Prospects for the Obama Administration to further build on the New Deal legacy of Franklin D. Roosevelt already looked bleak when I toured the FDR estate and Presidential Library at Hyde Park, NY on November 1, just before Election Day. As results came in the following evening, bearing out many of the polling-based predictions, it became ever more clear that President Obama will have the fight of his life – if, indeed, he chooses to make the fight – to carry out additional Keynesian stimulus endeavors of the kind FDR pioneered and to effectively implement the recently passed health care reform legislation. At this time, the year of the 75th anniversary of passage of Social Security legislation, it is important to remember that FDR had to battle powerful reactionary forces in enacting his New Deal programs, forces strongly resembling those facing Obama.
FDR did have one big political advantage over Obama, however. When he was sworn into office in 1933, the nation was by then several years into the Great Depression and one quarter of America’s work force was unemployed. In Obama’s case, when he came into office in January 2009, we had been falling into the current Great ‘Recession’ for less than a year, and the unemployment rate, then at 7.70 percent, was still rising. It hit 10.10 percent in October 2009, before falling to 9.60 percent by August of this year. It was not really possible for FDR’s Republican opposition to effectively put the blame on his policies when we still had a long way to go to work our way out of the Depression at the time of midterm elections during his first term of office.
Voters paying attention to elementary economics also should have known that the Obama Administration could not pull us out of the current recession in only two years, especially with Republicans and Blue Dog Democrats in Congress constraining the potential aggressiveness of economic stimulus policies. Although the near collapse of the American economy was brought on by three decades of ultra-free market policies largely initiated by President Reagan, continued by the Presidents G.H.W. Bush and Clinton, and greatly compounded by the disastrous economic and military policies of President G.W. Bush, the Republicans and allied big business interest groups successfully persuaded many Independent voters that Obama’s policies had failed, and it was time to change directions again.
But what direction? Exit polling showed that dissatisfaction among swing voters mostly involved the Obama Administration’s failure to make a significant dent in the unemployment picture. The Tea Party folks and hard-line Republicans purport to interpret this dissatisfaction as a condemnation of ‘Big Government’, and call for continuation of the Bush tax cuts – even (or perhaps especially) for those making over $250,000 per year – and reduced government spending. Government should "get its house in order, just like individual families do in tough times", they contend, and a return to economic prosperity will somehow follow.
Yet independent analyses showed that Keynesian stimulus spending under the Obama Administration did prevent unemployment from getting worse than it would otherwise have been. But it did not bring unemployment down as much and as quickly as many voters hoped or expected. A number of prominent economists, including Nobel Prize-winner Paul Krugman, warned at the time that the stimulus package that was passed in 2009 was not big enough, and they proved to be right. But could Obama, politically, have got a much bigger package through Congress? Some progressive Democrats think Obama should have tried, and then have strongly warned voters that the stimulus package was not going to be enough if his more ambitious proposal had been stymied.
Just how do Republicans in the U.S. House and Senate really expect the country to return to economic prosperity anytime in the near future without significant government involvement? If they really believe what they say about the need for a much smaller Federal government, they will be arguing to reduce or eliminate Federal farm and biofuels subsidies, reduce Federal gasoline taxes that support funding of highways, dramatically reduce the number of military bases all across the country, and reduce the Medicare program.
But, of course, we know those kinds of programs won’t be targeted for cuts. Medicare might be, but it would take a stealth attack. Because, although Ronald Reagan and other Republican and big business stalwarts fiercely fought against the original Medicare legislation, Republicans now, hypocritically, portray themselves as its defenders.
One piece of Obama’s health care reform, intended to help put Medicare on more solid long-term financial footing, phases out the extra subsidy for the Medicare Advantage program. Medicare Advantage runs Medicare through private insurers for those who have access to and opt to participate in such plans. But it costs more to the Medicare budget than the standard, government administered coverage. In effect, those not participating in Medicare Advantage plans (about 75 percent of Medicare participants) subsidize those who do participate.
You would think that free-market Republicans would oppose such a ‘subsidy’ for select groups of people, groups who are in no different overall economic circumstances than others! You would be wrong. One of the Republican election campaign attacks on ‘ObamaCare’ has been that this leveling of the playing field between Medicare Advantage and traditional Medicare constitutes a reduction in Medicare funding. In fact, Republican support for Medicare Advantage subsidies is all about keeping as much Medicare funding as possible flowing though private insurance companies, not about protecting Medicare funding.
As nearly as I can figure out, the economic agenda of Republicans who will now control the U.S. House, and their counterparts in the Senate – who will not be in the majority there but who will have enough additional seats to block even more legislation than they did in the present session of Congress – looks something like this: (1) oppose all increases in Federal income tax rates; (2) protect the defense budget, especially those portions that support government contracts and jobs in Congresspersons’ home districts (which means almost everywhere); (3) continue virtually all existing Federal subsidies to farm and business groups; (4) try to kill health care reform, most likely by constructing funding and other roadblocks to implementation; and (5) dramatically reduce funding for nearly everything else, which means programs that provide a safety net for ordinary and vulnerable people and programs that create human and physical capital and enhance the general welfare of the nation.
