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Do we need a new ‘New Deal’?

Whatever conventional wisdom tells us, it isn’t true that Franklin Delano Roosevelt’s New Deal brought the Great Depression of the 1930s to an end. However, today’s leaders could learn a thing or two from FDR’s ambitious scope.

Sean Collins
US correspondent

Topics Books

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There’s a notion around that says the current economic crisis is like the 1930s Great Depression, and since the New Deal solved that Depression, something like the New Deal will do the trick today. Shortly after winning the US presidential election in November, Barack Obama was hailed as the heir to Franklin Delano Roosevelt. A Time magazine cover that month captured the sentiment, super-imposing Obama’s face on an iconic photo of a dashing Roosevelt with a hat and long-tip cigarette (1).

Cover illustration by
Jan Bowman

As Obama has unveiled his stimulus package, ‘toxic asset’ programme and other measures in recent months, many have said his actions mirrored New Deal policies, a type of ‘New New Deal’. And as Obama reached his first 100 days in office, he held a press conference to note his administration’s accomplishments, and many made comparisons with FDR’s original ‘Hundred Days’ of post-inauguration initiatives (2).

It seems that the New Deal is the model that we’re supposed to follow in order to escape the downturn. But how relevant is the New Deal as a solution for today’s so-called ‘credit crunch’? This essay considers the realities of the New Deal of the 1930s, the ongoing debate over the implications of the New Deal, and the prospects for government intervention to address the current crisis. It is the second part of a two-part essay. The first part, published in the April issue of the spiked review of books, examined the origins of the Great Depression and parallels with the economic crisis today (see The ‘credit crunch’: another Great Depression?).

At the outset it is worth noting that the 1930s crisis was truly an international phenomenon and no country’s experience can be fully understood in isolation: US actions influenced the rest of the world, and vice versa. John Garraty and other historians have found parallels between the New Deal and other state initiatives in Europe in the 1930s (including those in Nazi Germany – but Garraty does not argue that FDR was a Nazi) (3). And today there are debates in each country that hark back to the experiences of that era. For example, while some American officials fear a return of deflation like that of the 1930s, it is reported that some in Germany are mindful of the country’s hyper-inflation of the 1920s when they express concerns about increasing deficit spending today (4). As this essay focuses on the New Deal, it mainly addresses the US experience, but hopefully the points raised will have wider resonance.

1) The reality of FDR’s New Deal

Roosevelt took the oath of office as president of the United States on 4 March 1933. On that cool, blustery and overcast day, he addressed a country that was anxious and desperate. Americans had endured three years of the Great Depression. A quarter of them were out of work; factory production had dropped dramatically; farm crops lay in fields unsold and rotting; banks had shut their doors. They had not experienced a crisis so deep and long-lasting like this before, and there was no end in sight.

Paralysed from the waist down, Roosevelt held on to the lectern tightly to prop himself up, and, in a booming voice that seemed to project across the American continent, began:

‘I am certain that my fellow Americans expect that on my induction into the presidency I will address them with a candor and a decision which the present situation of our nation impels. This is pre-eminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today. This great nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyses needed efforts to convert retreat into advance.’ (5)

It was a pivotal moment in American history. Roosevelt recognised that in order to succeed he needed to restore the morale of the country, and his robust words started that process.

The speed at which the economy had descended shocked many Americans. Not having strongly established collective organisations like those in Europe, many American workers adopted individual survival strategies. As the Marxist Paul Mattick wrote, people responded ‘as in a natural catastrophe, all tried to rescue what was still savable’, including accepting lower wages, returning to the land and entering into barter arrangements (6). As the Depression dragged on and unemployment spread, hopes that the downturn would be a short, temporary affair were crushed. America in the early 1930s had minimal local and state relief programmes, instead relying mainly on private charity and other communal organisations, and this voluntary-led system was unable to cope with the growing masses of unemployed. Crime increased, hunger marches and demonstrations emerged, and the authorities began to fear riots and social upheaval.

