The Republicans' Fatal Misreading of FDR -- and How It Would Worsen The Depression
The Arctic wind of a depression is colder with each passing week. There's still an air of unreality: can dole queues really swell and economies really shutter like they did in the history books? Is there a way out? It is here, in the falling darkness, that the differences between the main political parties - too narrow for too long - are becoming plain.
There is a deep disagreement between the Democrats and the Republicans about what governments can and should do now. To understand this, we need to look at a seemingly esoteric debate between the parties about what happened in the last global depression. There are two contradictory stories about how the Great Depression ended. They provide dramatically different road maps for 2009 - so it's essential to figure out which is right. The winning side will determine your chances of losing your job and your home.
The dominant story in the public mind is of President Franklin Delano Roosevelt's success. It goes like this. Like Obama, FDR comes to power with the American economy haemorrhaging jobs. He believed that, if private industry is withering, the government has to take up the slack by large public spending programmes. He set millions to work preserving green spaces and rebuilding the country's infrastructure. He thought it was necessary to borrow and spend in the short term to prevent complete and more costly collapse later. Use government to counter the economic cycle, rather than leaving us all to drift out to sea on it.
This is Barack Obama's story too, as they launch their own fiscal stimuli. His favoured analogy is of jump-starting a failing car, rather than let it whimper to a halt on the road.
But at the height of Reaganism, a small number of right-wing economists began to tell a different story about that time. They argued that the American people had been wrong: the New Deal actually made the Depression worse. By borrowing and spending so much, the government created a climate of uncertainty. This made investors hold on to their money - prolonging the despair. It didn't restore private investment, it "crowded it out". So in a depression, all government can do is cut back its own spending and wait for the business cycle to recover. The only effective way for government to hurry this along is a monetary stimulus: altering interest rates and the quantity of money in the economy in an attempt to increase demand.
This is increasingly the Republican view, promoted hard by conservative commentators like George Will. At the core of this case is a stark fact: unemployment was still at 13 per cent in 1937.
Which is true? The reality of FDR's rule is more complex than either story admits - but the lessons vindicate one set of principles resoundingly.
It's almost forgotten now, but FDR ran for election promising a balanced budget and big spending cuts. By the time he assumed the Presidency, however, public protests against the economic collapse were so huge that he was forced to change course and launch his public spending push. The result? Unemployment began to slide down from its 25 per cent peak.
But then, in 1936, FDR wobbled. He listened to the people making the fiscally conservative case and slashed spending. Unemployment rose again - producing the spike in unemployment that people like Osborne now perversely cite as evidence that the New Deal didn't work. But the reality stands. When FDR spent, unemployment fell. When FDR cut back, unemployment rose.
Yet perhaps the clincher is the answer to a bigger question: how did the Great Depression end? It didn't stop with the conservative suggestion: slashed spending, slashed debt and slashed government activity. It ended with precisely the opposite: the vast fiscal stimulus of the Second World War. The government sent debt soaring to its highest levels in US history (until today) in order to spend more than ever before. It set up the longest boom in US history.
This is our choice now. Obama will have to be pressured hard to make their stimuli much bigger, and to focus less on propping up old corporations and more on building a new low-carbon economy. He will make many mistakes. But, as FDR put it, "Better the occasional faults of a government that lives in a spirit of charity than the constant omission of a government frozen in the ice of its own indifference".
Johann Hari is a columnist for the Independent. To read more of his articles, click here or here.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
If the Republicans are really convinced that spending is a big problem, why aren't they asking to decrease the military budget?
The common "wisdom" among the right wing is that FDR practically caused the Depression.
Yet perhaps the clincher is the answer to a bigger question: how did the Great Depression end? It didn't stop with the conservative suggestion: slashed spending, slashed debt and slashed government activity. It ended with precisely the opposite: the vast fiscal stimulus of the Second World War. The government sent debt soaring to its highest levels in US history (until today) in order to spend more than ever before. It set up the longest boom in US history.
Now all you have to do is get some MIT and Harvard Economist to help you write a book and put an end to the lie they are distributing in the press and on TV non stop--that "FDR prolonged the depression
Why is this happening and how do you stop this?
The people who gave us GROSS fiscal irresponsibility will not be happy till the log rolls over and we're all finished..
Nicely done. Great points.
The raw truth is that no one and I mean no one knows how to get this economy on the right track. Also the stimulus attempts will not really work very well. I do not think you are going to get people who have lost their many jobs in the white collar sector to be building roads and fixing bridges. How stupid can you get. The answer is to let the economy burn and burn until it burns out and then restart from the ashes. Yeah, no one likes to hear that but that is the truth that will manifest after all the snake oil has been used to try to remedy something that can't be remedied. It is terminal!