The economic consequence of this agenda, if allowed to play out, is that we will continue, probably at an accelerating rate, on the path to a nation of "haves" and "have-nots". Put simply, the rich will get richer, and the poor get will poorer – with an ever-expanding portion of the middle class falling into the poor category. There is little or nothing in this Republican economic agenda to create and retain middle class jobs.
And that brings me back to Keynesian economics and FDR. FDR began to practice Keynesian economics well before John Maynard Keynes’ famous book, The General Theory of Employment, Interest, and Money, was published in 1936.
As Governor of New York from 1929 through 1932, FDR created the Temporary Emergency Relief Administration to create or find jobs for unemployed people. Then, in his first 100 days in office as President during 1933, he got Congress to enact the Civilian Conservation Corps, the measure creating the Tennessee Valley Authority, and the National Industrial Recovery Act, which pumped money into public works. These measures were all, in effect, attempts to use government spending to create jobs for unemployed people. FDR was acting as a pragmatist, without conventional economic theory to support him.
Meanwhile, Keynes, of Cambridge University, in England, was already a well-known economist who had been advising the British government for more than a decade. He was developing economic theory that was very much at odds with economic orthodoxy, an orthodoxy that more or less accepted business cycles and subscribed to balanced budgets and free markets as the best public policy for national governments. (Does this sound at all like the ultra-free market economists and politicians of today?) Keynes argued that in an economic depression, individual and business demand for goods and services could be inadequate indefinitely to restore jobs. The only solution in such circumstances may be for the government – through borrowing and spending – to create effective demand for goods and services, and hence, demand for workers.
Keynes wrote to FDR in the aftermath of the ‘100 Days’, in which he "critiqued certain aspects of the New Deal even as he offered encouragement and a lesson in the theory of employment and money he was then developing." (Source: Traitor to His Class, by H.W. Brands, Doubleday, 2008, p. 485. I also draw on this source for many of the following observations on the relationship between Keynesian economics and FDR, including the quotation to follow.) In his December 1933 communication to FDR, Keynes wrote:
"You have made yourself the trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out. But if you succeed, new and bolder methods will be tried everywhere, and we may date the first chapter of a new economic era from your accession to office."
FDR’s various New Deal initiatives did provide considerable relief and some degree of economic recovery during his first term. Unemployment fell to less than 15 percent by early 1937. Though still far too high, the unemployment rate was down a good deal from when FDR took office.
But in the Fall of 1937, the economy plunged down again. This touched off a renewed debate about Keynesian spending vs. balanced budgets. Conservative Republicans argued that the "Roosevelt recession" was the result of too much government spending and meddling in the economy, whereas a cadre of young New Deal economists, lawyers, and others argued that Roosevelt had moved too soon to try to balance the budget. What was needed, this New Deal cadre argued, was renewed and enlarged Keynesian spending. According to this view, FDR had attempted to balance the budget too soon, before the economy had fully recovered.
By 1937, the New Deal economists had Keynes’ book itself to back up their position. As Robert Heilbroner put it, Keynes’ 1936 General Theory had become a "bombshell". According to Heilbroner, the book "was revolutionary: no other word will quite do. It stood economics on its head as had such other revolutionary works as The Wealth of Nations or Das Kapital." (The Worldly Philosophers, Simon and Schuster, 1961 Revised Edition, pp. 234-35)
Keynes summarized the main points of his book in another letter to FDR. Keynes told him that consumption was the key to economic recovery, and since private consumption languished, public consumption must expand. The government must spend much more than it took in, so that the deficit would put money in the hands of people who would spend it. And the people who would put most of that money back in circulation would be the poor and middle class, not the rich.
FDR agonized in late-1937 and early-1938 over whether to reign in government spending in attempts to balance the budget or to expand Keynesian spending. But as the economy continued to languish, he finally came out in April 1938 on the side of the Keynesian expansionists. He called for increased spending on public works, including money for improvements to buildings, slum clearance, highways, flood control, and reclamation.
FDR faced opposition to his policies from conservative elements of his own party, as well as from Republicans. But, rather than proceed cautiously, he took the fight for progressive policies both to opponents within his own party and to Republicans in the 1938 primary and general elections. The results were not pretty, however. Several of his attempted "purges" within his own party were unsuccessful, and the Republicans gained eight seats in the Senate and 81 in the House in the Fall election.
What is the moral of this tale of FDR and Keynesian economics in the 1930s? That FDR should have folded to conservative forces after the 1937 economic downturn?
Not in my view. Keynes and his economic disciples on the U.S. side of the Atlantic were right about the lack of economic demand, and that only government spending can fill that void when the economy is mired in a depression or deep recession. FDR became convinced they were right, and he fought the good fight, knowing what was at stake for ordinary men and women in this country.
I personally believe that President Obama, in both heart and mind, also favors strong Keynesian stimulus programs at this time. His talk, for example, of the need for greater government investment in alternative energy sources and expanded rail service – the very essence of New Deal-type programs – indicates that he knows it is possible to both put people back to work and build infrastructure for the future.
But will Obama have the political courage to take the stand that FDR did in 1938?