Franklin Delano Roosevelt, he of the New Deal and the most progressive president our nation ever had (some may quibble with that, citing Woodrow Wilson or even Lyndon Baines Johnson) decided when he won the 1932 election that he was going to tackle the Great Depression head on. Never mind the Depression itself was largely caused by the Smoot-Hawley Tariff[1] (a fact lost on so many) and the failure of the Federal Reserve, two government initiatives which failed miserably. President Roosevelt operated under the assumption more government and more money was the answer, money to be injected into the system to solve the problem. Increase the money supply and more people will spend, purchasing overproduced goods (underconsumption) and thereby creating more jobs and a demand for more workers. In turn, those workers will spend their money, increasing demand for goods, and the cycle continues.[2]
President Roosevelt and his “brains trust,” the best and brightest recruited to serve in his cabinet, were convinced underconsumption and the wealthy taking advantage of tax breaks were behind the economic downturn. In essence, they were convinced capitalism was failing.
President Roosevelt stumped on the same trope we hear today: the rich were hording money and wealth at the expense of the poor, and high taxation along with a required higher minimum wage were the keys to even the playing field. President Roosevelt’s plan was essentially wealth redistribution through raising the minimum wage, raising taxes on the wealthy, and expanding government programs. Sound familiar?
The problem with that line of thinking is this: it simply doesn’t work. It never has and never will. History is replete with attempts to redistribute wealth in that manner, and empirical evidence shows such attempts are little more than well-meaning folly which tends to exacerbate the economic issues the government was trying to address.
Henry Morgenthau Jr., a member of FDR’s brains trust and treasury secretary said this in 1939, after the Great Depression’s unemployment woes continued despite mountains of money thrown at the problem.
“”We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration we have just as much unemployment as when we started, and an enormous debt to boot!”
Further, the notion of raising the minimum wage was just as disastrous. The idea, again, was to address underconsumption. Put more money in the workers’ pockets, and they’ll spend it, creating a snowball effect that would result in more production and more employment.
That is not what occurred.
What really happened, documented quite nicely by Burton Folsom, Jr. in his book New Deal or Raw Deal was rather than employ ten people at the new rate, small businesses had no choice; they cut their staff by half, resulting in more unemployment. The fact is they could not afford to pay the new wage rate, and unemployment actually increased.
What is quite interesting is that wages increased some 5% in the years before the Depression. Translated…consumption was increasing rather than decreasing.
Fast forward to today.
California’s new minimum wage law has resulted in businesses closing or cutting staff to ensure the wage law is me with the same result as in the 1930s. Further, unemployment is occurring and will expand either by businesses closing or automation taking the place of a worker (as also happened in the 1930s). Said one person interviewed the other day:
“From the people that I spoke to, my employees, we would rather have stayed at the wage that we did have before, just because now we don’t have a job,” Navarro said, “And those who are still working in the areas round us that went up to $20 an hour, they got their hours severely cut. And it’s a lot less people working on shifts. So their jobs got a lot more difficult.”[3]
Again, this is not new. The same thing happened in the 1930s. Jobs were cut and the workers who did manage to survive and maintain a job had to do the job of two people rather than one.
The other lesson of history revolves around taxation. During the Roosevelt administration, the top marginal tax rate went to 77%. The expectation was that the higher tax rates would bring in more revenue. Further, Roosevelt expanded the federal income tax base by lowering the exemption level, resulting in more people paying federal taxes, and he raised the corporate tax rate to 52% along with the Revenue Act of 1935 which was, essentially, a wealth tax imposed upon the highest earners (more than one million per annum). Sound familiar? President Biden has floated the same idea, attempting to sell the notion that those under $400,000 would be exempt.
