FDR's New Deal Weakened Capitalism

            The definition of capitalism and how it should be practiced in the economy is as disputed and diverse as religion. Party politics and individual agendas based on their respective understandings of capitalism have hurt, manipulated, and/or benefited the economy based on the individual eye of the beholder. Economists have argued over the definition of capitalism and the effectiveness of Franklin Roosevelt’s New Deal on the United States economy since its inception and application. There are many economists, who feel that FDR’s New Deal not only weakened capitalism, but that it also prolonged the Great Depression.

Dr. Steve Davies, the education director at the Institute of Economic Affairs in London, defines capitalism as “a system of the free exchange of goods and services between individuals on a voluntary basis under the rule of law and in a system of private property rights. In other words, it is a system of voluntary exchange in which all parties to the exchange are better off.”[1] FDR’s New Deal policies did not promote a voluntary exchange; and in the end, both parties affected by the New Deal were not better off.

The New Deal did little to help economic recovery. It prolonged high unemployment in the United States; “From 1943 to 1940, the median annual unemployment rate was 17.2 percent. At no point during the 1930s did unemployment go below 14 percent.”[2] The job market was not helped by the state influenced hikes in wages and labor costs, either. The New Deal negatively affected consumer prices and led to a tripling of taxes. The tax burden was intense and dipped into every aspect of American life from “income taxes, higher corporate income taxes, higher excise taxes, higher estate taxes, and higher gift taxes.”[3] The ever increasing taxes and unemployment “meant there was less capital for businesses to create jobs, and people had less money in their pockets.”[4]

As wage rates increased through New Deal policies, businessmen looked to technological mechanization in their industries and disposed of many entry-level jobs that called for unskilled labor. This led to the destruction of hundreds of thousands of jobs in the United States, particularly in states that were still behind in industrialization, like the South. Since the Civil War, the main unskilled labor force had remained the African American population. As a result, according to economist David E. Bernstein, “New Deal labor policies contributed to a persistent increase in African American unemployment.”[5]

Some economist purport that the New Deal helped the economy because of the massive public works projects had created jobs and spent billions of dollars in the economy; however, many of those projects went to the wealthier western states and not the poorer southern states.[6] Economist Jim Powell advocates that FDR used the public works programs as a ploy to buy voter support from western “swing” states over the “already solidly Democratic” South.[7] This argument is also supported in that relief and public works spending seemed to increase during election years.”[8] When FDR commented on Social Security taxes, he confessed that they were devised for securing votes and not to improve the economy. He said that they “'were never a problem of economics. They are politics all the way through.”[9] Burton Fulsom Jr. states that FDR’s goal was to “Tie older voters to the Democratic Party.”[10] Regardless, government projects and jobs are supported by the tax payers; and the New Deal was not helping the private sector rise up out of the depression to create the revenue needed to support the increasing federal government.

According to economist Thomas J. DiLorenzo, all the New Deal and public works projects did was divert already existing revenue from the private sector to the government: “The billions of dollars spent on public-works programs also failed to reduce overall unemployment—despite employing some 10 million people—because of the economic law of opportunity cost: diverting those billions from the private sector (through taxes) to the government sector only rearranged the composition of employment—fewer private-sector jobs and more government jobs.”[11] The New Deal did not improve the economy, but its “most important initiatives were active obstacles to economic renewal.”[12] There are many myths surrounding FDR’s New Deal that economics like Steve Davies have been trying to disprove according to their definition of capitalism.

Davies is clear in his statements that the New Deal did not save capitalism, nor did it end the Great Depression. He explains that where Great Britain had risen out of the depression by 1933, the United States found itself in greater peril by 1937. The United States had maintained its high unemployment, “but in addition the federal government has built up an enormous debt.”[13] Additionally, World War II did not save the United States from the effects of the Great Depression; in fact, he states that “the Great Depression does not really end until 1947 or 1948, and the war simply conceals or covers up the continuing low level of real wealth-creating economic activity in the United States.”[14] In the end, the statistical data produced by economists that share Davies’ definition of capitalism clearly show that the New Deal weakened capitalism.

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[1] Steve Davies, “Capitalism is NOT Imperialism,” Learn Liberty, June 3, 2013, http://www.learnliberty.org/videos/capitalism-not-imperialism/.

[2] Jim Powell, FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression, (New York: Three Rivers Press, 2003), vii.

[3] Ibid, ix-x.

[4] Ibid.

[5] Ibid, xi.

[6] Ibid, xii.

[7] Ibid.

[8] Ibid.

[9] Burton Folsom Jr., (2011), "Does Obama Have Any Idea Why New Deal Failed?," Human Events 67, no. 30: 25.

[10] Ibid.

[11] Thomas J. DiLorenzo, "New Deal for the World, A," Mises Institute, January 1, 1999, https://mises.org/library/new-deal-world.

[12] Alan Brinkley, (2008), "No Deal," New Republic, December 31. 12-13.

[13] Steve Davies, "Top Three Myths About the Great Depression and the New Deal," Learn Liberty, July 1, 2011, http://www.learnliberty.org/videos/top-three-myths-about-the-great-depression-and-the-new-deal/.

[14] Ibid.