I heard that a fair amount last night, and over the past few days.
This is faulty economic history. It is not 1932. It is 1929.
Outside of the economics profession, the FDR mythos is strong among Democrats: Hoover did nothing, and then FDR came in with his magic Keynesianism, and through the mighty power of massive government spending and a huge increase in the social safety net, got America moving again.
Economic historians know better. You can argue whether FDR, on net, helped a lot, helped a little, or mildly hindered recovery. But you cannot argue that if FDR had gotten into office on January 20th, 1930, America would have avoided most of the pain of the next three years. The progression of the bank panics and industrial slowdown throughout the next two years is well described, but not well understood. But the problem was clearly not merely a lack of government activity, or fiscal stimulus. Hoover was, contra popular myth, fairly active. It's just nothing he did worked. Neither did most of the things FDR tried.
FDR did some things right, don't get me wrong--and I think some of those really made a difference, notably bank audits and the creation of the FDIC. But he also benefitted tremendously from stepping in just as the banking system, and hence the economy, were bottoming out. By the time of the second banking panic, the system really didn't have much of anywhere to go but up.
Obama has the benefit of better economic theory--but not nearly as much better as we thought six months ago. There is no economic consensus--or even a revolutionary school like the Keynesians--with a coherent program for getting us out of the crisis. The happy, utterly wrong narrative of Democrats striding in and boldly reversing Republican errors with stiff regulation, an expanded safety net, and massive fiscal stimulus, is wrong when applied to FDR. It won't save Obama either.
If the crisis is as bad as some people fear, Obama will have no magic bullet to fire at it. The very best he can hope for is a fairly successful process of trial and error. To the electorate, that will look like bumbling as Rome burns.
Now, the worst may not happen; and even if it does, Bush, not Obama, may get the blame. But Obama is not in nearly as strong a position as FDR was in 1932.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
Economic historians know better.
Do they? Paul Krugman seems to make a different argument, and no offense, but I'm going to go with the Nobel laureate on this one.
I guess the revolutionary Austrian school's coherent program for getting us out of the crisis doesn't count?
But Obama is not in nearly as strong a position as FDR was in 1932.
This isn't 1932 though. No one in this day and age is going to win the EV like FDR did. Considering the times we live in, Obama has a clear mandate. After all, McPalin raised all the scare cards(socialism and all the other garbage) and yet still got smoked.
Well therer are like 40 Nobel Prize winners in economics.
It might be useful to get all of thier views if Nobel Prizes are your test of knowledge.
Paul Krugman and I undoubtedly disagree on the degree of effectiveness of various parts of FDR's program. But I'm pretty certain that Krugman wouldn't argue that FDR would have had as easy a time in 1930 as he did in 1932. What happened in those two years is somewhat mysterious, and to the extent that we had a working theory, often not under the control of the president--the (independent) Fed usually comes in for much of the attributable blame.
Obama, and other Democrats, will use regulatory power and the courts to set new agendas. The effects are more hidden and they generate more campaign contributions.
So far nothing in the Obama agenda looks like it will help turn the economy around.
Obama is not the second coming and he can not repeat the miracle of the loaves and the fishes. If others disagree please tell us why?
Krugman opposes trade barriers, Obama supports them. Who is the idiot?
Yup, and just like 1929, we keep seeing ideas that will just make things worse.
As the noted economist Yogi Berra once said, "It's tough to make predictions, especially about the future."
I sometimes think the profession exists primarily for the purpose of hiding from society the terrifying notion that nobody has a damned clue as to what fresh hell lies around the corner.
I like the choices given regarding FDR's effect on the depression: he really, really helped, he helped a little, or he only hurt a little. No room for "his interventionist policies, huge tax increases, and schizophrenic policy behavior scared away investment and added 7 years to a depression that was on its way out".
BTW
Obama won with 52% of the vote.
If 1.5% of the electorate changes their vote and the switch to the left is reversed.
Republicans had an aged candidate, a financial crisis, war, oil crisis, hostile press, unpopular President and they still came within 1.5% of defeating a candidate who was really a movement apart from politics.
