Three myths surrounding Boris Johnson’s ‘New Deal’
No, FDR’s New Deal did not end the Great Depression.
Prime minister Boris Johnson’s ‘build, build, build’ speech this week failed to throw much light on what, or if, there is a distinctive Johnsonian approach to economic policy. As many commentators noted, the £5 billion he pledged for various infrastructure deployments is a small amount for a government recovery plan, less than one quarter of one per cent of pre-pandemic annual output. This is like turning up to a battle with a water pistol.
The commitment was not even ‘new’ money, as it had been part of the infrastructure spending included in March’s budget statement. Nor does accelerating some of this spending, welcome as greater urgency is, reassure us on what should be the focus of any economic revival programme: that enough good new jobs will be available for people, not least young people leaving education as well as people hit by the expanding wave of business closures and redundancies.
As we assess the substance, if any, of Johnsonomics over the coming weeks and months of announcements, we can start by dismissing some of the fanciful narratives that are doing the rounds, both from the government’s supporters and its critics.
The first, and most pertinent, myth is that the economic woes we face are primarily the result of the pandemic lockdown. In fact, they long predate it. The second myth is that we are entering a distinctive era of state economic leadership that marks the rejection of ‘neoliberal’ orthodoxies. And the third myth, given Johnson hails his plans as ‘Rooseveltian’, is that President Franklin Delano Roosevelt’s New Deal ended the Great 1930s Depression.
The ‘old normal’ was already a dismal place
The coronavirus and the economic shutdowns it precipitated are not the cause of the economic malaise that is making people rightly anxious as we inch towards the post-pandemic world. We are hearing a lot about the inevitable difficulties of unlocking and restarting an economy, not least given these efforts are hampered by physical distancing rules and health concerns. But this challenge is hugely greater because the pre-Covid economic ‘normal’ was actually an already abnormal era of precarious sclerosis.
The task is not one of firing up a regularly serviced, well-functioning car that’s been sitting stationary for a few months. It is more like deciding what to do with a rusty, clapped-out banger. Rather than trying to coax that back to life – difficult but not impossible, though hardly worthwhile – now is the opportunity for building not just some new school classrooms and hospital units, but also a whole new productive machine.
Business investment, productivity growth and income levels have been faltering for decades. The debt burden on companies, governments and individuals has been trending upwards for decades. Unemployment levels were only deceptively low at the start of this year, camouflaged by the expansion in recent years of lots of insecure, low-productivity and low-paying jobs. The impact of the economic shutdown has served to bring these long-running systemic problems to the surface.
They were there all the time, but are now more difficult to cover up. Maybe even more debt taken on by the government and by companies, alongside the continued artificial preservation of mediocre or lousy jobs, will avoid the immediate appearance of a Great Depression-style slump. But the chronic economic weaknesses arising from sustained underinvestment will not disappear spontaneously. Yes, the government has a responsibility to pull the economy out of the lockdown-induced crash. But that can be achieved effectively only as part of an already overdue comprehensive economic restructuring.
The state never vacated the economy
The popular notion, especially from many on the old political left, is that Johnson’s proposals show that ‘government is back’. This is nonsense, based on the equally flawed idea that the Reagan-Thatcher 1980s ushered in a ‘neoliberal’, laissez-faire era. There is no such state renaissance underway today because the state never withdrew from economic and business life in the first place. There was no ‘smaller state revolution’ 40 years ago, in the sense of markedly reduced public spending, wholesale deregulation, or the liberalisation of market forces.
Instead, we have had continued public spending at pretty much the same levels as the late 1970s, though with even less of it spent on what could be useful investment projects. Well-publicised instances of deregulation, especially in financial services, were accompanied by the less talked about, but steady, expansion of rulebooks, regulation bodies and regulatory and compliance employment across all economic sectors.
More public services were outsourced to private provision, but this expressed a further blurring of the private-public divide. More and more ‘private’ businesses – including leading professional consultancies, pharmaceuticals and information-technology firms – found themselves increasingly reliant on state contracts and procurements. Individual and family welfare dependency on the state extended into a corporate welfare dependency and morphed into a generalised economic dependency.