As Burton Folsom, Jr. points out, there was already precedent for this during the years of the First World War. When this same notion was attempted then, Secretary of the Treasury, Andrew Mellon stated that high income tax rates “inevitably put pressure upon the taxpayer to withdraw this capital from productive business and invest it in tax-exempt securities…The result is that the sources of taxation are drying up, wealth is failing to carry its share of the burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people.”[4]
This does not mean to suggest tax rates get cut to zero (Mellon himself thought that 25% was about right), but it does support the notion of “supply-side” economics, the idea that cutting taxes increases tax revenue to the government rather than a tax rate of 77% as was under Roosevelt.[5]
Again, when President Roosevelt raised the income and corporate tax rate, the government did not bring in more money. Why? The wealthy simply did not pay the tax, preferring instead to hide their money in tax shelters or overseas. Businesses simply did not invest or attempt to expand their businesses. It simply wasn’t worth it. The result? Less money for the federal government and more unemployment.
The fact is when taxes are cut, business owners will generally reinvest profits to help the business flourish. Where’s the evidence of this? We have a number of examples through the presidencies of Calvin Coolidge, John Kennedy, Ronald Reagan, and George W. Bush. All proper examples of tax cuts that resulted in “increased rate of growth, increase the revenue received by the government. The rich not only paid more taxes because of the tax cuts for the rich, they called it, they paid a higher percentage of all taxes.”[6]
There is also a school of thought that indicates such a high minimum wage is detrimental to the poor or the uneducated, erecting a barrier for not only their gainful employment, but also as a barrier to those less educated to acquiring the work experience and skills necessary to compete in the wider workplace. Such sentiments were first brough to the fore by Michigan Representative Carl Mapes[7] who stated, “The enactment of this [minimum wage] legislation,” Mapes concluded, “will further increase unemployment, not reduce it. It is bound to increase unemployment unless all human experience is reversed.”[8]
Representative Mapes went on to explain that the law would harm low skilled workers trying to get their first foothold on the job ladder.[9]
There is much more to this than what’s presented in this article. The one sure thing we know about economics and economic theory is that it is just that…theory. We also know, however, through the annals of history, history once stripped of the bias of historians, that the single greatest engine of prosperity for nations and peoples has been capitalism. Not crony capitalism, but the free exchange of goods and services between people and business, with little interference.
When the African states decided to move away from their Marxist roots in the 1990’s, as China, Vietnam, and many South American nations did, they prospered. See what is happening today in Argentina under their new President Javier Milei. Since his inauguration and his scrapping of government-controlled economics, Argentina has, for the first time in 12 years, achieved a budget surplus. He achieved it by significant spending cuts, cutting the marginal tax rate, and cutting a bloated government.
Maybe if Gavin Newsome and President Biden, along with so many in our government would take the time to study history, they would realize the mistakes they’re making. On the other hand, pandering to an electorate that has come to rely on government largesse is the best way to get elected.
And the best way to fail.
[1] The Smoot-Hawley Tariff was enacted against the wishes of many Economics professors. Hoover did it anyway. It imposed significant tariffs on foreign goods to help pay the national debt because of the First World War. European nations retaliated initiating a trade war which contributed to the stock market crash…the rest is history. There were other factors as well, the most important being the failure of the Federal Reserve to act by providing money to cash strapped banks.
[2] This is largely the Keynesian economic approach which suggests the government should spend during an economic downturn rather than cut.
[3] Original Article Source: https://www.foxbusiness.com/economy/california-minimum-wage-shocks-fast-food-workers-restaurant-closes-only-begining-ex-manager-warns
[4] Folsom, Jr. Burton, New Deal or Raw Deal, page 128.
[5] Supply-side economics is derided amongst those in the political left; the term “trickle-down” economics being substituted. There is no such term as trickle-down economics, nor is supply-side economics illustrative of so-called trickle-down economics. The term is a misnomer, unfortunately applied by those who oppose supply-side economics.
[6] Dr. Thomas Sowell in an interview, the link can be found here: https://youtu.be/rc-bELgAowU?si=tw8Y7q8DiaQMT_QH
[7] Mr. Mapes served Michigan in the House of Representatives from 1913-1939.
[8] Folsom, Jr., New Deal, page 115.
[9] Ibid., p. 115.