And for those you see demographics as destiny, I might remind you that once upon a time Irish Catholics were extremely loyal democrats but many became Reagan Democrats. I would suspect that as the Black middle class grows and prospers (increasingly in the private sector) they too will learn to dislike seeing their hard earned dollars go to wasteful spending.
"But he also benefitted tremendously from stepping in just as the banking system, and hence the economy, were bottoming out. By the time of the second banking panic, the system really didn't have much of anywhere to go but up."
And yet, the economy only recovered in 1946! 14 years AFTER FDR stepped in. Doesn't that sort of tell you something about his efforts?
It was the Fed that turned a slump in the early 1920's into a big bubble and a crash. It was Hoover who turned this crash into a Depression with his interventionism. It was FDR who turned the Depression into a Great Depression with his socialism and statism.
It was only when the New Deal and assorted paraphernalia started running out of steam after WWII, after Roosevelt died, and after a Republican Congress was at loggerheads with the Democratic President that we saw a recovery.
Actually, it's worse than I stated; a good majority can't even tell what stale hell was around the corner many decades ago!
The progression of the bank panics and industrial slowdown throughout the next two years is well described, but not well understood.
Why is this? Why does economics pretend to be a science when it so clearly is not?
Or as Jon Stewart put it:
We've got three financial networks on all day. The bottom falls out of the credit market, and they were all running around. On CNBC I saw a guy talking to eight people in [eight different onscreen] boxes, and they were all like, ''I don't know!'' It'd be like if Hurricane Ike hit, and you put on the Weather Channel, and they were yelling, ''I don't know what the f--- is going on! I'm getting wet and it's windy and I don't know why and it's making me sad! Maybe the president could come down and put up some sort of windscreen?''
Until economists and econ writers can even begin to understand their own field, the rest of us will treat their political prognostications with exactly as much credence as they deserve.
I like the choices given regarding FDR's effect on the depression: he really, really helped, he helped a little, or he only hurt a little. No room for "his interventionist policies, huge tax increases, and schizophrenic policy behavior scared away investment and added 7 years to a depression that was on its way out".
Because the only people who believe that are people who started from the premise that FDR / Democratic policies or big government interventions must have been wrong and reasoned backwards, as opposed to looking at what actually happened.
Joe Klein's Conscience,
Reread Megan's post. Your comment makes no sense.
Megan: The revisionist "debate" that Roosevelt's New Deal may have deepened or prolonged the Great Depression should be recognized for precisely what it is: a sinister rewriting of history pushed by right wing ideologues like Amity Schlaes, who forget that had their free market ideology been followed, there would have been no free market -- or democracy -- left to save. FDR's genius was to restore American people's faith in democracy as a system that reflected their will and that could still produce form of government capable of meeting their most basic human needs. You don't measure what FDR did by listing the trivia of which plans worked and which didn't. You measure it by the fact that we avoided both Facism and Communism at a time when both were very much in danger of befalling us. It is all too easy to overlook what is no longer right before our eyes.
"I would suspect that as the Black middle class grows and prospers (increasingly in the private sector) they too will learn to dislike seeing their hard earned dollars go to wasteful spending."
Maybe, but the iconic example of such a person is Michelle Obama.
Great post, thanks
My history teacher in high school (78) took a whole hour to say the same thing.
"Obama is not the second coming and he can not repeat the miracle of the loaves and the fishes. If others disagree please tell us why?"
The mere fact of Obama's election is enough to halt the rise of the oceans. Fixing the economy is a trivial task compared to that feat.
Dilan - Because the only people who believe that are people who started from the premise that FDR / Democratic policies or big government interventions must have been wrong and reasoned backwards, as opposed to looking at what actually happened.
Why? Hoover did jack up taxes on the wealthy. Sweeden, which recovered fastest, did have the lowest tax rate.
The funny thing I don't hear; the one element present in all our financial crises from here to there is overextension of credit. Who's trying to fix that? Noone that I can see.
Maybe it's 1837?
That depression did in a competent pragmatist president - the newly elected Martin van Buren.
Maybe a comparison to 1976 would be more apropos than the 1932 comparison. If he's lucky though, history books will give him a comparison to 1992.