The political elites were also losing confidence. Republican President Hoover had followed the cross-party consensus approach of modest anti-Depression measures, only to watch the economy continue to descend. Roosevelt stepped up to this crisis situation, and in contrast to Hoover argued that it was the federal government’s responsibility to repair the economy, provide social relief and create jobs.

The ‘New Deal’ was the name given to the panoply of measures Roosevelt adopted to deal with the Great Depression. In accepting his party’s nomination, Roosevelt promised ‘a new deal for the American people’, but the content of this ‘new deal’ was left empty, and it would never, in fact, be given a proper definition. Today it is commonplace to refer to the ‘New Deal’ as if it was a coherent, unitary response, but it wasn’t. It is important to stress that the New Deal was not a pre-meditated, fully formed or ideologically consistent programme; it was a catch-all phrase used to incorporate a variety of different measures, some of which were contradictory or working at odds with one another.

Roosevelt’s approach was experimental and pragmatic: he tried many things and looked to see what worked. His flexible approach, his willingness to push the limits of traditional American politics while maintaining the essentials of capitalism, was in one sense a strength, but the lack of ideological coherence to his programmes gave rise to conflicts and would also prove problematic over time.

Given that he did not offer much in the way of specifics before entering office, it was not entirely clear what kind of change FDR – the scion of an old-money family and a man who was considered a charming but shallow American-style aristocrat – would bring for working-class men and women. To gain the confidence of the public it was vital for Roosevelt to back up his inspiring words on Inauguration Day with immediate action. And he did: he initiated a frantic period of emergency measures and legislative activity which would become known as the first ‘Hundred Days’. During this timeframe, his administration received approval from Congress to:

Rescue the banks: Two days after taking office he called a national banking holiday, and three days later Congress passed the Emergency Banking Act, which ratified Roosevelt’s action, among other measures. About a week after his inauguration most banks re-opened, but about a quarter were forced to reorganise or shut down.

Provide direct relief assistance from the federal government to the unemployed: Congress created the Civilian Conservation Corps (CCC), which put a quarter of a million unemployed 18- to 35-year-old men into labour camps, building dams, draining marshes and restoring forests; Congress also passed the Federal Emergency Relief Act to provide financial assistance to the jobless. Around the same time, the administration began a programme to construct bridges, ports and airports via the Public Works Administration (PWA), which also led to direct hiring.

Set controls on the agricultural and industrial sectors: The administration sought to fight deflation and raise prices by placing controls on farm and factory operations. The Agriculture Adjustment Administration (AAA) attempted to prop up crop prices by imposing restrictions on output, removing surpluses from the market and making direct payments to farmers. The National Recovery Administration (NRA) tried to stabilise prices and wages through regulatory ‘codes’. Businesses were allowed to collude to set price floors, while the government introduced a minimum wage, a maximum workweek, and protection to workers wanting to join a union.

The scope of the measures was certainly ambitious. As Eric Rauchway, author of the recently published The Great Depression and the New Deal, puts it, the Roosevelt administration’s policymakers ‘wanted to accomplish something further and different than the mere conclusion of a crisis: they wanted to make sure the Depression could not happen again. To do so, they expected to change the American political economy forever.’ (7)

The results of these policies were mixed, however. The bank rescue actions stemmed the worst of the banking crisis; as FDR’s adviser Raymond Moley later wrote, ‘capitalism was saved in eight days’ (8). But relief efforts were less successful. The programmes changed almost annually, and they had a small impact on the unemployment rolls.

The production controls embodied in the AAA and NRA were controversial and substantially failed. The AAA drew public wrath as, in the name of reducing supply, unsold livestock were killed as people went hungry and cotton was ploughed under at the same time many were poorly clothed. The programme also benefitted the big commercial farmers, as the subsidies were based on total acreage. The NRA also strengthened the hand of big versus small business, leading to significant concentration of fewer, bigger players in industry. And while the labour reforms helped unions in the short-term, over time (and reinforced by the National Labor Relations Act in 1935) they led to the channelling of militancy into a moderate bureaucratic structure. Both the NRA and AAA were later deemed unconstitutional by the Supreme Court, and milder forms replaced them. For all the attention paid to these programmes, neither could be said to have contributed much to economic growth.

