at exposing the error of the Fed's ways in the context of Austrian Business Cycle theory, he overlooks the achievements of entrepreneurs, which ultimately downplays one of the main driving forces of a capitalist economy.

    More generally, Rothbard is in the special category of writers who is just so dishonest, I am not sure if I recommend any of his works, even if they are seemingly good. From downplaying the Holocaust to arguing that the U.S. was the aggressor during the Cold War to printing "highly fictionalized" accounts to discredit Ayn Rand, Rothbard has repeatedly demonstrated that is he willing to obscure reality if he perceives that he is ultimately advancing his concept of liberty in the end. Considering this, I am rationally suspicious of Rothbard's scholarship on anything, even if his book on the Great Depression has some good content. In this respect, I suspect that there are other sources to get the Austrian view on the Great Depression than from reading Rothbard's book.

    I am not familiar with Gene Smiley's book.

    Doug said...

    Overall, I chose to read Jim Powell's FDR's Folly over the other books since it seemed to be the best organized, deeply researched and accessible book on FDR's New Deal that I was aware of at the time. I am still very excited for the impending release of Burton Folsom's New Deal or Raw Deal?, which should be available this November.