I don't know, but until I read this, I didn't see anyone accusing someone else of idiocy.
"The only thing we have to fear is fear." No that wasn't FDR, at least not originally. That was Hoover two years earlier.
What FDR had going for him, and Hoover did not, is exactly what Obama has going for him: he was a great speaker, and could convince the country of things. To the extent that fixing the economic problems will require people (as a whole, or even just people in Congress) to do things, Obama has exactly the tool that is needed.
It wasn't really until '46 that govenment really got into the type of stimulus known to induce demand.
There is an interesting study by some economists at UCLA:
FDR's policies prolonged Depression by 7 years, UCLA economists calculate
Krugman most recently has said that the election was over redistribution, not stimulus. Like the Germans of the 1920s we're special and the bondholders aren't (?) at least until the Chinese get tired of paying for the party.
Re: It was FDR who turned the Depression into a Great Depression with his socialism and statism.
This absolute nonsense. every a curtsory examination of the statistics show that the worst years of the Depression, the years that made it "Great", were before Roosevelt took office.
Ok I stand corrected
Krugman opposes trade barriers, Obama supports them. Who is always right?
But I'm pretty certain that Krugman wouldn't argue that FDR would have had as easy a time in 1930 as he did in 1932.
As far as you know, sure. I'm sure that's very truthy.
DanC, Obama is finishing this afternoon with close to 53% of the popular vote and a 6% margin. It would have taken a 3% flip to produce a tie in the popular vote.
The revisionist "debate" that Roosevelt's New Deal may have deepened or prolonged the Great Depression should be recognized for precisely what it is: a sinister rewriting of history pushed by right wing ideologues...
And also by liberal economic historians such as Peter Temin of MIT ("Lessons from the Great Depression: The Lionel Robbins Lectures"), and Barry Eichengreen of UC Berkeley and the IMF ("Golden Fetters") etc.
And also by current mainstream research by the likes of Cole and Ohanian (50 p paper, .pdf) of the Federal Reserve.
Brief description of their conclusion from a PR release...
If you are a liberal Democrat who believes that creating anti-competitive monopolies and cartels and enforcing big price increases for businesses via minimum price laws is the way to fight an economic slump and boost a weak economy, raise your hand and tell Obama now!
What FDR did right was get the nation off the gold standard. The gold standard transmitted the Depression and enforced the deflation -- every nation escaped its period of decline as soon as it got off the gold standard.
What FDR did wrong was everything else, causing the recovery in the US to take years longer than anywhere else.
I don't know what's supposed to still be mysterious about the causes of the Depression these days, except around the edges.
The Depression was deemed "Great" because of two things, (1) the depth it hit in 1932-3, and (2) the extraordinary slow recovery in the US, which wasn't complete until the 1940s, taking more than 10 years.
As to #1, the recession that started in 1929 was pretty normal for the era, not unlike the recession of 1921 that we've all long since forgotten.
But the Fed had no idea was it was doing in response to it, lacking both theory and data. Monetarist theory as proposed by the likes of Irving Fisher and Keynes as still considered experimental -- the Fed was operating in large part on the Real Bills Doctrine! -- and there simply wasn't any real time data on the money supply.
So in September of 1931, in the midst of recession and deflation, to stop a gold outflow, following the rules of the gold standard, the Fed raised intrest rates 2 full points -- actually by 133%, from 1.5% to 3.5%.
It considered this safe to do because it took the low 1.5% interest rate as indicating there was an ample supply of money. In actual fact, however, the low 1.5% rate indicated not ample supply but weak demand for money -- and increasing the rate 133% *immediately* collapsed money conditions through the floor. M2 immediately plunged at a 35% rate, M1 at a 25% rate, such a collapse of money as never seen before or since.
But that's not any kind of mystery. Supposed that during the past year, as the financial system locked up, Bernanke, instead of dropping interest rates from 5.25% to 1%, had increased them to 8% or 9%? And instead of shooting M1 straight up as he has, he'd cut it by 25%? Where would we be today? Then we'd be back in 1932!
Interestingly, in a study that ran an econometric projection of the economy from 1929 onward using modern economic models and computers, strong recovery was predicted in 1932 and on *until* that interest rate hike took place.