Other significant measures in the Roosevelt’s first term included financial securities regulations, banking insurance, and the establishment of government-owned power supply in the form of the Tennessee Valley Authority (some called Roosevelt a ‘socialist’, but the only government ownership he implemented was the TVA). The Social Security Act, which provided for unemployment and old-age insurance, was passed in 1935, a type of reform that had been in place in Europe for many years.

The New Deal is often associated with implementing a fiscal stimulus to overcome the Depression, but this is overstated. Federal government expenditures did increase, from eight per cent of GNP in 1932 to 10 per cent in 1936 (the end of FDR’s first term), but 10 per cent was low by European standards in the 1930s and compared with US levels in the post-Second World War period. The government ran a budget deficit, but this was modest too: it was 5.1 per cent of GNP in 1934, then declined to 3.2 per cent in 1935, before rising to 4.2 per cent in 1936. Roosevelt’s monetary policy was expansionary but this also did not have much impact. Against the wishes of Britain and other major nations, he took the US off the gold standard, allowed the dollar to depreciate and then returned to dollar-gold convertibility at a higher price, leading to gold inflows into the US. This inflow enabled the Treasury to increase the money supply, but it did not lower interest rates as they were already near zero (9).

What were the results of the New Deal for the economy? Roosevelt’s inauguration would prove to be the low point for the Depression. Real output grew by 9 per cent in 1934, 10 per cent in 1935 and 14 per cent in 1936. The downward spiral had been halted, due to both the internal recovery mechanisms, such as the depletion of inventories, depreciation of equipment and the elimination of weaker firms, as well as public spending to increase production. However, despite the impressive growth rates in percentage terms, the recovery was weak and sporadic. By the end of FDR’s first term in 1936, the economy had yet to recover to its 1929 peak (it would barely do so in early 1937). Unemployment had declined, but remained very high at 17 per cent in 1936. The most glaring weakness was the failure of private investment to recover; the economic gains were due much more to increases in consumption than investment.

Nevertheless, for most Americans it felt as if the tide had turned. Roosevelt was re-elected in November 1936 by a landslide, and Democrats increased their majorities in Congress. This election showed that Roosevelt had solidified a formidable electoral bloc of Northern urban political machines, unions, ethnic minorities, farm groups and the South that would become known as the ‘New Deal coalition’ and last until the 1960s.

Roosevelt’s position after re-election seemed invincible, but it was in fact the highwater mark of his New Deal. In 1937 he decided to challenge the Supreme Court, which had annulled a number of his initiatives, including the AAA and NRA, a minimum wage law for women workers, and an act regulating prices and working conditions in coal-mining. He proposed to add up to six additional judges, thus effectively packing the court with his own nominees. Many condemned the move, charging FDR with acting like a dictator, and political opposition took off, most damagingly for Roosevelt from conservatives within the Democratic Party. His plan failed, and it was his first major political defeat.

Not long after the Supreme Court debacle Roosevelt encountered an even worse setback: in the summer of 1937 the economy went into recession (called the ‘depression within the depression’). Factories shut (steel production dropped from 80 per cent to 19 per cent capacity), and millions were made unemployed again (reaching 19 per cent in 1938). The Roosevelt administration claimed that businesses had deliberately engineered a ‘capital strike’ to withhold investment, but conservative critics charged Roosevelt with ‘scaring business’ with anti-business rhetoric (referring to ‘economic royalists’), pro-labour legislation and tax increases. Liberals also criticised FDR for cutting spending programmes in 1937, blaming the reduction for the downturn. It now appeared that recovery was illusory, and the New Deal was a failure. Optimism turned into indifference.

