December 2008

The United States Does Not Need Another New Deal:Excessive Taxation and Regulation is not the Solution

By John Hendrickson

The November 24, 2008 issue of Time magazine featured President-Elect Barack Obama on the cover in a pose that resembled President Franklin D. Roosevelt. “The New New Deal: What Barack Obama can learn from F.D.R. — and what the Democrats need to do,” was the cover story that Time ran. The story alluded to the point that many Democrats are hoping to resurrect the New Deal. Creating a new New Deal, however, would be a fundamental policy mistake, because increasing taxation and regulation upon an already unbalanced economy will only worsen the economic crisis. It is vital to understand that calling for a new New Deal means advocating more regulation and taxation. In order to bring about economic recovery, policy makers need to follow the example of Calvin Coolidge rather than Franklin Roosevelt.

It is assumed that government regulation is harmless and that it will only result in safer products, better working conditions, and an overall improved economy. The Competitive Enterprise Institute has recently issued its annual study on government regulation, Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State, written by Clyde Wayne Crews, Jr., a thought provoking report for all concerned taxpayers on the cost of government regulation. Ten Thousand Commandments demonstrates that “regulatory compliance costs hit an estimated $1.157 trillion in 2007.”[1]  The report also found that “regulatory costs now exceed or nearly match revenue from major taxes.”[2]  As the federal government places more regulations upon the economy, those regulations are costing not only business and industry, but also consumers and taxpayers.

Crews notes that “the federal government funds new programs by either raising taxes or borrowing money…a third way the government funds programs is by regulating.”[3] Regulation, which is often forgotten unless one is directly affected, usually takes a back seat to tax policy, which receives the most attention. Unfettered regulation, though, can be costly. As Crews notes:

Rather than pay directly and book expenses for new initiatives, the government can require the private sector (and state and local governments) to pay for federal initiatives through compliance costs. Government regulation can help advance desired programs without using tax dollars. Because disclosure of, and accountability for, the regulatory costs are so rare, policy makers can afford to be careless about regulatory costs relative to ordinary government spending…Because regulatory costs are not budgeted and because they lack the formal presentation to the public and media that accompanies federal spending, regulatory initiatives can allow manipulation of private sector resources with little public fuss, thus rendering regulation a form of off-budget taxation.[4]

The danger with calling for a new New Deal is the fact that many of Roosevelt’s “alphabet soup” agencies were regulatory creatures, including the flagship program of the New Deal, the National Recovery Administration (NRA). At the heart of the progressive philosophy is the promulgation of the administrative state. Progressives believe that the administrative state, which has transformed into the welfare state, would serve as the instrument for reform, and in the process citizens would provide more power to the federal government in exchange for more political rights, such as economic security.

Judge Robert Bork summed up the constitutional implications of the New Deal when he wrote:

The New Deal was an economic and government upheaval. It stood for a sudden and enormous centralization of power in Washington over matters previously left to state governments or left in private hands, a centralization accomplished largely through the assumption of greatly expanded congressional powers to regulate commerce and lay taxes.[5]

The New Deal not only utilized regulation, but advocated progressive taxation. Economic historian Jim Powell noted that “the New Deal tripled taxes between 1933 and 1940 — excise taxes, personal income taxes, inheritance taxes, corporate income taxes, dividend taxes, excess profits taxes all went up.”[6]

Brian M. Riedl, a federal budgetary expert at The Heritage Foundation, wrote that “in a throwback to the 1930s and 1970s, Democratic lawmakers are betting that America’s economic ills can be cured by an extraordinary expansion of government.”[7] In other words, Democrats are trying to revert back to New Deal-Keynesian era economic policies. President-Elect Obama and Democrat leaders in Congress need to seriously reconsider the implications of such a policy direction.

During the early 1920s, after inheriting a severe economic recession, President Warren G. Harding and his Treasury Secretary, Andrew Mellon, responded to the economic crisis by utilizing tax relief and budget and spending reforms. Harding and Mellon responded to the recession — which had an unemployment rate of at least eleven percent — using constitutional and free market approaches. President Calvin Coolidge and Secretary Mellon continued the same economic policies of tax and spending reform and both understood the importance of constitutional government. In fact the Coolidge-Mellon tax cuts “helped produce an outpouring of economic development,” which created a healthy environment for business, increased revenues for the federal government, and created a budget surplus.[8]

The nation cannot afford a new New Deal. The federal budget is over $3 trillion, public national debt exceeds $10 trillion, entitlements are on the verge of bankruptcy, and excessive new taxes and regulations will not turn the economy around. What is needed is sound constitutional government, i.e. limited government. As Jim Powell wrote in the closing of his book, FDR’s Folly: “The stakes are high, and Americans can only hope that knowledge of past mistakes, particularly the New Deal, will help remind political leaders what must be done and what must be avoided for people to prosper.”[9]

John Hendrickson is a Research Analyst at Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry. 

[1] Clyde Wayne Crews, Jr. Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State, Competitive Enterprise Institute, 2008, p. 1.

[2] Ibid., p. 7.

[3] Ibid., p. 4.

[4] Ibid.

[5] Robert H. Bork, The Tempting of America: The Political Seduction of the Law, New York: Simon & Schuster, 1991, 53.

[6] Jim Powell, “A Fresh Debate about FDR’s New Deal,” CATO Institute. December 2, 2003, <http://www.cato. org, (November 22, 2008).

[7] Brian M. Riedl, Why Government Spending Does Not Stimulate Economic Growth,” Backgrounder, No. 2208, November 12, 2008, The Heritage Foundation, Washington, D.C.

[8] Burton Folsom, Jr. New Deal or raw Deal: How FDR’s Economic Legacy Has Damaged America,  New York, Threshold Editions,  2008, p.129-130.

[9] Jim Powell, FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression, New York, Three Rivers Press, 2003, 274.