The key economic question for today’s government is: will it continue the state’s economic trajectory of the past half-century and more, or break from it in a different direction? Will it extend the dependency practices of trying to sustain the old economy as much as possible, or will it take the bold step of initiating a new economy based on investment and innovation?
No doubt the forthcoming announcements will appear to reflect some of both. What matters is the overall effect: rescuing and sustaining, or transforming and creating. A continuation of today’s aggressive fiscal and monetary policies is more likely to resurrect the old than initiate a disruptive shift into new activities. Debt-backed demand stimulus and low interest rates tend to sustain the zombies that congest the business world. That’s only tolerable if even greater efforts are made to bring about new productive enterprises that provide decent employment opportunities for these old-economy workers, and for young entrants to the labour force.
The New Deal did not end the Great Depression
The New Deal policies introduced by US President Franklin Delano Roosevelt in 1933 did not end the Great Depression. It took the re-gearing of the economy around fighting the Second World War, and the subsequent forced reorganisation and retooling of the economy, for that to happen. Going far beyond textbook demand stimulus, the American state helped drive business to adopt the latest technologies and to seize advantage of the postwar reconstruction opportunities in Europe and Asia.
While FDR showed compelling ambition, particular New Deal policies weren’t even that big a break from what had been happening under the previous president, Herbert Hoover. For instance, the spectacular Hoover Dam that FDR dedicated in 1935, and with which the New Deal is often associated, started being constructed in 1931, under its namesake president. The New Deal mythology also forgets that FDR won the 1932 presidential election on a platform of government spending cuts and achieving a balanced budget.
Economic historian Barry Eichengreen has appropriately dismissed the view advanced by many latter-day Keynesians that FDR saved US capitalism by his commitment to large-scale fiscal stimulus. In contrast to this myth, Eichengreen explains that the president’s goal after his first election was to ‘balance the budget immediately, completely, and, if necessary, on the backs of his supporters’.
Once in office, the severity of the economic crisis did prompt the new president to act decisively, with his New Deal package of measures, to try to get the economy moving again. Even then he didn’t abandon his attachment to balanced budgets, which he briefly achieved again in 1937. Also inconvenient for the postwar – and ongoing – reinterpretation of the New Deal as ‘Keynesianism in practice’ is the fact that John Maynard Keynes’ classic theorisation for state economic intervention, The General Theory of Employment, Interest and Money, was only published in 1936, towards the end of the New Deal programme.
Thus the New Deal was far from acting out a Keynesian fiscal-stimulus approach. More pertinently for today, the experience also reveals the limits of state spending in breaking free from a depression. The programme had minimal effect in raising investment levels and energising economic activity.
Its limitations as a counter to the Depression were shown starkly when, in the middle of 1937, the US economy went back into recession for another year. This was no blip. Industrial production fell by about a third. Unemployment jumped from an already high 14 per cent in May 1937 to 19 per cent in June 1938. Employment did not regain the early 1937 level until the United States entered the Second World War in late 1941.
Useful infrastructure was built under the New Deal umbrella, including thousands of bridges and other physical installations. All this building work certainly contributed to output growth and created many temporary jobs. But it strikingly failed to revive productivity or bring about economic renewal. That required something much more transformative: the reorganisation of production around the war effort and postwar reconstruction.
Having banished these three myths, there is just one touchstone by which to assess the success of Johnsonian post-pandemic economic policies: will they help bring about new industrial sectors, business activities and enough well-paid jobs to generate the productivity growth, wealth and employment that people need?
Building useful things is good, but, as 1930s America illustrated, it doesn’t on its own restore the lost dynamic within production. A sounder three-word mantra to focus Johnson’s covenant would be: ‘Create good jobs.’
Phil Mullan’s new book, Beyond Confrontation: Globalists, Nationalists and Their Discontents, will be published by Emerald Publishing later this year.
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