For all intents and purposes, the New Deal was dead. There was an upturn in late 1938, but by the end of the 1930s there was still high unemployment and private investment was still one-third below its 1929 level. Roosevelt was increasingly isolated politically, and in the 1938 mid-term elections the Republicans came back, taking eight Senate and 81 House seats. There would be no significant legislation for the rest of the decade.

Many people wrongly believe that the New Deal overcame the Great Depression in the US. In reality, it took the Second World War, and all the destructiveness that entailed, to end the Depression. As the major powers headed towards world war, Roosevelt transformed himself from, in his words, ‘Dr New Deal’ to ‘Dr Win-the-War’. He was re-elected in 1940 to an unprecedented third term, but this was on the back of a desire for national unity in the face of impending war, not a reward for conquering economic crisis.

2) The debate over the New Deal

There has been an ongoing debate over the New Deal since the 1930s. This debate has gained a new lease of life thanks to today’s economic crisis.

This revival is highlighted by the charged dispute over the merits of The Forgotten Man: A New History of the Great Depression, by economics journalist Amity Shlaes. The book was published in 2007, but has received more notoriety since the onset of the credit crunch. Republicans in Congress have been brandishing Shlaes’ book, as if it were the Bible of the Republican ‘just say no’ opposition to the Obama administration. This is because Shlaes’ ‘new history’ contests the idea that FDR’s New Deal was a success, and because the Obama team has been relying on the implicit assumption that the 1930s showed that the government needs to spend its way out of a crisis. It is interesting that this is the first time in decades that conservatives are challenging the legacy of FDR, who has traditionally been viewed as one of the ‘great’ presidents by both sides (for instance, Reagan dared not criticise Roosevelt, even though he criticised the welfare state constructed under the New Deal).

Shlaes’ consistent theme is that the New Deal did not lead to an economic recovery. Each chapter begins with the unemployment rate and the Dow Jones Industrial Average, just to drum home the point. As noted above, this is a correct conclusion, and it is a useful corrective to the simplistic story that is told in school classes and elsewhere.

However, as a sophisticated economic argument (which it appears to want to be), Shlaes misses the mark. Those who espouse Keynesian state spending solutions – which include the leading economic advisers in the Obama administration, as well as many academic economists – also acknowledge that the New Deal did not lead to full recovery. As liberal economist and New York Times columnist Paul Krugman noted in response to Shlaes: ‘The main line of empirical argument seems to be that FDR didn’t succeed in ending the Great Depression. Since that’s also what my side of the debate says – fiscal expansion was too cautious, and disastrously abandoned in 1937 — I don’t see what this is supposed to prove.’ (10)

Shlaes scores better points when she highlights the irrationality of FDR’s National Recovery Administration (NRA). When you read her tale of the harassment of the Schechter family’s poultry business, you can understand why the Supreme Court in the landmark Schechter Poultry Corp vs the United States case decided in favour of the family and invalidated the NRA. Small business did lose out under the New Deal, but Shlaes goes too far when she argues that the small businessman was the ‘forgotten man’, as her book’s title puts it. This phrase was one used by Roosevelt to refer to the masses of unemployed, but Shlaes says it was first coined by Yale philosopher William Graham Sumner in 1883 to refer to taxpayers who foot the bill for state remedies. Shlaes’ fixation on this phrase is a general theme throughout the book: she highlights the biographies of obscure characters, like the black cult leader Father Divine, and has little to say about FDR’s ‘forgotten’ people.

Shlaes argues that the New Deal prolonged the Great Depression. Here, she is actually repeating (or perhaps unearthing) charges made in the 1930s by conservatives and business critics of the New Deal. Then and now, it is a line of reasoning that blames, as one author writes, ‘the New Deal medicine for the failure of the patient to recover earlier and more fully’ (11). Shlaes displays a reluctance to look too closely at this severe case of market failure. When FDR entered office, there were already three years of the Depression with little sign of recovery. And Shlaes’ attempt to dismiss this point by claiming that Hoover’s policies were the same as FDR’s is just inaccurate. Yes, Hoover did take steps to try to deal with the Depression, but they were tepid and he clearly did not believe government had a direct responsibility for correcting capitalism, in contrast to Roosevelt.

