Americans are still regaled with tales that Obama's spending binge and massive deficits are vital to an economic recovery. As evidence many of his supporters are citing Roosevelt's New Deal as proof that deficits work. In fact, the New Deal was an economic disaster that kept the US in depression until WW II restored full employment.

Early last year the Campaign for America's Future (an extreme leftwing organisation funded in part by George Soros) published a defence of Roosevelt's economic policies by Charles McMillion in which he categorically stated that "FDR's New Deal quickly brought rapid growth to the nation's economy during the Great Depression". (The "FDR Failed" Myth). This is complete nonsense. Economic growth is the process of capital accumulation, not a simple increase in GDP. On this definition alone Roosevelt was a dismal failure.

Professor Robert Higgs calculated that from 1930 to 1940 net private investment was minus $3.1 billion. (Robert Higgs, Depression, War, and Cold War, The Independent Institute, 2006, p. 7). W. Arthur Lewis calculated that from 1929 to 38 net capital formation plunged by minus 15.2 per cent (W. Arthur Lewis, Economic Survey 1919-1939, Unwin University Books, 1970, p. 205). Benjamin M. Anderson estimated that in 1939 there was more than 50 per cent slack in the economy. (Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States 1914-1946, LibertyPress, 1979, pp. 479-48). It ought to be obvious that where a process of capital consumption is underway -- as it was in the 1930s -- one should expect to see a significant rise in the average age of plant and equipment. This is precisely what happened as shown by the table below.

What is one to make of a self-professed economist like McMillion who cannot make the simple distinction between a reduction in idle capacity and an increase capital accumulation? Now this might come as a surprise to Mr McMillion and his comrades at the Campaign for America's [Socialist] Future but the embarrassing fact remains that recovery was already underway before Roosevelt could even implement his destructive New Deal policies. Roosevelt was inaugurated on 4 March 1933. I don't want to be a party pooper (actually I do) but the depression bottomed out "in the late winter of 1932-33" and recovery was clearly underway in the February-March period with the Federal Reserve Index of Production rising from 60 to 100 in July. (Frederick C. Mills Prices in Recession and Recovery, National Bureau of Economic Research, Inc., 1936, p. 307).

Nevertheless, Roosevelt did inadvertently encourage an increase in output. In an effort to pre-empt his proposed industrial codes firms speeded up production. Once the codes were implemented production slowed. Referring to increased production Mills wrote:

This increase continued in the post-code period, in 1935-36, with rising production as the active factor in the advance. Prices declined slightly. (Ibid. 320).

Mills was not the only observer who commented on the detrimental impact that Roosevelt's impending industrial codes would have on production. Benjamin Anderson noted that businessmen took into account the coming National Recovery Act codes and the proposed tax increases when

They speeded up production to get as much done as possible before these increased costs began to operate. This undoubtedly brought the production curve to a higher point that it would otherwise have reached so soon. (Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States 1914-1946, LibertyPress, 1979,p. 332)

McMillion claims that the 1937-38 crash was caused by a reduction in Federal spending. As we can see from the chart below both Federal and total government spending increased until 1936 when Federal spending dropped from 10.94 per cent of GDP to 9.58 per cent of GDP while total spending (Federal and state) fell from 20.17 per cent of GDP in 1935 to 18.74 per cent of GDP in 1937. These are falls of 12.7 per cent and 7.1 per cent respectively.

Let us put this in perspective. The fall in total government spending amounted to a paltry 1.43 per cent of GDP. Yet according to Roosevelt's disciples and various Keynesians this was enough to raise unemployment from 14.3 per cent in 1937 to 19 per cent in 1938 while at the same time slashing the production of durable equipment by 32 per cent and causing industrial production as a whole to crash by 33 per cent. (Lester V. Chandler, American Monetary Policy 1928-, Harper & Row, 1971, pp.248-9).

