FDR And The Lessons Of The Depression

August 30, 2010

In 1937, after several years of partial recovery from the Great Depression, the U.S. economy fell into a sharp recession.  The episode has become a lightning rod in the ongoing debate about whether the economy needs further increases in government spending to keep employment from declining even more.  The economy did not tank in 1937 because government spending declined.  Increases in tax rates, particularly capital income tax rates, and the expansion of unions, were most likely responsible. 

Unfortunately, these same factors pose a similar threat today, say Thomas F. Cooley, professor of Economics at New York University, and Lee E. Ohanian, professor of Economics at the University of California, Los Angeles. 

There are important parallels between the tax and labor policies of FDR and those of President Obama, say Cooley and Ohanian: 

  • As in the 1930s, tax rates on capital income will be rising sharply with the expiration of the 2001 and 2003 tax cuts.
  • Beginning in 2011, dividends will be taxed as ordinary income with rates increasing up to 39.6 percent for many taxpayers, more than double the current 15 percent rate; the capital gains tax rate will rise to 20 percent from 15 percent.
  • And like FDR, President Obama has advanced unionization through his recess appointments to the National Labor Relations Board (NLRB) and his support for "card check," a provision in the controversial Employee Free Choice Act that would allow unions to organize without holding a secret ballot vote.  

FDR eventually abandoned the excess profits tax and decreased the tax rate on dividends, but only after they significantly damaged an already weak economy.  He also reduced union bargaining power in the 1940s as the National War Labor Board struck down union wage increases that exceeded the increase in the cost of living.  This promoted wartime economic expansion, say Cooley and Ohanian. 

There are lessons to be learned from the history of 1937-1938 but they are not the ones being taught.  The Obama administration should consider these: Raising business costs by increasing capital income taxes and promoting higher unionization is a mistake that will hurt most those who they should want to help -- workers who have lost jobs during this recession, say Cooley and Ohanian. 

Source: Thomas F. Cooley and Lee E. Ohanian, "FDR and the Lessons of the Depression," The Wall Street Journal, August 27, 2010. 

For text:

http://online.wsj.com/article/SB10001424052748703461504575443402028756986.html#

 

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