The biggest failing of The Forgotten Man is its blindness to the depth of the political crisis of the 1930s. Society was coming apart, and the ruling class was in disarray. Many elites had abandoned faith in the market; as a 1931 Business Week article put it, ‘To plan or not to plan is no longer the question. The real question is who is to do it.’ (12) Shlaes herself highlights how Mussolini was popular (leading Cole Porter to pen the lyric, ‘You’re the top, you’re Mussolini’), but she does not probe too far to ask: what would have led many elites – not just a minority of left-wing intellectuals – to ditch free-market capitalism?

Moreover, Shlaes slights Roosevelt’s political strengths, presenting him as merely someone able to build winning coalitions at election time. FDR may not have engineered a full economic recovery, but he did pull American capitalism through an exceptionally demanding period. As HW Brands demonstrates in his useful biography, Traitor to His Class, Roosevelt was a master of politics (13). Many elites disliked the fact that he crossed a line and admitted the market was not self-correcting, and thought he made too many concessions to labour. But his embrace of labour enabled him simultaneously to gain votes and neutralise the working class from becoming an independent, radical force.

If liberal Keynesians are in power now, occupying the corridors of the White House, they are not likely to be toppled soon if conservatives are wielding Shlaes’ book. But that does not mean their arguments are on solid ground.

As Paul Krugman says, most Keynesians do not believe that Roosevelt followed a Keynesian approach. Christina Romer, the chair of Obama’s Council of Economic Advisers, recently gave a speech entitled ‘Lessons from the Great Depression for economic recovery in 2009’ (14). Two key lessons are ‘a small fiscal expansion has only small effects’ and ‘beware of cutting back on stimulus too soon’ – both in opposition to what Roosevelt did during the New Deal. It is odd how liberals can support the New Deal and take credit for FDR in one breath, and claim he handled the Depression erroneously in the next.

It’s true that Roosevelt and the New Deal were not Keynesian in nature. Keynes only published his General Theory in 1936, after the New Deal had begun. Roosevelt was reluctant to increase deficit spending too much and retained a desire to balance the budget. In particular, he cut back spending and tightened monetary conditions in 1937. Keynesians then and now argue that this move is what caused the 1937 recession, but they overstate the influence of these fiscal and monetary restrictions. As noted above, the real problem was a lack of private investment; FDR’s moves may have lit the match of the downturn, but the investment shortfall was the flammable material.

Following that recession, the increase in public expenditure in 1938 can be interpreted as an indication that FDR was now more open to deficit spending to assist recovery. As Alan Brinkley details in his excellent book, The End of Reform, the 1937 downturn led liberal intellectuals to take on board Keynes’ prescriptions (15). Brinkley argues that this shift meant turning away from the radical restructuring of the US economy started in Roosevelt’s first term, and towards an emphasis on increasing personal consumption through manipulation of fiscal and monetary levers. But while Keynesianism would become the economic philosophy of liberals for years to come, FDR was not completely accepting of it. He was not truly committed, as postwar liberals would be, to the goal of ‘full employment’ by means of ‘aggregate demand’ management.

Some, but not all, Keynesians contend that the Second World War, which did end the Depression, was an example of Keynesianism in practice. In one sense, a war economy is consistent with the Keynes message. Keynes’ General Theory is arguably a formalisation in theoretical terms of policy measures that had already been deployed in earlier periods, in particular the First World War (16). And there is an inward and nationalistic disposition inherent in the Keynesian approach, which relies on the state to try to rectify a nation’s economy.

But the specific case of the Second World War is not proof of Keynesian success. For a start, the war led to restrictions on consumption, by rationing and other means, in opposition to Keynes’ advice to increase consumption. It is also hard to argue that a war economy, in which the state has almost total command over resources, is the same as peacetime deficit spending. Most importantly, this view ignores the fact that the biggest contributor towards overcoming the Depression was the destruction of capital values during the war, which created the basis for a new round of profitable accumulation and the postwar boom. Finally, it is troubling to say the least if the vast destruction of world war is held up as an exemplar.

