True or False

A very good friend asked me which part of the account below is not true. I invite readers of this blog to refute any part of it with evidence.

Those who ignore history are doomed to repeat it.

The Ghosts Of '38


Politics: After their rout Tuesday in key state elections, Democrats would be wise to take a lesson from history. No, we're not talking 1994, when the GOP took back Congress after two years of Clinton. We're talking 1938.

That little-remembered year during the depths of the Great Depression was one of the most edifying in electoral history. With FDR in the White House, and still very popular, a rogue Congress with radical ideas embarked on a series of legislative initiatives that helped push a recovering economy back into depression.

The result: Democrats lost 80 seats in the 1938 election, after gaining seats in 1930, 1932, 1934 and 1936.

How did this happen? As Amity Shlaes notes in her history of the Depression, "The Forgotten Man," Roosevelt believed less competition and high wages would heal the economy. Aided by Congress, he went about engineering those two things with a vengeance, trebling the size of the federal government in less than a decade.

At the time, such drastic action may have seemed warranted. Within three years of the 1929 crash, GDP had fallen nearly a third and a fourth of the U.S. work force was idle. Even so, the economy appeared to stabilize in 1934 and 1935, and in 1936, Democrats won landslides in both Congress and the presidency.

What happened next is a tale of overreach and hubris — one that holds lessons for today's Democrats.

It starts with a series of far-reaching changes to the economy that FDR initiated after entering office in 1933. They included the Agricultural Adjustment Act, which slapped new taxes on farm goods and forced prices to go higher, and the National Industrial Recovery Act, which created business cartels, set prices and imposed more than 500 "codes" governing prices, wages and workweeks.

Both the NIRA (1935) and AAA (1936) were found unconstitutional. But they set the tone for economic tinkering. In a 2007 landmark study, economists Harold Cole and Lee Ohanian calculated that without these restrictive policies, the economy would have recovered in 1936 — seven years before it actually did recover.

Conditions only got worse in 1936 and 1937. Worried about budget deficits and the possibility of inflation, the Fed contracted the money supply. As it did, the newly enacted Wagner Act raised labor costs, encouraging many companies to lay off workers. Those who still had jobs noticed that their paychecks had shrunk, as Social Security withholding kicked in for the first time ever.

The Roosevelt Democrats also unveiled a 5% tax on corporate dividends, and raised the top income tax rate to 90% from 63%.

As today, anti-business rhetoric was rife. FDR called businessmen "economic royalists." Congress imposed new taxes on corporate earnings and put more restrictions on the stock market.

By 1937, notes the Mackinac Center for Public Policy's study "Great Myths of the Great Depression," the economy had scored a first — a "depression within a depression." Real output fell in 1938 by 6%, as business investment shrank by a third.

Democrats are following the same playbook today, spending wildly, trying to raise taxes and imposing government control over vast swaths of the U.S. economy. They'd be wise to back off. If they don't, 2010 could turn into a repeat of 1938.