As Good as Gone|
Are government stimulus projects a trillion dollar hole?
For those who are old enough to
have parents raised in the Great Depression it is almost impossible to
not have positive memories of FDR. Not only did he steer the country through
the Great Depression and World War II, he was also elected an unprecedented
Many of our parents felt deep affection for the president they knew through
most of their formative years. Maybe that’s why, some 60 years later,
when former Wall Street Journal editorial
board member Amity Shlaes released her critical reassessment of FDR’s
presidency, “The Forgotten Man: A New History of the Great Depression,”
initial reader response may have been lukewarm.
However, as the economic news of 2008 went from recession to possible
depression, Shlaes’ book has become instructive as a look back on
the 1930s, a re-examination of FDR’s real economic record, and a
tutorial on what lessons need not be borrowed
from that era’s economic policymakers.
Conventional wisdom recalls that President Herbert Hoover deepened the
Depression by a) contracting the money supply, b) insisting on a balanced
budget at a time when business activity had stopped, and c) signing into
law the protectionist Smoot-Hawley Tariff Act. A historical side note:
One of the act’s authors, Willis Hawley, represented Oregon’s
first congressional district.
Roosevelt, on the other hand, gets credit for stopping the run on the
banks through the establishment of the FDIC program and for creating an
alphabet soup of new agencies through the National Recovery Act, which
led to massive federal spending on infrastructure projects. Timberline
Lodge and New York’s Lincoln Tunnel are just two of many government
projects built during this time.
Roosevelt also expended great effort micromanaging the economy and the
nation’s money supply, which included removing the dollar from the
gold standard. And of course, Roosevelt gets tremendous credit for lifting
the country’s spirit with his “Fireside Chats.” His
historic words at his first inauguration, “We have nothing to fear
but fear itself,” brought hope to a frightened nation.
But, historians and Americans alike have mixed their emotional response
to FDR with the cold reality of his economic results. His strong, successful
leadership through the darkness of World War II will forever color FDR’s
legacy. But it should not be confused with his impact and success managing
the struggling American economy at that time.
As Shlaes points out in her book, a look back at the economic data of
that era suggests that instead of helping matters, Roosevelt deepened
and prolonged the Great Depression through his policies of heavy government
intervention. Last summer in a WSJ op-ed
Shlaes laid out her book’s premise:
The real question about the 1930s is not whether it
is wrong to scrutinize the New Deal. Rather, the question is why it has
taken us all so long. Roosevelt did famously well by one measure, the
political poll. He flunked by two other meters that we today know are
critically important: the unemployment rate and the Dow Jones Industrial
Average. In his first inaugural address, Roosevelt spoke of a primary
goal, “to put people to work.”
Unemployment stood at 20% in 1937, five years into
the New Deal. As for the Dow, it did not come back to its 1929 level until
the 1950s. International factors and monetary errors cannot entirely account
for these abysmal showings.
So what does account for FDR’s poor economic record? Shlaes sees
two factors: FDR’s erratic policy behavior and his reliance on government-sponsored
infrastructure projects to create jobs and wealth. Shlaes believes that
the government’s heavy-handed approach to the economy slows private
sector recovery in several ways.
Shlaes’ comments regarding Roosevelt’s expansionary fiscal
policy (What is the Fiscal Cliff?) could portend bleak results for President-elect Obama’s proposed
stimulus package. “The year 1936 saw a deficit of 2.6 percent of
the economy, compared with say, a surplus in 1930. The economy did grow
in those years. But it never got back to its old 1929 level. As soon as
FDR stopped doling out the cash (in 1937, after the election) the economy
crashed again. The stock market plummeted. Five years into the New Deal,
in the winter of 1937-1938, two in 10 were again unemployed.”
Shlaes notes the failure of FDR’s infrastructure projects to stimulate
the economy and compares their allure to today’s thinking. “With
each point that unemployment rises, [the Democrats’] proposal to
create jobs by building bridges, roads or buildings looks more attractive.
Again, the New Deal is the model here … The states, too, lavished
cash to create infrastructure jobs in the 1930s. Many structures that
were built were solid. But they didn’t bring recovery, either. Evidence
from that period suggests that government was crowding out the private
sector … For every state-relief job created, about half a private-sector
job was lost.”
If it is true today, as it was in 1933, that the primary goal is “to
put people to work,” then both state and federal elected leaders
will need to avoid emotional responses, partisan deals, and old party
platform strategies. And if it is true today, as history shows it was
during the Great Depression, that government infrastructure projects are
insufficient to stimulate the economy and may in fact do harm, then all
parties must find new approaches.
The first priority will be to take into account one simple fact: 60-68
percent of net new jobs created in the last decade were generated from
Therefore, putting people to work in any lasting, meaningful way will
require massive stimulus to small business. Not big government projects,
though they may have a small, short-term place in the plan. Not handouts
or bailouts, though they too may be required on a short-term, low-level
Shoveling a trillion taxpayer dollars into a hole of government spending
is not the answer. If infrastructure projects and handouts are the focus
of Obama’s stimulus package, the money is as good as gone. Real
economic recovery will only come from small business stimulus. And no
doubt it’s time for thinking outside the box that goes well beyond
standard direct payments or traditional tax cuts — though these
too may play a role.
America needs economic leadership. That being said, it would be wise
to heed another of Shlaes’ observations on FDR. “There is
evidence, however, that FDR’s very strength was a negative, because
he used it to give himself a license to do true experimenting. In his
second inaugural address, FDR said that he sought ‘an instrument
of unimagined power for the establishment of a morally better world.’
No one knew what it meant, and markets were terrified … Businesses
refused to invest.”
Despite FDR’s incredible charismatic leadership ability, small
businesses did not recover until the 1950s. And unfortunately, most of
the jobs created during FDR’s tenure were in the armed services
of World War II.
If President-elect Obama’s economic recovery plan fails to acknowledge
these realities, Americans must press for a better plan. We cannot afford
to wait 20 years for recovery, we cannot afford another trillion dollars
of debt, and we certainly cannot afford a world war, no matter how charismatic
our new leader appears to be.