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Tuesday, February 10, 2009

The Great Deception

Part of the argument over the current economic crisis is a revival of the debate about F.D.R.’s policies combating The Great Depression of the 1930's.

Rhetoric from the Right has become the popular revisionist view: that the New Deal’s radical programs and huge federal government involvement in the economy not only failed to end the Depression, but actually lengthened it. It did not end until World War II impelled full production and employment.

That view, however, is an oversimplification, that is not supported by the historical facts and fails to answer two questions. (1) If it was a failure, why was FDR re-elected overwhelmingly in 1936, and again in 1940? (2) Wasn’t World War II the biggest government project of all? Apart from ignoring these inconvenient questions, the conventional wisdom is contrary to the evidence.

Political historian James MacGregor Burns in his book, “Roosevelt: The Lion And The Fox”, points out that Roosevelt’s first term (1933 - 1936) was successful in stopping the slide and turning the disastrous economy around. Roosevelt was re-elected by an enormous margin, winning all but two states. FDR’s legendary skill at inspiring confidence was not an illusory trick. There were good reasons for the public’s overwhelming support. The New Deal had worked.

“By almost any test the economic surge since 1932 had been remarkable. Unemployment had dropped by almost 4 million since the low point early in 1933; at least 6 million jobs had been created. Payrolls in manufacturing industries had doubled since 1932; stock prices had more than doubled. Commercial and industrial failures in 1936 were one-third what they had been four years before. Total cash income of farmers had fallen to four billion in 1932 and recovered to almost seven billion in 1935. Capital issues had shot up sixfold sice 1933. The physical volume of industrial production had almost doubled.”

However, in 1937, the economy turned sharply downward again, wiping out many of the gains of the last four years. The period of 1937-1938 came to be known as “The Roosevelt Recession.”

Burns ascribes the downturn to several causes. After his stunning re-election, an overconfident FDR frittered his political capital on his wrong-headed effort to pack the Supreme Court. The conservative Court had overturned as unconstitutional several of the New Deal’s more radical programs, notably the NRA, infuriating FDR. His solution was to propose increasing the number of justices, a notion that the more traditional members of FDR’s famous coalition (particularly Southern Democrats) could not abide. The press and eventually the public was outraged.

More seriously, it exposed a basic flaw in FDR’s political nature. He had never followed a coherent or consistent economic theory, filling his brain trust of advisors with contradictory advice that he never committed to with any enthusiasm. When he first ran, in the fall of 1932, he had promised to balance the federal budget. By the time he was inaugurated, the emergency had deepened so much that he had abandoned that idea in favor of the deficit spending that marked the New Deal. In the beginning, he acted boldly.

Burns observes: “In three years, federal and other relief agencies had poured over 5 billion dollars into work projects and related relief activities. Another 4 billion had gone into public works: roads, dams, sewage systems, public buildings, and the like.” Agricultural programs (AAA) had succeeded in establishing price supports and federal lending through the RFC had been increased. Social Security began collecting payroll taxes in 1936, and while initially it was a drag on the economy, eventually it would provide the safety net for unemployment and old age. The Home Owners Loan Corporation reduced foreclosures for millions. “The WPA put to work not only blue collar workers but artists, writers, actors, teachers - and in jobs that salvaged their self respect. The National Youth Administration helped thousands of hard-pressed high school and college students to continue their education.” The S.E.C. and F.D.I.C. stabilized investment and banking.

The New Deal’s support for unionization was another critical factor that had controversial effects on the economy. Conservatives violently opposed the movement, citing the drag on business from the pressure to raise wages and working conditions and attendant strikes that fought for these changes. Proponents of unions argued that higher wages and job security were necessary to increase the buying power of workers, to stimulate growth of the middle class.

In 1937, after the court packing debacle, FDR lost his political footing, wavering in his usual forceful confidence in his programs. Congressional conservatives abandoned him and forced a change in direction. The administration sharply reduced spending, submitted a balanced budget. When the economic downturn became evident that year, FDR waffled, unwilling to increase federal spending which would devastate the budget. It was not until the next year, 1938, when the federal budget once again increased, that the recession subsided.

Almost all economists agree that high tariffs imposed by many nations, including the U.S., for the populist cause of protectionism was short-sighted and counterproductive to recovery.

Burns concludes that the inability to end the Depression was not caused by a failure of the theory of government activism. Rather, it was the timidity of Roosevelt’s continued commitment to decisive action after the initial surge of his first term.

In later years, economic theorists have continuously debated the point. Although FDR’s economics was not strictly “Keynesian,” neo-classical economists led by Milton Friedman argued that the New Deal big government solutions failed because it tampered with free markets. Friedman became the leading guru of the Reagan Era, impelling de-regulation and reduction of governmental oversight of the economy, which seems to have laid the foundation for the crisis today.

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