In the last blog post, I told you that President Obama says we need yet more government spending–a business aid package that he asks Americans to support. On Monday, August 30, he said, “My economic team is hard at work identifying additional measures that could make a difference.” But why, we should ask, should we keep repeating the same story and expecting the elusive recovery? Isn’t the classic definition of insanity the notion of doing the same thing over and over and expecting different results?

History helps us here. In the 1930s, Presidents Hoover and Roosevelt experimented with massive government spending in an effort to end the recession of 1929. Both presidents tried public works spending and farm subsidies. FDR also tried a huge road building program (WPA), special youth employment programs (CCC and NYA), huge infrastructure investments (TVA), and a business subsidy program (NRA). Just for good measure he also threw in social security, minimum wage, and special privileges for unions. What was the result? After seven years of these experiments under FDR, the U. S. unemployment rate was more than 20 percent. At the same time (the year 1939), for most of Europe, unemployment averaged about 11 percent, according to a detailed study by the League of Nations.

Why does stimulus spending fail so often when it is tried? Because it assumes that politicians in Washington can spend our money better than we can spend it ourselves. They can’t. Politicians can tax us and borrow from China all they want, but they simply can’t pump it into the economy more effectively than Americans can themselves. True, politicians can direct tax revenue into key states and congressional districts to win votes at election time. So sometimes we have key battleground states benefiting from other people’s money. But “spreading the wealth around,” as President Obama calls it, only works when people are voluntarily spreading their own wealth around, not having politicians do it for them.

In the wake of economic failure, however, President Obama has taken one good step–he announced Monday that he might consider keeping the Bush tax cuts in place. Fine idea. If people know they are going to get to keep more of what they earn, they will be able to spend more and invest more. Free people freely spending their own money is the first step to economic recovery.

Let’s tell a story. Once upon a time we had a president who very recently announced the need for an economic stimulus package, a “booster shot,” as he called it, for the struggling economy. Our storybook president called his bill the “Economic Stimulus Act.” When he signed it, he proudly proclaimed, “The bill I’m signing today is large enough to have an impact.”

Then something sad happened. The stimulus package, instead of rescuing the economy, seemed to depress it. Unemployment went up and more layoffs occurred.

Of course, we don’t have to imagine such a story. It actually happened–to President George W. Bush. Remember? In February, 2008, President Bush promoted a $152 billion stimulus package that yielded not more jobs, but fewer jobs as national unemployment rose from 4.8 percent in February to 5.8 percent in July to 6.9 percent in November, the month when Barack Obama was elected.

Oddly, the new President Obama decided to repeat the Bush story. The new president proposed yet another stimulus package, this one to be almost $800 billion–much larger than the one Bush put forth the previous year. The bigger the better, we were told. What happened? The same thing. Unemployment went up after the Obama stimulus became law — from under eight percent to about ten percent.

A year and a half after the second stimulus flop, President Obama says we need yet more government spending–a business aid package that he asks Americans to support. On Monday, August 30, he said, “My economic team is hard at work identifying additional measures that could make a difference.” But why, we should ask, should we keep repeating the same story and expecting the elusive recovery? Isn’t the classic definition of insanity the notion of doing the same thing over and over and expecting different results?

(Look for the answer to this question in the next blog post.)

One of the benefits of studying history is that we can see what worked and what didn’t work in the past. That helps us put the present in perspective. My larger point is that many ideas that are fashionable today will be discarded and in the dumpster thirty years from now. In fact, my task as a teacher is often to explain to students how it is possible that so many people in a given generation could have believed something that today is obviously so silly. Let’s look at some examples.

In 1920, most Americans genuinely believed that if we prohibited the manufacture of alcoholic beverages, people would mostly stop drinking and morality would improve. For a while it worked. But a dozen years later the experiment was clearly a flop, and law enforcement agencies around the country were swamped trying to stop bootleggers from selling imported or home-made booze. But that was okay; we put prohibition aside because we had a new fashion–the idea the we could outlaw war. Dozens of nations around the world–the United States leading the way–signed the Kellogg-Briand Pact, which committed nations to outlawing war in international policy. It was all supposed to be that simple. Pass a law, and war will be gone. And then came Mussolini. Then came Hitler. Then came the Japanese. End of Kellogg-Briand Pact. But it was the wisdom of its day.