This comment is very revealing, and says a lot about the basic naivety of Americans who have been to apathetic and comfortable for too long.
White collar workers--given that they are healthy and able--will do exactly what you think is so stupid, if our worst fears about the economy come true; desperation leads to inspiration, and that will take the form of manual LABOR, or any other type of work that will get them on their feet again.
D.A.M.N. straight. If I lose my job, you bet your shiney hiney I'll be out there doing manual labor if I need to. I have three kids to feed.
This guy must love Ron Paul
Well said, sir, hear hear!
"New Deal economics" - Paul Krugman November 8, 2008 NYT
"Everybody’s talking new New Deal these days — and, predictably, the FDR-haters are out in force, with all the usual claims about FDR having actually made the Great Depression worse. (To the right, way back when, FDR was “That Man.” Now Obama is “that one.” Interestin
Eric Rauchway is all over this. Basically, the anti-FDR argument on the data is based on (a) considering people employed by the WPA “unemployed” (even though they were getting paid, and building public works that are in use to this day) plus (b) always focusing on 1938 — the year in which the economy suffered a serious setback from the progress of the previous four years.
Let me offer two pictures, beyond what Eric provides, to clarify things."
Continues: http://kru
you forgot the third way. that would be foreign exchange. both monetary policy and keynesian policy are needed first to make sure there is an ample supply of money readily available when investment makes sense, second to make sure that those people who are unemployed have enough money to feed themselves. the unemployed should also have to do something constructive in return like the wpa and ccc programs did in the 30s. you'll recall that one of the first things fdr did was to raise the value of gold by 75% from $20/oz to$35/oz. this allowed him the leeway to spend the money(created out of thin air) he did right through ww2. there is no similar mechanism today as the dollar is purely fiat. this means that the gov't can print as much money as it wants but it also has the ability to devalue the dollar as much as it needs to make usa industry(real value added stuff) much more competitive in the world. there are serious international ramifications to this path but the alternative is a prolonged devastating possible collapse anyway so why not.
where are the jobs that will lead the usa out of this depression? there are none without a massive devaluation of the dollar.
Good article. And yes, make the stimulus package bigger and better. Fewer tax cuts -- more infrastructure and education. Spend, spend, spend! Move the economy FAST, rather than slow. We'll be able to pay off the debt in short order -- no problem.
You're not real good at math are you?
More debt-funded stimulus won't work.
You're not real good at reading are you?
A major article on the Great Depression in the American Economic Review noted that a major factor was that the Federal reserve was curbed
American Economic Review 2008, 98:4, 1476–1516
Great Expectations and the End of the Depression
By Gauti B. Eggertsson*
The Quote: Congress had passed the Thomas Amendment, a
bill that gave Roosevelt broad powers to inflate and effectively eliminated the independence of
the Federal Reserve.
I don't think that Geithner, Volcker and Summers are going go go that far.
"There are two contradictory stories about how the Great Depression ended."
Unless every one of my teachers and textbooks from the early 70s through the early 90s were dead wrong, WWII ended the Great Depression. The success or failure of the New Deal was and still is impossible to measure. No matter your initial perspective some programs [seemed] to work and others seemed to fail but none--individually or in concert--managed to change the general perception of "depression" by the general public.
To say that the greatly increased government spending during WWII was the solution ignores the fact that such spending went to war--REAL WAR--that required sacrifice and rationing *during a depression*, not the most insane advice I've ever heard from a President, "Keep spending".
I see one thing and one thing only that currently unites our country--a belief that we can no longer be subject to wild price variations in a commodity which is officially valued only in U.S. dollars: oil.
Why not the ENTIRE trillion or so of stimuluous directed towards first reducing our short-term consumption and tapping into the limitless (by our current measure) energy available at the periphery of our atmosphere? The "Manhattan Project" for energy...
My faith that this will occur is nearly zero. Instead what I suspect will be named the "Great Collapse" will end with the "Great War" that finds the victors crawling out of caves in the Himilayas.
What gets me about the War-Ended-
There are a few reasons our financial services have imploded. One might blame it all on the evisceration of FDR's regulations, but it's way more than that. Manufacturing has left and ALSO changed. Computerization has wreaked havoc on our traditional concepts of labor/goods. Soon they'll be paying us to buy things. I could go on. This certainly is NOT the 1920s.
The smartest guys in the room, the masters of the universe could only follow the herd over the cliff in the last decade or two. The best brains knew it was all built on crap, but could do nothing about it.
Now what? There are no play books. Resurrecting FDR, horribly enough, won't work. Burning Reagan in effigy might. We'll need to stay warm somehow.
