iOS app Android app More

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors
Larry Beinhart

Larry Beinhart

Posted: December 16, 2008 06:59 PM

The Great Depression, The New Deal, World War II and the Crash of '08

What's Your Reaction:

Let's start with what everyone can agree on. There was a Great Depression, then the New Deal, then World War II.
Also, that America emerged from that war as the world's economic powerhouse and embarked on an astonishing period of growth, prosperity and power.

What is controversial is how much good the New Deal did or did not do.
The economy grew, but there was a downward blip from 1936-38 when Roosevelt raised taxes and cut spending in an attempt to balance the budge. (If you're interested, see graph http://en.wikipedia.org/wiki/File:Gdp20-40.jpg)

Unemployment was at about 25% at the start of the Great Depression. In 1940 it was still at 15%.
The universal consensus used to be that the New Deal was effective, though not perfect. Moreover, it saved the United States from embracing the extremes of Fascism or Communism as so many other countries did.
But the Right has invested huge sums of money and put a great deal of effort into manufacturing and then selling the claim that Roosevelt's policies were not effective.

"Before we go into a new New Deal, can we just acknowledge that the first New Deal didn't work?"
George Will, ABC, The Roundtable

Even that the New Deal was counter-productive.

UCLA Economists: Government Intervention Prolonged Great Depression
2004 study found FDR's 'misguided policies' delayed recovery.
By Paul Detrick
Business & Media Institute

What then - according to the Right - ended the Great Depression?

The "New Deal" Was an Utter Failure
It was, in fact, the Second World War that brought an end to the Great Depression.
Exposing Liberal Lies (Web Blog)

Actually, there's not much doubt that World War II finally fixed the unemployment problem and lifted the economy up to a significantly higher level.
Here, from a more reputable, fair and balanced source:

The war decisively ended the depression itself.
Christopher J. Tassava
EH (economic history) net

But what was World War II, for America, as an economic event?

The United States entered World War in December of 1941.
So '41 can be treated, in economic terms, as a pre-war year.
In 1941, tax revenues were 7.7% of GDP (Gross Domestic Product) and government spending was 12.1% of GDP
Taxes went up. Deficits were disregarded. Government spending zoomed.
By 1944, tax revenues were 21.7% of GDP and government spending accounted for 45.3% of GDP. Almost half.
It was the New Deal without restraint.
It was Keynesian economics on steroids.
It was Roosevelt unleashed.

If the New Deal did not end the Great Depression, but World War II did, what's the lesson?
By the numbers, it has to be that the New Deal was too half-hearted.
It was also that patriotism was able to overcome the backwardness of Republicans and the shortsightedness of the rich.

War is an expensive endeavor. It is also, in and of itself, not a very profitable one. As we've seen with the Iraq, Afghanistan and War on Terror adventures, it can be like throwing money into a pit and blowing it up.
Why did WWII create such success for the United States?
Looked at it strictly as an economic event, we put all our efforts and assets and all our credit into fighting half the world and we emerged as the only modern industrial nation left intact. Though it was not (as far as I know) a conscious goal, and it was a high risk way to get there, we came out of it with a dominant market share of all manufacturing and technology and even agricultural sectors.

What does this tell us about what the response to the crash of '08 should be?
It should be whole-hearted. Not half-hearted.
We should not fear high taxes, deficits, or government spending.
Provided - provided - that we will be producing something of serious economic benefit.

This is not a war against a foreign power. It is an effort against the problems of our own economy.
We have to determine what those problems are and what they are not.
They are not the sub prime crises or the housing bubble. Those are symptoms.
There are two real problems.

One is our faith in free markets to the degree that it is magical thinking. Markets are never free (in that ideal, magical way), they are never honest by themselves, they are never far-sighted, and they don't supply everything that either a strong economy or a healthy society needs.
If there is an advantage, a greater profit, to be had through fraud, deception, excessive risk taking, collusion and monopoly, diversion of funds, failure to live up to contracts, bribing, buying or influencing governments (which are the only, and necessary, check on fraud, deception and all the rest), some members of the business community will engage in them. They will, at least in the short run, and often in the long run, out perform their more honest competitors.
There are things we need for economic health that established business have battled tooth and nail and will continue to fight until their death and ours.

The second is that in the last seven years we have come to the crisis point of a long term trend. We crossed the line from being a producing economy to being a credit economy.
This is an unsustainable condition.
It is also a consequence of the underlying philosophical proposition that free markets create the best of all possible worlds.

The goal must be to transform America into an economy that produces more than it consumes.
The question is how to do that?
Oddly enough, the solutions that have been proposed are on the right track.
1. Invest in infrastructure.
Expenditures on infrastructure become an invisible subsidy for all other business. They make all other business cheaper, faster, easier and more efficient.
Expenditures on infrastructure, for the most part, cannot be outsourced.
2. Energy independence.
Imported oil normally accounts for about a third of the US trade deficit.
The way to end that is to produce our own energy and to consume less energy.
The question is how? The green answers are wind, solar, tidal energy, possibly geo-thermal. These are infrastructure intensive. The primary cost is building machinery, setting it up and then building efficient transmission lines. Money that we spend on oil pours out of America just like dumping it down a sewer. Money spent on infrastructure stays in town.
Then there's "clean" coal and nuclear. There's lots of literature that says both are feasible. I don't know who paid for it. The problem is to include all the costs - the environmental destruction - and actual, effective regulation. Theoretically, both are easily solved. In the real world, it has proved to be unlikely.
3. National health.
The private health care we now is the worst of all possible worlds for a modern, westernized society. Its bureaucratic, wasteful, and it rations care. Its far and away the most expensive system. It sends money to non-productive places. It make American business non-competitive.
4. Government goal setting for business and technology.
The glory of free market capitalism is that it is innovative. Thousands, even hundreds of thousands of different people come up with new ideas and try them out. Most fail, a few are wild successes. That won't go away. Imagination, ambition, greed, innovation, will remain.
There are lots of things wrong with central planning.
One is that it "distorts" the economy. Compared to what? To imaginary free markets? Probably. To where we are now? Unlikely. Can it be worse? Probably not.
The second is that it stifles innovation. Compared to what? Innovation in financial instruments? Clearly, the market, left to itself, did not produce alternative energy, popular, efficient American cars, pleasurable mass transit, a new electrical grid, a solution to the obesity epidemic, a reduction in the prison population, and a host of other things.

We have a choice. Go to war for our economic future and well being.
Or muddle along with half measures, lost in a fog of pseudo-free market theology, and let ourselves be drained by our own parasites and plundered by the more driven, forward thinking, and committed.


Larry Beinhart is the author of Wag the Dog, The Librarian, and Fog Facts: Searching for Truth in the Land of Spin. All available at nationbooks.org

His new novel is: SALVATION BOULEVARD. Website: http://www.larrybeinhart.com

Responses can be sent to beinhart@earthlink.net