This nonsense became so entrenched that in 1943 Paul Samuelson confidently predicted that when the war ended and government spending was significantly cut mass unemployment would return on the scale of the 1930s. To the amazement of Keynes' disciples nothing of the kind happened. Between 1945 and 1947 Federal annual spending was slashed from $95 billion to $36 billion -- a $59 billion cut in two years. This was a staggering 62 per cent reduction and amounted to 26 per cent of GDP as it stood in 1945.

Instead of America spiralling into a depression with 8 million unemployed lining up at soup kitchens the cuts began the longest period of prosperity in US history, despite the fact that This achievement is all the more remarkable -- to Keynesians, that is -- when we consider that at the same time "fourteen million World War II servicemen also returned to civil life". (President Truman's State of the Union address 6 January1947).

Now Keynesians tend to treat surpluses as contractionary and yet the US budget went into surplus in 1947 where it remained until 1950. (Incidentally, students won't find any of these facts in any Keynesian textbook.) Yet typical leftist 'journalists' like Jonathon Chait and David Ignatius are still arguing that big-spending government saved America in the 1930s and could so again under Obama if only those stupid Republicans would go away. There is simply no arguing with reality-challenged leftists.

It is also argued by the smart set that it was a reduction in government spending that caused the 1937-38 crash. But the experience of 1945 and 1947 demolishes the case that government spending is necessary to maintain full employment. What McMillion and the rest of the leftists ignore is the fact that the real cause of the crash was a massive union push for higher real wages. The following table clearly brings out this fact. The figures in the PARW (productivity adjusted real wages) column are real wages divided by productivity.

In economic theory there is a tendency for every factor to be paid the full value of its marginal product (the value of its additional output). When for any reason factors are paid in excess of this value they will become idle. In the case of labour this is called unemployment. It therefore follows that a period of prolonged widespread unemployment should be marked by wages rates exceeding the value of labour's output. This is exactly what the table shows.

We can see that the adjusted real wage fell from 117.6 in 1935 to 114.9 in 1936. Thanks to the union action -- sanctioned by Roosevelt -- the adjusted wage had jumped to 132.4 in 1938 and unemployment went from 14.3 per cent in 1937 to 19 per cent in 1938. It was estimated by two economists that in 1938 the adjusted wage exceeded the 1929 wage by 14 per cent. (See Richard K. Vedder and Lowell E. Gallaway's Out of Work, New York University Press, 1997, p. 103). The chart below shows who unemployment moved inversely with movement in the adjusted real wages. (Unemployment figures are on the left side and productivity adjusted wages are on the right.)

There is nothing new here. The grey area in the next chart represents the gap between real wages and productivity. It can be easily seen that throughout the 1930s real wages exceeded productivity. It was not until the two converged that unemployment declined. (Mind you, putting 12 million people into uniform also helped).

Compare the situation with Australia. In 1932 unemployment peaked at about 25 per cent and then began to fall, even though commonwealth spending had dropped by over 12 per cent from the financial years 1930-31, 1931-1932 to 1932-1933. For the periods 1931-1932 to 1932-1933 total spending for the states also fell. So why did unemployment start falling and continued to do so until it reached 8.9 per cent in 1938 as against 19 per cent in the US? Because in Australia real wages were largely allowed to adjust to rising productivity whereas Roosevelt did the exact opposite. Even now the sheer destructiveness of Roosevelt's NRA is scarcely appreciated. Benjamin M. Anderson was scathing about the destructive consequences of this product of Roosevelt's economic illiteracy:

[The] NRA was not a revival measure. It was an anti-revival measure. . . Through the whole of the NRA period industrial production did not rise as high as it had been in July 1933, before the NRA came in. Following disappearance of NRA, after the Supreme Court decision in May 1935, there cam the first real recovery. We passed the July 1933 peak in the autumn of 1935, and then, with rapidly growing volume of production and with decreasing unemployment, had approximately two years of growing business activity. . . (Anderson, pp. 333-34).