Obama and his crew have to invent their way out of this one -- along with the rest of the developed world. I don't even think war therapy will work. He's got a pretty good ear. I'm sure once he hears how it should go he'll pick up on it. But until then, hunker down. It's going to take a while.
BTY, we were still in a bad employment depression for years after WWII. This is seldom mentioned. What got us out of that? A baby boom. Can't do that one again.
"...But at the height of Reaganism, a small number of right-wing economists began to tell a different story about that time..."
This is wrong.
Economist Murray Rothbard (Austrian School) wrote "Americas Great Depression" - first published in 1963.
And...?
Uh, it means that 1963 came before the "height of Reaganism", which was circa 1984.
Fact is, many of knew and wrote about the failure of the New Deal from the 30's onward.
Hayek, Von Mises and Friedman was were greats in economics who saw why the Roosevelt schemes failed and then explained the mechanics of the failures in detail.
All their works are terrific reading today. Obama's ideas are not new.
In this article, you are trying to compare and contrast two radically different periods in history. Moreover, you neglect the drought factor, which helped spur the Great Depression. And did you bother to read the House stimulus bill before writing this article? How will funding for the following, which are all included in the bill, help jump start the economy: ACORN, STD education, Head Start, National Endowment of the Arts, National Science Foundation, U.S. Forest Service, National Park Service. With the exception of ACORN, the latter are already federal programs, and adding more to their coffers, will do nothing to spur the private sector of the economy. Assume that funding for ACORN was included because it's fully a Democratic organization in goals if not in name. Economists, who can speak credibly to the proposed stimulus bill because they've read it, point out that it advocates social engineering versus stimulus.
judithod, did you read the stimulus bill? Clearly you didn't, as indicative by the fact that the bill makes no mention of ACORN at all. It says there will be funding for community organizing associations, but which organizations are up for question.
This is what happens when all you do is watch Fox News
"Funding for ACORN in the stimulus bill" has been shown to be untrue. It's another Republican lie. The specific item in the bill refers to "neighborhood stabilization activities", which is NOT just groups like ACORN, but many many others. At best, ACORN might get a few hundred thousand, if anything--quite a bit different from saying they'll get billions.
It does a person no good to simply believe what their chosen overlords say, and repeat it like a paranoid parrot.
A minor amount of money will go to the NEA. Nearly $90 billion will go to states to protect jobs, which will help immediately. Highway improvement will get $30 billion. Money will be spent in R&D, health care, and infrastructure, just to mention a few. All of these projects will put money in the pockets of Americans. If what you're hinting at is a bigger plan, I couldn't agree more!
well constructed sentences don't make you correct. check the NEA stats on roi for govt investment. 11 to 1 !! best investment govt ever made.
FDR had his best returns on investment with the NEA and other "social engineering" programs. Interestingly enough, you don't really address any of Hari's actual points.
conservatism is a failed philosophy for now. always has been, actually..
Nice to see the ditto-heads are here.
Welcome.
Read all the articles here, you might actually learn something.
Read Hayek, Von Mises and Friedman. You will *definitely* learn something.
Both my country-girl mom (born 1924) and city-guy dad (born 1921) lived through the depression. I heard stories about their Depression-Era struggles all my life. They are both firm believers that FDR led the US in the right direction during The Depression. My dad worked for WPA a short time before the war (he lied about his age, then got caught and was let go!) and went on the mortgage assistance program so he and his mother could keep their little Chicago bungalow after his father died unexpectedly. This is the simple history I believe. Talk to your parents and grandparents before it's too late (dad died in 2005). They'll tell you the truth.
Indeed they will.
My city-born Dad (1910) and mother (1923) were telling me from the time I was young that Roosevelt was the worst thing America ever produced. My dad refused to buy the 6-cent stamp (which had FDR's picture on it) because there was *no way* he'd ever lick Roosevelt's backside.
Our family came from Chicago back to the 1880's, and the constant failure and waste inherent in Government projects was something plain to everyone who watched it.
Nothing has changed.
My mom, Texas girl (born 1920) and my dad, Sicilian imigrant (born 1911), lived through the depression. My mother and her family adored FDR because jobs were created and her brothers were able to work. My father also thought he was a great man. I'm not sure of when or who told me but I was under the impression that the sense of real and permanent relief came from our entry into WWII.
In the 1960s the telephone company bragged that during the depression they kept all of their employees working - they never laid off one person. Loyalty was important then. Employees were loyal to their company and the company took care of its employees. Now, the loyalty is expected only from the employees. Corporate loyalty to employees is laughed at and I think that is part of the problem. Corporate loyalty is given only to money - not to country or people.
You must be logged in to comment. Log in or connect with
