By John Aloysius Farrell, Thomas Jefferson Street blog
The White House joined the debate over the New Deal yesterday, pushing back against the conservative argument that the U.S. should have stuck with Republican Herbert Hoover's tight-fisted economic policies in 1932 (and should revive them now) because President Franklin Roosevelt couldn't immediately end the Great Depression.
Conservative pundits have contended recently that FDR's Keynesian pump-priming was a failure because (as students of U.S. history know, but some wingers are apparently just discovering) prosperity did not return to America until the nation mobilized for World War II.
Well, putting aside the fact that the centralized economy of wartime America, with its huge government spending and mammoth budget deficits, was pretty much what John Maynard Keynes was envisioning when suggesting that government could pick up the slack of demand in recessionary times, there is plenty of other evidence to demonstrate that Keynes and Roosevelt were right.
Roosevelt erred not by following Keynes, but by not following Keynes enough, said Christina Romer, the chairman of the White House Council of Economic Advisers, in a speech—"Lessons from the Great Depression for Economic Recovery in 2009"—at the Brookings Institution yesterday.
"The key fact is that while Roosevelt's fiscal actions were a bold break from the past, they were nevertheless small relative to the size of the problem," she said. "This is a lesson the administration has taken to heart."
Times are tough, but not as tough as in Roosevelt's day. At its worst, unemployment reached 25 percent in the Depression, and real GDP fell over 25 percent. As of today, unemployment is at 8.1 percent, and real GDP has declined just two percent. A few financial companies have failed, but not like in the Depression, when nearly half of the country's financial institutions crumbled and vanished.
It is important, when debating what to do now, to remember "the truly horrific conditions the previous generation of Americans endured and eventually triumphed over," Romer said.
Though the problems facing FDR were formidable, his initial response was too modest, and not sustained. The federal budget deficit rose by just 1.5 percent of GDP in 1934, then actually declined in 1935, before climbing again in 1936. At the same time, state and local governments were cutting back spending to balance their budgets. "The result was that that total fiscal expansion in the 1930s was very small indeed," she said. "As a result, it could only have a modest direct impact on the state of the economy."
Even so, the pump priming—when combined with the aggressive monetary policy of the Treasury Department—had an impact. Real GDP rose and unemployment dropped almost in half during Roosevelt's first term; banks regrouped and stocks began to climb. The government's real mistakes, said Romer, were in abandoning Keynes prematurely, and adopting a series of tight-money moves in 1937.
"The economy was on the road to recovery, but still precarious and not yet at a point where private demand was ready to carry the full load of generating growth," she said. "Had the U.S. not had the terrible policy-induced setback in 1937, we, like most other countries in the world, would probably have been fully recovered before the outbreak of World War II."
"This fact should give Americans hope," said Romer. But "the 1937 episode is an important cautionary tale for modern policymakers. At some point, recovery will take on a life of its own, as rising output generates rising investment and inventory demand through accelerator effects, and confidence and optimism replace caution and pessimism. But we will need to monitor the economy closely to be sure that the private sector is back in the saddle before government takes away its crucial lifeline."
(Ready for Stimulus 2.0?)
There is one final point, that Romer did not dwell on, but I will: There is inherent virtue in action.
Hoover never understood this. His millionaire Treasury secretary spoke of the Depression as a necessary, even laudable, episode which would "purge the rottenness" out of the economy.
But like Ronald Reagan, who confronted a different set of economic challenges when he took office in 1980, Roosevelt acted. Yes, some of FDR's innovations were rank failures. Some of his political moves were blunders. So too with Reagan.
But the very fact that Americans, in each case, could look to Washington and find confidence and energy, dash and eloquence in their leader was, in battling the psychological effects of an economic crisis, quite important.
And that is a lesson worth keeping in mind. Not every stimulus project, tax cut, congressional earmark or defense contract will justify its apparent price tag. But together, they can convey an intangible, but no less valuable, benefit in difficult times. They are signs of Americans taking action. And that is what we do.
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