However, there is a period when Keynesian policies were put into practice – the Sixties and Seventies. But they failed. By the mid-1960s inflation began to emerge, and the world entered a major recession in 1973. This led to the situation known as ‘stagflation’ – a combination of stagnation and inflation – and recognition of the limitations of so-called Keynesian ‘pump priming’. In turn, Ronald Reagan and other conservatives challenging the postwar liberal consensus were elected into government, relying on theories such as monetarism and ‘supply-side’ economics.

As today’s crisis took off on George W Bush’s watch, the pendulum of American politics swung back to liberals. Under Obama, Keynesianism has made a comeback, and people seem to have forgotten the 1970s. We are all Keynesians again, you might say.

3) A ‘New New Deal’ to the rescue?

Barack Obama cannot be accused of passivity. During the first 100 days his administration’s activity may not have produced the sheer number of initiatives as Roosevelt’s did, but it is not outlandish to see similarities between the two. Since Obama entered office, his ‘New New Deal’ programmes have included:

  • Bailout of banks;
  • Rescue of Detroit car companies;
  • An economic stimulus package ($787 billion, the largest peacetime stimulus);
  • Housing-related measures, to lessen foreclosures and assist with mortgage refinancing;
  • The ‘Financial Stability Plan’ to deal with bad assets on bank balance sheets;
  • A federal budget with a large increases in spending.

So there’s definitely been a lot of activity, and a lot of money (trillions now trip off the tongue much more readily). But this blur of the busy-ness and big bucks has somewhat disguised a serious issue: the Obama administration’s unwillingness to confront the problems raised by the crisis and make hard choices.

This trait is displayed in a number of areas. A key one is the Financial Stability Plan, also known as the ‘toxic asset’ plan, which has been spearheaded by the Treasury secretary, Timothy Geithner.

As background, the issue at stake is that the values of these assets held by the banks are uncertain. Mortgage lending was over-extended, and as house prices and the economy went south, it turned out that a fair amount of the mortgages inside ‘securitised’ bundles were worth a lot less (or worthless). Potential buyers of these assets have assumed the worst, and the banks have been stuck with them and are now assumed to have massive liabilities. But the fact is that many (probably most) of the mortgages underlying these securities have some value – despite an increase in foreclosures, most people are continuing to pay their mortgages. And so, most bundles of mortgages too must have value. The problem is that no one seems to know what’s inside any one package – and therefore potential buyers of them have assumed the worst. What’s needed is a decisive intervention to untangle these combinations and make the underlying mortgages transparent, which would then enable a sorting out of the good from the bad.

But the US authorities have dithered in response. The former Treasury secretary, Henry Paulsen, danced around the issue, changing tack but never addressing it head-on. After a dud initial announcement, the Geithner plan was unveiled in March. But his plan does not address the key issue. Instead, it is a convoluted way to subsidise the purchase of these assets, and get them off the banks’ books (while hiding that is what they are doing). First of all, private firms will bid in an auction on these assets, because the government didn’t want to set a price for the toxic assets. But if all of the potential buyers still fear that there are worthless mortgages in the packages, they are unlikely to offer all that much, even in a competitive bid. Next, the government will provide loans and direct subsidies to the buyers. This way the government can say to the public that the buyer bears downside risk – but the reality is that the risk is low, because what the investor needs to put forward is a relatively small amount. There are a lot of smoke and mirrors to hide the fact that the plan is really a bailout.

The Obama-Geithner response reveals a lack of leadership, a fear of taking on a job that appears enormous and risky. For the government to address the main issue now would likely require intervening directly in the bank operations, and probably letting some fail. ‘Nationalisation’ is still ideologically taboo in the US, but it is worse to have backdoor nationalisation, as exists now, without owning up to it, and to carry it out in such as way that it does not provide an effective resolution. Geithner claims that his approach is one that is based on private risk-taking, but in this case it really is an outsourcing of responsibility and passing the buck.

