My View: The New Deal roots in the stimulus debate - Sacramento Opinion - Sacramento Editorial | Sacramento Bee: Conservative and liberal critics of President Barack Obama's fiscal stimulus plan agree on one key point: It looks too much like President Franklin Roosevelt's New Deal of the 1930s, and therefore it might not do what it should to alleviate the current economic crisis.
But of course, the two sides disagree on what the New Deal was like and how it should guide us now.
When Roosevelt came into the presidency on March 4, 1933, the economy had fallen into a hole of historic depth. The unemployment rate reached nearly 25 percent. As the conservative economist Milton Friedman later said, the situation required action: "Something had to be done; it was intolerable. And it was a case in which, unlike most cases, the short run deserved to dominate."
Until Roosevelt took office, the U.S. government did little to aid suffering Americans. After the stock market crash of 1929, President Herbert Hoover repeatedly reassured Americans that the fundamentals of the U.S. economy were sound and that the crisis they endured was one of confidence.
"The income of a large part of our people is not reduced by the depression," he said, "but is affected by unnecessary fears and pessimism."
By 1932, Americans had tired of Hoover's ineffectual cheerleading. They voted instead for Roosevelt's promised New Deal, which included aid to farmers, conservation measures, transparency in securities issues, improved working conditions and increased public works.
The basic facts of what happened next are not much in dispute: The economy turned around upon Roosevelt's taking office and – with the exception of a recession in 1937-38 – improved steadily through his first two terms. Unemployment fell and gross domestic product grew at a rate economist Christina Romer, chairwoman of Obama's Council of Economic Advisers, describes as "spectacular," with average annual increases of about 9 percent; the four years of Roosevelt's first term were, as Gauti Eggertson, an economist at the Federal Reserve Bank of New York, writes, "the greatest expansion in output and industrial production in any four-year period in U.S. history outside of wartime."
It's true that even at this spectacular rate it took the United States a long time to recover fully – pre-crash rates of employment didn't reappear until the early 1940s – but inasmuch as the economy was moving fast and in the right direction, the length of time it took to get there is a measure of how far it had to go after the disastrous slump from 1929 to 1933.
The key New Deal policies that enabled the recovery are not much in dispute, either. On coming into office, Roosevelt's administration worked immediately to save American banks. During Hoover's administration 20 percent of the nation's banks had failed. Roosevelt shut down and audited the remaining banks, permitting only those that appeared solvent to reopen, thus restoring confidence among depositors. Committing the federal government to insure deposits and committing public money to banks they had certified as sound investments, the New Dealers rescued the nation's financial system. "Capitalism," as Roosevelt adviser Raymond Moley claimed, "was saved in eight days."
In recent months, policymakers have moved swiftly to invest in banks, as Roosevelt did, without knowing as much as Roosevelt's administration did after the bank holiday about what assets banks held.
In any case, saving the banks solved only the supply side of the economic problem. Banks now had money to lend, but Americans needed to begin to borrow and spend as they had in the 1920s to get the economy moving again.
Many conservative critics of the New Deal now say Roosevelt shouldn't have done much more, that the economy would have recovered on its own, and most of what the administration went on to do prevented the American economy from recovering at an even faster pace.
On this view, spending public money only displaced private investment and slowed the return to normalcy. Today, Republicans including Rep. Eric Cantor of Virginia, Sen. John McCain of Arizona and Sen. David Vitter of Louisiana, likewise say that Obama's plan provides spending but not economic stimulus.
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