History Lessons from the New Deal

Paul Krugman:

Franklin Delano Obama?: The reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious....[T]he institutions F.D.R. built have proved both durable and essential... remain the bedrock of our nation’s economic stability. Imagine how much worse the financial crisis would be if the New Deal hadn’t insured most bank deposits. Imagine how insecure older Americans would feel right now if Republicans had managed to dismantle Social Security....

But the new administration should try not to emulate a less successful aspect of the New Deal: its inadequate response to the Great Depression itself. Now, there’s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse. So it’s important to know that most of what you hear along those lines is based on deliberate misrepresentation.... The New Deal brought real relief to most Americans.

That said, F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.”...

The effects of federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover, whose full effects weren’t felt until his successor took office. Also, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level.

And F.D.R. wasn’t just reluctant to pursue an all-out fiscal expansion — he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits....

This history offers important lessons for the incoming administration. The political lesson is that economic missteps can quickly undermine an electoral mandate. Democrats won big last week — but they won even bigger in 1936, only to see their gains evaporate after the recession of 1937-38. Americans don’t expect instant economic results from the incoming administration, but they do expect results, and Democrats’ euphoria will be short-lived if they don’t deliver an economic recovery.

The economic lesson is the importance of doing enough. F.D.R. thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent...

Comments

[Arthur James]

In December 1933, the economist John Maynard Keynes wrote an open letter to President Roosevelt, which began:

"You have made yourself the trustee of those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out."

(quoted from Donald Markwell,"John Maynard Keynes and International Relations: Economic Paths to War and Peace", Oxford University Press, 2006, page 176)

Although the circumstances are different, exactly 75 years later President-elect Obama is in something like the same position. People around the world see him as the trustee of their hopes, both for better international relations and for revival of the world economy.

As in FDR's time, when Depression led remorselessly to war, so today, the two may be more closely connected than we would like to think.

President Obama must ensure that the US provides leadership in dealing with the global economic crisis of our day. This, too, is one of the lessons - probably not widely enough appreciated - of FDR's time, and of Keynes's insights (see Markwell's book quoted above).

[Ben Ross]

I recently looked at a biography of Lewis Douglas, Roosevelt's first budget director. (The title is "Independent" - Pete Peterson is maybe a current figure of comparable views.) He was a pure economic conservative who wanted a balanced budget, first last and only. Broke with Roosevelt after about a year and a half, as did Al Smith.

Roosevelt stayed committed to the balanced budget for a fair while.

[Kaleberg]

It seems that getting to be a good economics advisor is like getting to be a good software (or other engineering) job estimator. You can keep improving your estimates if you just multiply by your age.