A New New Deal?

Here is an interesting paper I found on Barry Ritholz's The Big Picture website. It is by Marshall Auerback is a Denver, Colorado-based global portfolio strategist for RAB Capital plc. Here's the abstract:

Historical revisionists have done much to dismiss the economic achievements of the New Deal, some even going so far as to suggest that FDR’s fiscal policies worsened the crisis. Such arguments have been made popular during the past 25 years by economists and historians keen to debunk the effectiveness of Keynesian economics in favor of the neo-liberal Washington Consensus. We suggest, on the contrary, that mainstream economics and policy have been unable to come to grips with our current socio-economic problems because of a lack of historical memory.

In particular, the key to evaluating Roosevelt's performance in combating the Depression is the statistical treatment of many millions of unemployed engaged in his massive workfare programs. Including such ‘workfare’ recipients as employed presents a radically different picture for the New Deal, showing unemployment dropping by almost two-thirds from a high of 25%. Treating these men and women as unemployed while soldiers in Germany and France were treated as having jobs has made the Roosevelt administration's economic performance appear uncompetitive, but it is fairer to argue that the people employed in government public works and conservation programs were just as authentically (and much more usefully) employed as draftees in what became garrison states. Meanwhile Roosevelt was rebuilding America at a historic bargain cost.

As President Barack Obama confronts the most serious economic crisis since the Great Depression, it behooves him to embrace the legacy of Franklin Delano Roosevelt and introduce a new “New Deal” as soon as possible.

Here is a key claim by this paper...

One advantage we have over policy makers of the 1930s: the historic experience of the Great Depression itself. The gross policy errors made during that period — such as raising taxes, tightening monetary policy and trade barriers — are less likely today. And the landslide victory of Barack Obama and the corresponding gains of the Democrats in Congress ensure less visceral opposition to a major role for government going forward. Fiscal policy has been virtually absent from the US government’s policy arsenal for almost a generation, in part inhibited by a perception that the state’s major role should be to protect property rights and ensure a very modest supply of public goods. More specifically, according to this view of economics widely known as the “Washington Consensus”, the state should create and sustain (a) efficient, rent-free markets, (b) an efficient, corruption-free public sector able to supervise the delivery of a narrow set of inherently public services, and (c) decentralized arrangements of participatory democracy. It should not, in this view, attempt to influence the rate of unemployment.

The reputation of fiscal activism has also been harmed by a historical revisionism aimed at the heart of FDR's original New Deal, the essence of which is that he achieved little of lasting economic benefit and that it was only World War II that finally took America out of the Great Depression. This is factually incorrect. There is much evidence to support the contrary position, that the effects of the New Deal were in fact greater than even mainstream historians have been willing to allow. This paper presents some of the relevant evidence.

And here is how history can be re-written to meet a political agenda:

Even pro-Roosevelt historians such as William Leuchtenburg and Doris Kearns Goodwin have meekly accepted that the millions of people in the New Deal workfare programs were unemployed, while comparable millions of Germans and Japanese, and eventually French and British, who were dragooned into the armed forces and defense production industries in the mid-and late 1930s, were considered to be employed.

This made the Roosevelt administration's economic performance appear uncompetitive, but it is fairer to argue that the people employed in government public works and conservation programs were just as authentically (and much more usefully) employed as draftees in what became garrison states, while Roosevelt was rebuilding America at a historic bargain cost.

Here is the contemporary illness that Auerback diagnoses:

There had NEVER before been anything even close to the severe downturns that occurred just prior to the administration of FDR. Not until now. And today’s crisis, unsurprisingly, has come at a time when much of the legislative framework put in place by Roosevelt has been largely eviscerated. FDR's long-term stabilizers in fact worked very well, but were gutted during an unprecedented period of corporate predation, which found its apotheosis in the recent credit boom and growth of the so-called “shadow banking system.” Before this market fundamentalist philosophy took root during the Reagan era, the financial sector accounted for only 2 per cent of U.S. corporate profits. In recent years, the figure has approached 40 per cent.

It is true that under FDR, we ended up with a national debt exceeded the national income by the end of the war -- as the government spent over $200 billion more than it took in taxes during the war years. But of course, the American people "saved" more than 200 billion" during the same period – the national debt was private financial wealth. And the end result was full employment prosperity. A final point, which today’s deficit hawks should bear in mind: if deficits are so economically ruinous, then why run them during wartime, when in theory the optimal functioning of the economy is most crucial?

So what form should a new ‘New Deal’ take today? As any university economics student promptly learns, a dollar's worth of expenditures on goods and services yields a larger multiplier than tax cuts. This suggests that supporting already planned investment in infrastructure -- by states and municipalities that are currently liquidity constrained, and squeezed by declining tax revenues -- would be a more effective way of supporting aggregate demand than “trickle down” economics.