Another example of the avoidance of difficult questions is with respect to the broader issue of the predominant role of finance in the economy generally. The relative shift away from goods and services towards finance, and the likelihood that finance will no longer continue to be a source of growth in the future, is a structural problem that needs to be addressed. For a start, there has been no reckoning with the fact that the government has been fully complicit in promoting the financial sphere. In 1999 the New Deal-era Glass-Steagal Act, which had separated investment banking from commercial banking, was fully repealed by the Clinton administration (involving individuals who are now in the Obama cabinet). This repeal did not directly lead to the subprime crisis but it did facilitate an expansion of the financial economy. At the same time, and with less notice paid, regulations on non-financial businesses were tightened. Today there is a possibility that the Obama regime’s call for ‘more regulation’ will just pile on to the substantial regulation that already exists.

Furthermore, there is a reluctance to discuss alternative, non-financial sources of economic growth in the future. The talk of ‘green jobs’ overstates the potential for employment creation via environmental initiatives, given the lack of substantial private investment and relatively modest government expenditure in this area (17). More government money is going into salvaging the clapped-out auto companies than supporting innovation for the future. And instead of debating and advancing an alternative to the financial economy, the Obama team is propping up the banks in the hope of a return to the past. ‘Getting credit flowing again’ is the administration’s mantra, but the bailout initiatives are more geared towards credit that assists hedge funds and other private investors, rather than lending to commercial businesses (which have started to recover).

A third and final example of problem-evasion is the short-termist outlook regarding huge increases in government spending, and an unwillingness to face up to the potential consequences. The US government deficit is expected to increase to 13.5 per cent in 2009, more than twice the previous high during the 1980s.

As mentioned above, the Obama administration’s rationale for additional spending includes the argument that such increases are a key lesson from the New Deal. Yet it is a selective use of the past. You might think from this line of argument that state spending has been modest up to now. But the New Deal increased the role of the state in the economy, and this role has grown rather than retreated over the decades since. The secular trend – from ‘government is the problem’ Reagan to ‘the era of big government is over’ Clinton to ‘most radical conservative’ George W Bush – is for state spending to rise and rise (see chart below) (18). Indeed, increases in government expenditure today are starting from a higher base than in the New Deal era, and thus arguably will provide less bang for the buck than they did in the 1930s.

source: US Government Spending

The selective use of history also ignores the 1970s experience of stagflation. As was the case then, today’s fiscal and monetary loosening holds out the potential for inflation down the road. The total public debt is projected to increase to 54 per cent of GDP in 2011, its highest level since the Second World War, and this increase could cause worse problems than in the Seventies, as the US tries to finance it. Investors are now reportedly demanding higher interest rates on the debt being issued, and there is a risk that bond markets might push rates up to unaffordable levels (19).

Today, there is also a short-termist obsession with the immediate prospects for recovery – identifying the so-called ‘green shoots’. It would not be surprising if there was an upturn in the near future. The stimulus money must have some impact on growth, and there are inherent restructuring mechanisms at work, such as bankruptcies and the pressure on wages from unemployment. The real question is less ‘when’ will the recovery start, so much as ‘what kind’ of recovery will it be? Unless the structural issues are addressed, there is a good chance it will not be a sustained recovery. People need high-paying jobs that come with a dynamic economy, not temporary state jobs (or worse, bare-minimum handouts).

One of the barriers to a better discussion is the way in which the economy is talked about in a technical way, without any recognition of the political ramifications. It seems the only ‘politics’ that emerges is when bankers are criticised by the government for being ‘greedy’. Yet these kinds of attacks divert attention from the state’s role in the crisis, and also provide a cover for an expanded role for the government in the economy going forward. There is a ‘leave it to us, we’re the experts’ flavour to the whole economic recovery discussion. But actions like the US government going so far as to provide warranties on Chrysler cars ought to be understood as political issues, and provoke a debate about social priorities.

