By Kieran Neild, grassroots assistant at the TaxPayers’ Alliance
Emulating the former US President Franklin Delano Roosevelt’s response to the Great Depression, Boris Johnson has christened the government's post-coronavirus economic plan as a New Deal for Britain. Michael Gove went even further in his much-read Ditchley Lecture, claiming that FDR “saved capitalism”. Although many would agree that Boris’ plan is a “lite” version of America's economic policy in the 1930s, we should be alarmed that the government is holding it as a capitalist triumph to be copied.
Roosevelt’s New Deal was a large programme of federal government spending which established a series of federal government agencies and enacted financial reforms which aimed to bring the United States out of the Great Depression. The deal was characterised by three aims known as the ‘three Rs’ - relief, recovery, reform.
Between 1933-39 the New Deal provided relief for the unemployed by spending millions of dollars on public work programmes and artificially raising the price of food to lift farmers in the south out of poverty. The federal government intended to recover the economy to pre-crash levels by forcing employers to pay higher wages and standardise work hours to increase consumer surplus and reduce unemployment. The government also introduced a wealth tax, colloquially known as the ‘soak the rich’ tax. The tax was levied at 75 per cent and imposed on the highest incomes in America. Finally Roosevelt also reformed the banking system and insured deposits to prevent ‘bank running’.
Although many of these measures were enacted to deal with a financial crash and not a government-induced virus lockdown, the UK government has decided to replicate the three Rs by gearing up Whitehall to play an active role in the economic recovery.
The government announced it would ‘Build Build Build’ its way out of the economic slump by investing in affordable housing and spending £5.6 billion on new infrastructure projects. In his recent “mini-budget” the Chancellor went even further enacting unprecedented measures to provide relief for furloughed staff and the service sector. Billions of pounds have been made available for the job retention scheme and a 50 per cent discount on meals up to the value of £10 has been given to everyone in the UK to encourage spending in restaurants and cafes. These taxpayer-funded support programmes are estimated to cost an eye-watering £192.3 billion, according to the Office for Budget Responsibility. This figure does not include the government’s ‘leveling up’ agenda, which has seen further billions splashed on local authorities.
The government is walking in the footsteps of Roosevelt and has decided to turn on the spending taps. As such, borrowing this year will rise from between 13 and 21 per cent of GDP - almost certainly taking public sector debt to over 100 per cent of GDP. But is this government spending spree worth it?
If Boris is so keen to emulate the New Deal and use it as an inspiration for our own economic recovery, the answer would depend on whether Roosevelt’s New Deal worked in the 1930s. This appears to be the central (and increasingly accepted) assumption of Boris Johnson’s boosterism. But did it work then, and will it now? Put simply, it did not and it appears that the UK is going to fall victim to the fallacy that you can borrow yourself into prosperity and forever spend on the otherwise unaffordable.
Arguably, the main aim of the New Deal was to reduce unemployment in the US and get the economy moving. An endless list of so-called alphabet agencies, like the AAA (Agricultural Adjustment Agency) and PWA (Public Works Administration), were established by the federal government to create, administer and regulate sectors of the workforce and the economy. But years of bureaucratic meddling and big spending did not achieve the President's primary objective of reducing unemployment to single figure pre-crash levels. At the beginning of Roosevelt's New Deal administration in 1933, unemployment was at 24.9 per cent. By 1938 unemployment in the USA was at 20 per cent, with the New Deal shaving off a disappointing 4.9 per cent from the total. FDR boosterism was not a satisfactory solution to the short term and painful unemployment spike.
The broader economic recovery from the depression was also sluggish, with GDP per capita 27 per cent below the pre-crash trend. It was only by 1941, when the US entered the Second World War, that the economy finally improved. Military spending had geared the American economy towards total war, and as such brought down unemployment to pre-depression levels. The lend lease programme contributed to the economic revival, boosting US manufacturing and agriculture to feed and arm Britain in her fight against Germany. In isolation, the New Deal was not enough.