As to #2, the extrordinary length of time the recovery took, the recovery in the US being much slower than anywhere else, see my prior comment about FDR's policies and the references cited in it.
Now here's the short answer why "no", today is not going to be the 1930s all over again: 25% deflation.
The *killer* in the Depression was that deflation. If you were a business that took out a $100k loan at 6% before the deflation hit, after the deflation you were paying in real terms 8% and owed a loan principal of $133k, at a point when your business income had collapsed. You were busted, and since you and all your kind couldn't pay back your loans your lenders were busted too, etc., chain reaction.
That deflation ain't going to happen this time. Bernanke will be dropping money out of helicopters first. In fact, he pretty much already is.
Without that deflation, this downturn could be another 1991, or even 1981-2, which would be plenty bad enough. But there is no chance it will repeat the 1930s.
Economics being a social science is not akin to physics or any of the hard sciences. Let us stop pretending. It is made up crap. You can come up with anything and people would be arguing about it forever.
-Supply side economics- the best way to raise revenue, tax cuts or tax increases?
- What caused the Great Depression?
- And most relevant: What is behind our current economic problems. Is it a crises or no?
So conjecture away. You may have a Nobel Prize in your future but people will be arguing about it ad infinitum.
It was also during World War II that the country shifted from merrily building tiny useless roads to building usefull roads, high-capacity ones to active places.
@ Jim Glass
The UCLA study by Cole and Ohanian on the NIRA that you and Hassert cite is hardly evidence that New Deal prolonged the Great Depression. As you recognize, a fundamental problem of the Depression was persistent deflation. Since the NIRA and a related New Deal program essentially gave government sanction to industry wide cartels that raised prices and wages, these particular programs were clearly inflationary. I would argue that these programs, while objectionable in ordinary times, were precisely the right medicine to combat the persistent deflation plaguing the economy at that time. They never had a chance to work because conservative jurists on the Supreme Court declared the programs unconstitutional after just two years of operation.
Wow, I always regarded Jim_Glass as a well-informed, intelligent advocate of libertarian beliefs. It's quite a shock to see him come here and start pimping the idea that banks have an inalienable right to cheap money whenever they damn well please.
Here's a hint: if your business model is *that freaking sensitive* to changes in already-low short-term interest rates, you're *already* living on borrowed time. If the economy is so sensitive to such, *it* is living on borrowed time, and the sooner we accept the fundamental restructuring, the better.
People who are genuinely producing the serious innovation that meaningfully advance economies don't give a **** whether the risk-free interest rate is 1% or 9%. If your business does, I regard it as an addict and part of the problem.
As far as the stock market is concerned, this is a little like 1938. Back then, there was the crash in '29, the bear market bottom in 1932, and then a five year cyclical bull market ending in 1937, followed by another cyclical bear market within a longer secular bear market. This time around, we had the dot-com crash in 2000, with the cyclical bear market bottom in 2002, and then a five year cyclical bull market ending in 2007, followed by another cyclical bear market (which we're still in), all within a secular bear market.
@Maynardgkeynes
As you recognize, a fundamental problem of the Depression was persistent deflation. Since the NIRA and a related New Deal program essentially gave government sanction to industry wide cartels that raised prices and wages, these particular programs were clearly inflationary.
But, they also increased unemployment and decreased investment because cartels mean that there are very high barriers to entry and that decreases demand, which leads to deflation. So, what makes you think this program did not prolong the depression?
The debate about the FDR & the depression continues, at least in some circles. Let's hope the people advising Obama are past it.
Economists have not decorated themselves in glory during this period, and at least some are able to admit it. We're out of the range of our knowledge, which is one thing this crisis has in common with the Depression.
One other is excess leverage. Unwinding leverage without a major collapse still appears to be beyond our ken.
A third is that like FDR, our President-elect has strong rhetorical gifts. These may, like FDR, let him talk the country into trying things even more extreme than the existing bailout.
