Economic Thought of the Democratic Party, Then and Now

In John. T. Flynn’s book about fascism, “As We Go Marching“, the author quotes two planks of the platform of the Democratic party from 1932.

1. An immediate and drastic reduction of governmental expenditures by abolishing useless commissions and offices, consolidating departments and bureaus and eliminating extravagance, to accomplish a saving of not less than 25 per cent in the cost of the Federal Government; and we call upon the Democratic party in the States to make a zealous effort to achieve a proportionate result.

2. Maintenance of national credit by a federal budget annually balanced on the basis of accurate executive estimates within revenues, raised by a system of taxation levied on the principle of ability to pay.

This platform was in response to the unprecedented peacetime deficits of the Hoover administration. As expected by economic theory and as expected from previous experience (Flynn spells this out in detail when analyzing the persistent deficit spending of Italy and Germany for decades before WW2), Keynesian stimulus failed to lift the US economy out of the depression (we point out that Keynes did nothing more than put his stamp of “authority” on such notions with his influential book of 1936). Thus, as part of the presidential campaign of 1932, the Democrats presented credible alternative policies for ending the depression.

As there are actually three proposals in the two planks, let us take a look at each one.

  1. 25% reduction in federal and state spending. – It is interesting to note how significantly mainstream economic thought has changed over the years. While current day politicians call reducing the projected rate of increase of government spending “austerity”, 80 years ago, the favored presidential candidate actually proposed real, deep, spending cuts. In 1932, FDR was praised for promoting a policy to end the depression. In 2012, Ron Paul is castigated as a crack pot for promoting the same policy to end the depression. Of course, FDR did the complete opposite upon gaining office. However, it is amusing to realize that the end of the depression occurred when the federal government drastically cut spending after WW2
  2. A balanced budget to maintain the credit rating of the federal government. – The idea that a nation should live within its means by balancing its budget used to be an undisputed notion in economics. This began to weaken as the strands of thought that Keynes would eventually gather become more prevalent. As the years progressed, it became a bedrock principle of mainstream economics that governments can carry debt eternally and even peacetime deficits are largely irrelevant. So now we find ourselves in a world in which the wealthy nations runs gargantuan deficits year after year, blithely assuming that somehow all will be right in the end. Regarding maintaining national credit, we note the reaction to the loss of the US AAA credit rating last year.
  3. Tax increases to balance the budget. – This is the only one of the three proposals that sounds like something that the modern day Democratic party would endorse. It is also the only one of the three proposals actually enacted by FDR’s administration. Again, as predicted by economic theory and as known from experience [1], actual tax revenues will always fall short of optimistic projections during a depression and raising taxes only exacerbates the dire economic situation.

[1] From Flynn’s book: “But as the depression advanced there was a persisting failure of tax funds so that by 1931 there was a deficit of $901,959,000 which increased the next year to nearly three billion dollars. A part of this deficit resulted from the public-works expenditures but most of it was caused by a failure of tax revenues. Hoover, of course, never planned an unbalanced budget.

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