So what can we learn from Roosevelt's New Deal? Firstly, some provisions of the programme were good. Roosevelt aimed to minimise reckless spending by differentiating federal spending between emergency and non-emergency budgets. The former were passed to tackle the depression, whilst the latter were designed to fund the federal government machine. The Economy Act 1933 cut the pay cheque of government employees in the non-emergency federal budget. Even with mounting spending, Roosevelt kept one eye on the ballooning federal budget and attempted to make a $500 million saving by cutting public sector pay. Unfortunately, our government seems to have so far ignored the necessary attempts of the Roosevelt administration to cut waste in the public sector and instead has gone full-throttle on a ‘spend, spend, spend’ agenda. In selectively imitating the politically easier bits of FDR economics, Boris wants to have his cake and eat it.
Despite these caveats, the New Deal did not do what it said on the tin - it opened a can of worms. The federal government encroached on state rights by imposing federal bureaucracies and hampered a private business led recovery. The federal debt vastly increased to 43 per cent of GDP in 1939, more than double what it was in 1929. Deficit spending and increasing debt had done little to solve the challenges the American economy faced. Borrowing became a feature of American economics and US debt is now a staggering $26 trillion and rising.
The crux of the problem was the economic theory behind the New Deal, the fallacy that a nation could spend their way out of trouble. Henry Morgenthau, secretary of the treasury in Roosevelt's administration, himself acknowledged this fallacy in 1939:
“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”.- Morgenthau, Henry Jr. Diary of Henry Morgenthau. Franklin D. Roosevelt Library. (May 9, 1939).
The UK is failing to heed Morgenthau's warning. We are likely to be lumbered with an overbearing state, regulating and spending its way to recovery with little benefit. We must hope the PM will not follow in Roosevelt's example any further and raise a damaging ‘wealth tax’. This has been advocated by the Labour Party in recent weeks, in a desperate attempt to ‘soak the rich’ in order to pay for the costly measures we have undertaken. Taxpayers in the UK are right to be worried about such a daunting prospect. Roosevelt’s wealth tax did little to increase tax receipts or balance the budget, and politicians of all political stripes must remember this.
In contrast to the US New Deal, Britain in the 1930’s took a very different approach. Chancellor Phillip Snowden took emergency measures to curb public expenditure, enacting fiscal austerity to reduce the budget deficit . As a result, the UK had a relatively mild Great Depression in comparison (although it must be said that areas of the north of England and Wales suffered worse relative to the south-east). Abandoning the gold standard allowed British exports to compete with global competition, saving Britain's manufacturing industries. In addition, a liberalised housing market facilitated unprecedented levels of private sector house building, creating thousands of jobs in construction. As a result, the UK had just two years of negative GDP growth in 1930 and 1931, vindicating Britain’s balanced budget approach and faith in free markets. Opening up the housing market, with measures such as the welcome stamp duty cut and ambitious planning reform, could do far more to help Britain recover than the mountains of other measures announced by Rishi Sunak.
The government should not have a selective memory on the New Deal but instead learn from the mistakes of the past. It ought to build on temporary tax cuts and enact meaningful reforms to our convoluted tax code. Furthermore, many of the government's grand schemes, like the Kickstart scheme, are simply not the right way to recover. Businesses should not be subsidised for keeping staff employed. Business-friendly tax reforms like abolishing employee and employer’s national insurance contributions would be a much more sustainable and realistic way to create jobs. Employer's NI is a job tax which acts as a disincentive for businesses to hire staff. Simultaneously, abolishing employee NI will leave more money in the pockets of taxpayers who know how best to spend it. There are many ways to give our economy a post-coronavirus boost, and the TPA has a credible alternative to statism.
Politicians would do well to look to our own history rather than rely on the misunderstood lessons of FDR, and focus more heavily on the measures which have been proven to work here. The government’s blind faith in the New Deal is concerning for us all. Not only did the programme fail to reduce unemployment to single figures, the New Deal left lasting scars on the US economy - with spiralling debt and soaring budget deficits. We need an alternative vision for Britain which has learnt from the lessons of the past. Liberalised markets and long term fiscal prudence have worked in times of economic hardship in the past, there is no reason why they cannot work again. No deal is better than a bad New Deal, after all.
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