The Democratic Party of DuPage County pulled in the big guns Sunday to press the case about the urgent need for a massive economic stimulus plan.
At the Presidents Day Gala at the Drury Lane Conference Center in Oakbrook Terrace, President Franklin Roosevelt made an appearance. I’m presuming that since FDR died in April 1945, the man who appeared was a re-enactor. But he did an excellent job in portraying the Depression-era president.
What he didn’t do so well was in convincing me that we neeed to follow FDR’s plan of trying anything to get the economy back on track. Roosevelt inherited an economic crisis the likes of which we had never seen before and haven’t experienced since.
The FDR re-enactor regailed the Democratic audience of stories regarding his bold experimentation in tinkering with fiscal policy to restore confidence in the free market system and put people back to work. This impressed me as a not-to-subtle message that members of Congress need to pass something — anything — to pull us out of our recession.
The problem with this message is that FDR is not a good example of what to do in case of an economic crisis. The unemployment rate when he took office in 1933 was 25 percent. By the time we entered World War II, the unemployment rate had lowered to about 15 percent.
Yes, 15 percent is better than 25 percent, but this is a drop of a little more than a third in eight years. I would expect at least that much of an incremental decrease in the unemployment rate in eight years by the mere inertia of the free market.
So I have to conclude that Roosevelt didn’t do much of anything to improve the economy, but he spent a ton of money while not doing it. Sure, it resulted in an abundance or roads and buildings being constructed, and this has its benefits. But if the goal was to push the economy into high gear, it was a dismal failure.
We know this not just by the anemic decrease in the unemployment rate but also the rapid economuc growth that occurred once we entered the war. The unemployment rate dropped to below double-digits in a few years. And we can pinpoint what made the difference.
The key to sustained economic growth is not simply government spending, particularly the way FDR did it. He put “millions of people to work” (as the re-enactor said Sunday) through his many government programs. But the government funded these programs with higher taxes on wealthy people, the very ones who run companies and offer steady jobs to people.
So how can the government put so many people to work yet still keep the economy from growing? It does this by not creating new wealth but by merely taxing the that wealth exists. Michael Steele, the newly named chairman of the Republican National Committee, attempted to explain the distinction between having work and having a job to George Stephanopoulos on ABC Sunday morning. Despite Steele’s best efforts, Stephanopoulos said he didn’t “get it.”
Here is the difference: Government-funded work programs create short-term contracts for public improvements. This is OK, but it doesn’t ensure economic stability for the worker. As Steele said, these contracts will all eventually end. They could end in a few months; they could end in several years. But they will last only as long as it takes to complete the project.
A private company survives by creating work not just for the short term but for the long term. And when it contracts with another firm, new wealth is created. Thus it has a greater chance of surviving by perpetually creating interest in its goods or services.
So what the private company offers a person is a job, something that has the potential of lasting for a long time. No, there’s no guarantee that this job will last forever, but the likelihood is higher because the company is doing what it can to stay competitive in its industry and is always seeking new contracts.
Consumers are more likely to spend money when they believe their stream of revenue is steady. If you know you’ll have work for the next three months or have a job for the next three years, the job situation will stimulate more consumer activity because people feel more stable when they work for a company that shows it can sustain itself and continue to offer employment. And because new wealth is created in the private sector in terms of money and goods/services, the economy grows.
Government-funded work programs are not predicated on creating new wealth; they merely tax the wealth that exists (or they run up huge debts to be paid later). Roosevelt tied up so much capital in his New Deal programs that private companies couldn’t grow enough to produce new wealth and put people back to work in sizable numbers.
When we entered World War II, the military infrastructure had to be rebuilt. The U.S. military largely demobilized after a war, so the tanks, plans and ships (as well as everything needed to equip them) had to be developed from scratch. The government ran up huge debts to pay for it all, but it worked in that case because the contracts rebuilt the weatlh of these companies and ensured the debts could be paid off later (it really was a matter of smoke and mirrors).
We don’t have the same situation now. There is not a demand for as massive a military build-up as there was in World War II, so the chance to pump huge sums of IOUs into these firms is pretty slim. The economic stimulus plan offers little in the way of true incentive for companies to create more jobs.
What could help with this? Cutting the payroll tax and reducing or eliminating the capital gains tax would stimulate the economy better than the kind of spending this plans promotes. It would put money back into the hands of entrepreneurs and employees, and their conficence in the market would improve. Result? More spending, reaping additional benefits on the economy.
So FDR may be a good example, but more for what we shouldn’t do in an economic crisis than what we should do. The facts are right in front of us, but we have to accept what they’re saying.
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