What Not to Do to a Fragile Economy
It is not really true, as is often said, that history repeats. No historical analogy is ever 100 percent correct. What history does offer, if we’re smart enough to seek it, is a certain context for how decisions made long ago played out and that we might learn from those musty old facts.
As historian David M. Kennedy recounts in his masterful, Pulitzer Prize-winning book, Freedom from Fear, at the start of his second term in 1937, Franklin Roosevelt made a series of decisions about the fragile U.S. economy that with perfect hindsight – it was 74 years ago – look as though they could have been made in the frightfully dysfunctional Washington, D.C. of the summer of 2011. In the Roosevelt era, the result was “the Roosevelt Recession” or the “recession within the depression.”
As Kennedy points out, on the same day in the fall of 1937, Roosevelt told his advisors in the afternoon that, in light of a continuing slump in private investment and the lack of job creation, government stimulus spending must be maintained, and then later than night in a speech to a group of business leaders he said that the federal budget must be balanced.
The federal budget was a fraction in 1937 of what it is today, but FDR’s New Deal programs, aimed primarily at reducing unemployment, had overspent tax receipts by $4 billion, a sum nearly equal to the entire federal budget when Roosevelt became president. Sound familiar?
Still, even with all the accumulating red ink, then-Federal Reserve Board Chairman Marriner S. Eccles was astounded that the President had “assented to two contradictory policies” and he wondered if Roosevelt really “knew what the New Deal was.”
Roosevelt proceeded to dither for months while his administration tried to settle on a strategy of spending or cutting. In the end FDR did some of both, sending decidedly mixed signals to the markets, the public and, as the great Utahan who headed the Fed makes clear, his own advisers.
Only in 1938 did Roosevelt agree again to a relatively small stimulus effort that started to bring jobless rates back down, but even with those modest steps it wasn’t until 1941, with war production ramping up dramatically, that employment rates got back to where they had been in 1937.
Historian Kennedy offers the best explanation for FDR’s “weak and contradictory instruments of economic policy” when he says that Roosevelt may have “simply succumbed to the politician’s natural urge to do a little something for everybody.”
Fast forward to the summer of 2011. With the U.S. and global economy threatening to tank in 2008 fashion, with job creation, home construction and economic investment virtually flat, the Congress and the President have been locked in a protracted battle to cut spending as if the awful federal debt – and it is awful – was the pre-eminent economic concern. It’s not.
Like 1937, putting Americans to work is the real crisis confronting the country. Without a much higher percentage of Americans pulling down a paycheck, the country will limp along indefinitely in this wounded state of non-recovery. Yet, no one believes that there is any chance for more real spending to stimulate job creation. Major businesses meanwhile sit on huge piles of cash afraid to jump into a hiring mode for fear that the economy will get weaker before it gets better.
For his part, President Obama seems to send many of the conflicting messages FDR sent in the late 1930’s: control spending, increase jobs, make investments, raise taxes. No wonder the markets, not to mention voters, can’t make heads or tails of the direction.
Congressional Republicans, responding to the continual rightward drift of their party, have so far defined the economic problem as spending that has brought on the record deficits. Obama, meanwhile, has failed to offer his own compelling narrative for what happened to get the country – and the world – in this mess and, better yet, how to get us all out of the ditch.
Kennedy notes that FDR in 1938, thanks to high unemployment, his contradictory economy policies and a stumbling economy, was “a badly weakened leader, unable to summon the imagination or to secure the political strength to cure his own country’s apparently endless economic crisis.”
That, too, sounds familiar.