Frederick C. Mills observations were no less damning:

During the ten months that followed the end of [Roosevelt's] code operations employment rose 7 per cent, and average hourly earnings remained constant. Over the entire period of recovery we have a pronounced advance in total wages paid, a considerable rise in man hours worked and a notable increase in hourly rates of pay. (Mills, p. 325).

McMillion stated that the crisis was the fault of the largely unregulated financial and commercial sector. This is an outrageous lie. These sectors are heavily regulated. To state otherwise -- as he did -- is to show utter contempt for the truth. A contempt that is revealed by his refusal to acknowledge the role that Democrats played in aggravating the crisis by corrupting Fanny Mae and Freddy Mack and looting them for their own personal gain. Then there is his refusal to acknowledge the fact that Democrats -- helped by the thugs at ACORN -- intimidated banks into making sub-prime loans. But we should not be surprised by Mr McMillion's double standards. Like all dedicated leftists he will not hesitate to lie in order to advance the socialist cause.

The crisis was both predictable and avoidable. In 2004 I warned that America would suffer financial problems in around 2008. And so it came to pass. I pointed out time and time again that the Fed's grossly mismanaged monetary policy had laid the foundations for another recession, and that once again the market would be blamed. The Austrians are forever pointing out loose monetary policies create economic imbalances (malinvestments) that must sooner or later be dealt with.

The crisis first strikes at manufacturing and then works its way down the production structure. Consumption always suffers the least while the capital goods industries suffer the most. The following table illustrates this point. Therefore, if we wish to avoid future financial crises the central banks must learn the power of money and how it affects relative prices and the capital structures.

Leftism is a cult and like all cults it is impervious to reason and facts, something its adherents like McMillion demonstrate time and time again.

A note on Campaign for America's future: This is a hate-America organisation determined to destroy its institutions and transform it into a socialist slagheap. Needless to say, it receives funding from George Soros, the man who thinks America needs to be "de-Nazified". It is a member of a complex network of extreme leftist organisations that share its contempt for ordinary Americans and their love of country.

It was co-founded in 1996 by Robert Borosage, a man who thinks America's military is a threat to world peace and should therefore be dismantled. He also admires the sadistic Castro. From 1979 to 1988 Borosage served as Director of the Institute for Policy Studies. This is important because the IPS served as a front for the KGB and the Castro regime during the Cold War. So close were its links that it openly used KGB agents has lecturers. After the collapse of the Soviet Union it maintained its links with the DGI (Castro's version of the KGB). It is viciously anti-American and has done everything in its power to fatally cripple the country's intelligence agencies and the military. As Brian Crozier said of this organsiation :

The IPS is the perfect intellectual front for Soviet activities which would be resisted if they were to originate openly from the KGB.

Crozier is one of the World's leading experts on the Soviet Union and was an advisor to the British Secret Service, the British Foreign Office and the CIA. He is a fellow and founder of the prestigious Institute for the Study of Conflict. He is also a Distinguished Visiting Fellow on War, Revolution, and Peace of Stanford University's Hoover Institution. His memoirs were published in Free Agent: The Unseen War 1941-1991, HarperCollins, 1993.

At one point Crozier posed such a danger to the IPS that it threatened to sue him for libel in a British court. It chose this tactic because in the UK truth is no defence in a libel case. The plan was to use a court victory to destroy Crozier's credibility. However, they withdrew the case once they realized Crozier would fight (he had the financial support of Sir James Goldsmith) and that they would be subject to a public cross examination regarding their activities and the contents of certain IPS documents. Their unseemly retreat served to confirm Crozier's charges against them. (Brian Crozier, The KGB Lawsuits, The Claridge Press, 1995.)

This tells us all we need to know about Borosage and the real motives behind the Campaign for America's Future.

The following articles concern the IPS's treasonous activities:

Did the KGB help plan America's Foreign Intelligence Surveillance Act?
John Kerry and his anti-American IPS playmates
Institute for Policy Studies and 9/11: will Congress blame the IPS instead of the CIA?
Institute for Policy Studies targets President Bush and Cheney