Stimulus Economics 2: Why FDR is Again Popular 

Last week, we examined the debate between monetarists (neo-classical economists) and Keynesians about the inflationary consequences of the $787 billion stimulus package. Despite the unprecedented scale of the economic slump (1930s depression being our starting point) and the size of government spending to reverse it, the economic analysis of the policy response is pretty “old economics”, i.e. economists assess the response based on the analytical tools (and “principled biases”) they always employ in proffering policy advice and interpreting economic history.  The hole George Bush’s tax cut created in government’s finances was ignored by those who favour driving the economy through the spending decisions of individuals. Now when consumer confidence is low (owing to weak job security and diminished income from their financial assets) and consumers are not spending, monetarists criticise the attempt to replace consumer demand with state spending. The argument is not really about the size of the deficit, but about differing views on whether government spending can drive the (sustainable) growth of jobs.

Commentators on the Obama’ administration’s stimulus resort to analysis of the results of Frederick Delano Roosvelt’s (FDR) stimulus package to promote their views. FDR had announced during the 1930s Great Depression that the “New Deal” was an attempt by the government to “create an economic upturn” by making “additions to the purchasing power of the nation”. Much like Obama’s stimulus package. Liberal economists regard the New Deal as a splendid waste of money that “increased” unemployment by more than 10 per cent, delayed the recovery and sharply raised government debt. How could this have been despite the existence of a panoply of “New Deal”   programmes (banking, railroads, industry and farming) designed to inject capital in different sectors and create jobs? Liberal economists argue that the programmes prevented the creation of jobs by the private sector by diverting capital into state coffers. Furthermore, the “New Deal” created an atmosphere that stimulated the growth of labour unions whose activities hampered the growth of key industries like automobiles. Wage and price controls also harmed the economy. The “New Deal” paid to keep people employed rather than allow industries to innovate, restructure and create jobs that would have created other jobs. FDR’s Treasury Secretary, Henry Morgenthau, made a diary entry in May 1939: “We have tried spending money. We are spending more than we have ever spent before and it does not work… We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started”. 

 To what extent should comparisons between FDR’s “New Deal” and Obama’s stimulus scare us? As noted, their aims are pretty similar. They seek to inject demand into the economy in pretty similar ways. And both of them have social goals (including the creation of “new entitlements”). The “New Deal” legislated against discrimination at work, leading to better pay for blacks. Supporters of the Obama stimulus argue that improving education for the poor and expanding health insurance to them would strengthen the economy. The stimulus transfer funds to the state, enabling them to improve schools (renovate laboratories and gymnasiums) and fund Medicare (government health insurance for the elderly), keeping construction workers and healthcare administrators in work. ( North Carolina refused this Federal aid because its former conservative governor does not believe in the creation of jobs through such state spending).  Liberal economists detest the creation of new state agencies and this supersizing of the Federal government.

FDR’s policies could not have been the utter failure liberal economists paint them as. According to Robert B. Reich, secretary of labor under President Bill Clinton, and a professor of public policy at the University of California at Berkeley, the debt incurred under the New Deal “put Americans back to work, financed industrial production, underwrote a new generation of science and technology and created a wave of demand for consumer goods when the war ended”. It is only extremist liberals who argue that the American (and other governments) should employ only a monetarist stimulus (cutting interest rates) and eschew the fiscal stimulus.

While it’s reasonable to entertain doubts about the extent to which it aided industry and created jobs, the New Deal no doubt strengthened the nation’s infrastructure.  The more productive debate really is about whether counter-recession economic policy ought to be used for social goals such as expanding entitlements to the poor, the pace and levels of investment in social (health and education) and physical infrastructure and the required duration of policies to create demand through funding of government jobs.

(This is the second of a three-part series which examines arguments for and against the fiscal stimulus of the Barack Obama Presidency that was first published in July 2009 in BusinessDay. As the world deploys another round of fiscal stimulus to fight the economic fallouts of the COVID-19 pandemic, arguments about the appropriate objectives, limitations, and consequences of government fiscal interventions will be revived. The first part of the series, Why Economists Have Their “Favourite” Inflations, can be read here).