Nobel Prize winning economist Paul Krugman looks at the history of the New Deal in his NY Times column today (Monday) and comes to a conclusion that may sound surprising at first glance:
The New Deal wasn’t as successful in the short run as it was in the long run. And the reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious.
Krugman goes on to explain:
The definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached [this] conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.”...
And F.D.R. wasn’t just reluctant to pursue an all-out fiscal expansion — he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy....
Krugman continues:
The effects of [FDR's initial] federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover, whose full effects weren’t felt until his successor took office. Also, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level....
After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections.
What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.
...and suggests
Obama should learn from F.D.R.’s failures as well as from his achievements.... The political lesson is that economic missteps can quickly undermine an electoral mandate.... The economic lesson is the importance of doing enough.... My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It’s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.
Krugman's conclusion:
Mr. Obama’s chances of leading a new New Deal depend largely on whether his short-run economic plans are sufficiently bold. Progressives can only hope that he has the necessary audacity.
I hope President Obama and the Democratic Congress take this advice to heart. For more on this subject, including some neat graphs illustrating Prof. Krugman's points, check out this post on his NY Times blog page.