Finally, in the 1930s came the Keynesian idea that if we had an economic downturn, we should just “stimulate aggregate demand,” that is, spend money we don’t have and that would spark economic growth in the economy. Thus, the U. S. went on a course of massive deficit spending. In Franklin Roosevelt’s first two terms in office, the U. S. amazingly doubled its national debt through a flurry of new programs such as WPA, TVA, AAA, and CCC. What was the result? Toward the end of FDR’s second term, unemployment was 20.7 percent, the top income tax rate was 79 percent, and the Great Depression had become the worst economic catastrophe in U. S. history.

The good news is that we learned some lessons: prohibition didn’t work and unfortunately, we can’t outlaw war. Human nature will not let that happen. But the bad news is that we never got around to discarding the notion that “spending money we don’t have will stimulate economic growth.” For some reason, that fantasy has lingered, and remains in economic fashion in top political circles today. The sooner we can dump that idea in the dustbin, the sooner we can begin again to prosper as a nation.

“Republics they say are ungrateful. . . . The people that create or build to make victory possible . . . are war profiteers to be subjected to suspicion, to be investigated, to be harassed.” Thus spoke Andrew Higgins, the inventor of the Higgins boats that were so essential to the U. S. D-Day landings in WWII. Eisenhower called Higgins “the man who won the war for us.” But when the war was won, Higgins was socked with an IRS investigation and then was largely forgotten. I grew up in Nebraska, where Higgins was born and raised, but I never heard about Higgins in history class. Instead we studied William Jennings Bryan, the Nebraska politician who wanted government to set the prices of gold and silver. Oddly our American republic seems to honor manipulative politicians more than creative entrepreneurs.

The first billionaire in U. S. history was John D. Rockefeller. He dominated oil refining so strongly that his Standard Oil company alone held a 65 percent world market share of oil refining in the late 1800s. In other words, just Rockefeller alone sold about two-thirds of all the oil used in the entire world. No OPEC or Middle Eastern cartels squeezed the U. S. while that man lived. Yet in Cleveland, Ohio, where Rockefeller achieved his success, we find no memorial to his creative brilliance. In Kentucky we have major roads dedicated to Rep. Gene Snyder and Senator Wendell Ford, but no monument to Col. Harlan Sanders, the founder of Kentucky Fried Chicken. Those who have created the jobs that helped make the U. S. a world economic power seem less important than the politicians, who have redistributed much of their wealth to the nation’s non-producers.

Why does the U. S. economy in 2010 continue to stagnate? Maybe we are looking at the wrong role models. When we honor politicians, who bring home pork to build roads, and neglect our nation’s entrepreneurs–our real job creators–we send our children the wrong message about how to preserve and sustain a free society.

Scapegoats. The sequence of massive federal spending followed by a lack of recovery plus tax hikes is poison for a politician. Therefore Roosevelt sought scapegoats to explain his failure. Wall Street bankers were his favorites. He called them “economic royalists” and blamed them for causing the Great Depression. He also blamed America’s top businessmen for instigating a “capital strike”—they were refusing to invest in order to make him look bad. FDR then launched IRS investigations of key Republicans and used the newspapers to encourage hostility toward these targets.

Obama has followed FDR’s playbook of attacking Wall Street bankers and various corporate leaders. He condemns the raises these bankers sometimes receive and the profits earned by some large oil companies and health insurance companies.

Such emphasis on “class warfare” may be an inevitable part of redistributing wealth from one group to another. Perhaps Roosevelt and Obama believed that by increasing envy and resentment toward some Americans, they could capture the votes of larger groups of Americans and thereby win reelection (in FDR’s case there is evidence of this). True, this strategy guarantees that many wealthy Americans will attack any president who uses class warfare, but the campaign for redistribution will always supply large amounts of money to subsidize favored groups.

When Roosevelt was reelected in 1936 Senator Carter Glass, Virginia Democrat, admitted, “The 1936 elections would have been much closer had my party not had a 4 billion 800 million dollar relief bill as campaign fodder.”

Obama may be hoping his “stimulus” package and his health insurance bill will generate similarly large support among Americans receiving federal benefits and that these voters will go to the polls to overwhelm those who are paying the bills.

This is an excerpt from the June edition of The Freeman, a publication from the Foundation for Economic Education.

Tax rates raised. During the Great Depression Roosevelt raised both income and excise taxes. In 1935, with FDR’s push, the top marginal tax rate hit 79 percent. Few paid that rate, but thousands of Americans were in the 50-percent bracket. Entrepreneurs had to hand over more than half of any income above a certain level. Facing disincentives to make capital investments, many entrepreneurs used their wealth cautiously—investing in tax-exempt bonds, art collections, and foreign banks. Little wealth went into creating jobs, so high unemployment persisted. During World War II FDR raised taxes further, to 94 percent on all income over $200,000.