Alternatively, they may allow him to provide Rooseveltian reassurances like those which prevented a complete loss of confidence in our system. We may hope that he avoids FDR's class-baiting gambits, such as publishing the names of wealthy individuals who had not paid enough taxes in his eyes, even though they had complied with the law.
As Brian noted, economics is a social science and while there are well recognized ORDINARY patterns and events, it does not have a set of ironclad and well understood principles like the hard sciences. Most notably there is a human decision variable involved, both a psychological and political factor, in any of the speculative analysis of where things go from here...
One thing that should be self evident is that raising taxes on individuals, businesses, capital, and equity dividends, in a time of downturn, most likely will not be very conducive to renewed growth. Increasing costs on businesses will cause them to pass these along to consumers or reduce staffing to cope; in the case of small businesses it will most likely be the latter. This path can only lead to more suffering...
And, government "stimulus" can only go so far and is a temporary measure at best...
You want more capital to be available in the markets? Lower the capital gains tax...
You want more jobs here in the US? Lower our corporate tax; it's the second highest in the world. More businesses will move here which will provide more jobs. If you look at Ireland’s economy, they lowered the rate a few years ago and have experienced phenomenal GDP growth, as well as tax revenue increase, ever since.
It's a common misconception, one especially flogged by Mr. Obama, that supply side economics does not work. All things being equal, I can say with confidence that had our corporate tax rate not incremented upwards over the last 15 years, there would be a lot more jobs being created here than there are currently.
Another thing we must do, and an area where Mr. Bush really failed, was in fiscal responsibility. We need a spending freeze by the US government. No business, NONE, can arbitrarily decide on budgetary increases year over year; they are dependant on revenue growth and inflation. Our government spending should RARELY grow at more than the rate of inflation. Additionally, our federal employees are paid an incredibly high wage, and the US government is the single largest employer in the country. This has to change...
We must reduce spending, and live within our means like every ordinary household must-with few exceptions! And, unmentioned in this whole discussion is the exponential increase in our entitlement obligations. As our entitlement programs eat up an ever increasing share of our nations GDP, it is not the time to begin redistributing wealth between the social classes...
Mr. Obama has a lot of charisma, and may be able to put folks at ease and inspire confidence. That is half the battle, and I wish him well there. But it may be more to Megan's closing scenario; it may end up appearing to most that he's bumbling, fiddling with the economy, while Rome burns...
This issue really begs the fundamental difference in Ideology between the political parties. The Republicans view taxes as a means of revenue to meet necessary expenses. On the other hand, the Democrats view taxes as a means of social engineering. While the truth may actually lie somewhere in between these extremes, now is a time for useful action-not a mountebank’s pandering economic redress in the name of specious "social justice"...
"You want more jobs here in the US? Lower our corporate tax; it's the second highest in the world."
It's also worth looking at state and local taxes on businesses, as well as variations in energy costs. I did that recently with Rhode Island and Utah ("A Tale of Two States: Utah versus Rhode Island"). Utah's unemployment rate is one of the lowest in the country, at 3.5%, and Rhode Island is the highest, at 8.8%. According to The Tax Foundation, among the states, Utah ranks 17th in business tax climate, and Rhode Island ranks 50th. According to the Energy Information Agency, Utah had the 5th cheapest industrial electricity rates in July, with an average cost of 5.26 cents per kilowatt hour, and Rhode Island ranked 47th, with an average cost of 15.53 cents per kilowatt hour.
"You want more jobs here in the US? Lower our corporate tax; it's the second highest in the world."
Nice post, Bob. We should also keep in mind that a lot of the "rich" are actually business owners. Because of changes in the tax code, many C-corps restructured into S-corps and partnerships which are "disregarded entities" for the purpose of taxation. The profits of the company are no longer taxed at the company level and are, instead, taxed as the income of the owner. Thus, the tax increases Obama proposes fall largely on small businesses which will likely cut employees, benefits, or employee hours to compensate and will obviously destroy jobs and incentives to invest.
Chet forgot to check what economic work Krugman got his Nobel for. It wasn't his liberal "socialism-lite" economic punditry, but studies he completed in the early 1980s. UCLA has verified that FDR lengthened the Depression with many of the same proposals that Obama now suggests.
It's going to be a long ride.