Conclusion

Today’s crisis is not a repeat of the 1930s Great Depression, nor is resurrecting the New Deal the answer to our current problems. Not only is the economic situation different, but the political context is also new. We always need to learn from the past, but Obama and other leaders have been too reactive and reliant on conventional answers, supposedly based on the lessons from previous experiences of crisis management. Instead, we need to identify what is new today, and recognise that new problems will require new thinking to overcome them.

Roosevelt did not have a solution for the economy, but, to his credit, he at least acknowledged that the situation was unprecedented and required an original approach. He threw out the old playbook and creatively engaged with problems. I don’t think Roosevelt had the right answers for bringing prosperity to the mass of people then, nor do I think his policies hold out solutions for today, but imaginative and pragmatic engagement would be a useful mindset today, too. We must stop relying on the crutches of the past, stop shirking from the novel and difficult problems raised by the current crisis, and step up to the challenge it poses to us. And as we are facing a broad political crisis rather than just a technical economic one, this is a project that should concern all of us, not just experts and leaders.

Sean Collins is a writer based in New York. Read part one of Sean’s essay here.

The Forgotten Man: A New History of the Great Depression, by Amity Shlaes is published by Jonathan Cape. (Buy this book from Amazon(UK).)

Traitor to His Class: The Privileged Life and Radical Presidency of Franklin Delano Roosevelt, by HW Brands is published by Anchor Books. (Buy this book from Amazon(UK).)

The Great Depression and the New Deal: A Very Short Introduction, by Eric Rauchway is published by OUP USA. (Buy this book from Amazon(UK).)

(1) See the Time cover from 24 November 2008 here.

(2) Measuring Obama by FDR’s yardstick, Los Angeles Times, 21 April 2009

(3) The Great Depression, by John A. Garraty, Anchor Books, 1987

(4) See ‘Bonehead’ German Finance Minister sends invite to Krugman, Spiegel, 26 March 2009 and Allies see Germany trying bailout with a thimble, New York Times, 16 December 2008

(5) The text of the inauguration speech can be found here and a newsreel of the address can be found here.

(6) ‘The Great Depression and the New Deal’, in Economics, Politics and the Age of Inflation, by Paul Mattick, M. E. Sharpe, 1978

(7) The Great Depression and the New Deal: A Very Short Introduction, by Eric Rauchway, OUP USA, 2008

(8) Cited in The Great Depression and the New Deal: A Very Short Introduction, by Eric Rauchway, OUP USA, 2008.

(9) On monetary expansion, see ‘What ended the Great Depression’, by Christina Romer in The Journal of Economic History, Vol. 52, No. 4, December 1992. Romer argues that the increase in the money supply did have a positive impact on recovery by reversing deflationary expectations.

(10) ‘Changes in money-wages and Amity Shlaes’, in Paul Krugman’s blog, New York Times, 29 November 2009.

(11) The Climax of Capitalism, by Tom Kemp, Longman, 1990

(12) Cited in ‘Five myths about the Great Depression’, by Andrew B Wilson, the Wall Street Journal, 4 November 2008

(13) Traitor to His Class: The Privileged Life and Radical Presidency of Franklin Delano Roosevelt, by HW Brands, Anchor Books, 2008

(14) ‘Lessons from the Great Depression for economic recovery in 2009’, presented at the Brookings Institution, 9 March 2009.

(15) The End of Reform: New Deal Liberalism in Recession and War, by Alan Brinkley, Vintage, 1995

(16) A point made by Paul Mattick in Marx and Keynes, Porter Sargent, 1969.

(17) See The myth of 5 million green jobs, Real Clear Politics, 27 May 2009.

(18) Chart data source can be found here, or accessed here.

(19) See Worries rise on the size of US debt, New York Times, 4 May 2009 and ‘The risk of debt’, by Megan McArdle in her Asymmetrical Information’ blog, 12 May 2009.

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