Most of the tax hikes under Obama are planned for the future. Thus far we have seen proposed tax hikes on products such as cigarettes, liquor, plane tickets, and soft drinks. He wants the tax cuts enacted under President Bush to expire. That will mean a spike in the capital gains tax, the income tax, and the estate tax. As FDR showed, tax hikes eventually follow large spending increases.

This is an excerpt from the June edition of The Freeman, a publication from the Foundation for Economic Education.

Spending fails. After the large increases in federal spending under Roosevelt and Obama, unemployment remained high. In the 1930s unemployment fluctuated, but recovery never occurred. In April 1939, toward the end of Roosevelt’s second term, unemployment was almost 21 percent. Treasury Secretary Henry Morgenthau complained, “We are spending more than we have ever spent before and it does not work.” Nonetheless, almost all of FDR’s programs continued—usually with annual budget increases.

When Obama took office unemployment was at 8 percent, and in the next year it steadily increased to over 10 percent before falling back just under that mark. He and his advisers were puzzled that large spending increases did not slash unemployment, and he argued that his spending was saving jobs that would otherwise have been lost.

Critics of Roosevelt and Obama insisted that it was impossible to spend our way out of a recession. During the New Deal, economics writer Henry Hazlitt observed that public-works spending destroyed as many jobs as it created. “Every dollar of government spending must be raised through a dollar of taxation,” Hazlitt emphasized. If the Works Progress Administration builds a $10 million bridge, for example, “the bridge has to be paid for out of taxes. . . . Therefore for every public job created by the bridge project a private job has been destroyed somewhere else.”

This is an excerpt from the June edition of The Freeman, a publication from the Foundation for Economic Education.

Massive federal spending. Presidents Roosevelt and Obama responded similarly to the crises. They talked about balancing the federal budget, but instead resorted to massive spending. Earlier presidents, like Cleveland and Harding, cut spending when the nation was threatened with economic hardship. Hoover was the transition president, running deficits with record spending on public works, the first federal welfare program, and the first large-scale federal farm program. The results were budget deficits and 25 percent unemployment.

President Roosevelt became Hoover on steroids. FDR and his advisers, despite some early moves to cut spending and control the deficit that Hoover left behind, decided that ever-larger federal spending would trigger economic expansion and pull the country out of its economic slump. Thus Roosevelt began the Agricultural Adjustment Act (AAA), which paid farmers not to produce, and then expanded Hoover’s Reconstruction Finance Corporation, which provided bailout money to large banks and corporations. He also expanded spending on public works and targeted large subsidies to various special interests.

President Obama, who often cites FDR, followed his example of targeting spending to interest groups. He signed into law a $787 billion stimulus package that sent tax dollars to various cities and voting groups across the nation. He later supported an expensive “jobs bill” that would send money into key congressional districts. The President also campaigned for a cap-and-trade bill and universal health coverage, both of which promised to increase the federal debt substantially. In fact, the increase in federal debt under Obama and Roosevelt is similar. The national debt more than doubled in Roosevelt’s first two terms, and it is projected to double again in eight to ten years.

This is an excerpt from the June edition of The Freeman, a publication from the Foundation for Economic Education.

President Obama has often remarked that the Great Recession (2008–10) is the greatest economic crisis since the Great Depression. It’s interesting to study the many parallels between the Great Recession and the Great Depression.

Causation. The main causes of both crises lie in actions of the federal government. In the case of the Great Depression, the Federal Reserve, after keeping interest rates artificially low in the 1920s, raised interest rates in 1929 to halt the resulting boom. That helped choke off investment. Also, President Hoover signed into law the sky-high Smoot-Hawley Tariff, which stifled trade and damaged American exports throughout the 1930s. Finally, the President signed a large tax increase into law in 1932, which halted entrepreneurship.

The seeds of the Great Recession were planted when the government in the 1990s began pushing home ownership, even for uncreditworthy people, with a vengeance. Mortgage-backed securities built on dubious mortgage loans became “toxic” when the housing market took a downturn, and many American banks verged on collapse. The government’s urgent desire to bail out various banks and corporations created uncertainty and instability, and this may have widened the recession.

This is an excerpt from the June edition of The Freeman, a publication from the Foundation for Economic Education.