Obama’s new deal is the same old blunder
Dominic Lawson
Here’s something new: instead of the customary attempts to put an optimistic gloss on the state of the economy, our governments are doing exactly the opposite. Over here Ed Balls tells us, more or less, that this is the worst recession since dinosaurs roamed the primordial swamps. Meanwhile President Barack Obama declared last week that “if we don’t act immediately, our nation will sink into a crisis that at some point we may be unable to reverse”. As The Economist commented, with some alarm: “The notion that [America] might never recover was previously entertained only by bearded survivalists stockpiling beans and ammunition in remote log cabins.”
Obama’s dire assessment was on the surface the more surprising – wasn’t he supposed to be the great uplifter of the national mood, in the spirit of Franklin D Roosevelt’s “The only thing we have to fear is fear itself”? It seems all the odder because Obama has explicitly drawn on folk memories of FDR’s New Deal, telling television viewers to “keep in mind that in 1932, 1933 the unemployment rate was 25%”.
Obama is probably right to assume that those same memories have it that the massive state interventionism of the New Deal triumphantly restored America to full employment. That’s why he felt comfortable in asserting, on the eve of the launch of a $2 trillion (or so) injection of taxpayers’ money, “There is no disagreement that we need . . . a recovery plan that will help to jump-start the economy.”
He might, therefore, have been surprised to see an advertisement in the national papers, signed by more than 200 eminent economists, which declared: “With all due respect, Mr President, that is not true. Notwithstanding reports that all economists are now Keynesians . . . we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s.” The sorry facts bear this out. The unemployment rate in the US was still 19% in 1939. Over the following four years the number of unemployed workers declined dramatically, by more than 7m. This had a very particular reason: the number of men in military service rose by 8.6m.
You might say that it is always possible to find 200 economists to disagree with anything, but in fact the practitioners of the dismal science are genuinely divided on this one. When the US Journal of Economic History polled economists on the proposition that “Taken as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression”, 49% agreed. These would be the ones who might have recalled the damning remark of FDR’s own Treasury secretary, Henry Morgenthau. In 1939 he confided: “We have tried spending money . . . it does not work . . . we have just as much unemployment . . . and an enormous debt to boot.”
The trouble, 70 years on, is that America’s debt is already enormous, even before Obama’s “jump-start” has begun to hoover up the taxpayers’ trillions.
Perhaps Obama will not repeat some of the errors of the New Deal. Roosevelt (and indeed Hoover) recalled the anger caused by the wage cuts during the depression of 1920-1 and cajoled employers to keep wage rates stable, even as output dropped. This is a policy supported by the Keynesians of today, who argue that lower wages lead to lower demand, which leads to lower output, which leads to more unemployment, and so on ad infinitum.
In practice, however, if labour costs do not come down in a recession, then employers are even less willing to hire staff. The US government of the 1930s augmented this error with protectionist tariffs – designed to keep out imports from countries that had not sought to maintain wage rates, regardless of profitability.
Unfortunately, it may be that Obama will indeed leap into the same elephant trap: the president issued an executive order this month requiring federal agencies to put in place agreements that set “wages, work rules and other benefits” when awarding big construction projects. Perhaps this is payback for the unions’ support for Obama during the election. Admittedly the White House has sought to strip out many of the “buy America” clauses that Congress had attached to its stimulus bill, but when the gold-plating of federal contracts reduces any beneficial effect they might have on overall employment rates, we can be certain that the protectionist chorus will then belt out again, fortissimo.
This fear was not the reason the Dow Jones index plunged by almost 5% between the moment the Treasury secretary, Tim Geithner, began to announce the details of the “rescue” package and when he had finished speaking. There was a stunning lack of detail in the plan to inject up to $2 trillion into the financial system – prompting the observation even from a firm supporter of his, the Nobel prize-winning economist Paul Krugman, that it reminded him of “an old joke from my younger days: what do you get when you cross a godfather with a deconstructionist? Someone who makes you an offer you can’t understand”.
How would the Treasury secretary invest the hundreds of billions earmarked to “rescue” the housing market? “We will announce details in the next few weeks.” How, exactly would he construct the announced $1 trillion public-private partnership to absorb the banks’ “toxic debts”? “We are not going to put out details until we have the right structure.” With apologies to Obama the author, this might be described as the opacity of hope.
It is, in fact, a dangerous mix of messages, and not just because it erodes the public’s sense that the administration knows what it is doing with all the billions it is throwing at the banking system – a complaint which over here is proving ever more damaging to our own government’s fading prospect of reelection.
You simply can’t tell the public on the one hand that there is an imminent danger of economic meltdown if your plans are not implemented – and on the other, give the impression that those plans are little more than scribbles on the back of an envelope. Obama is much more able to get away with such a mismatch between promise and practice – he has a fresh mandate and the high level of opinion poll support which tends to attach to that. Yet, for the same reason, he will never have had a better opportunity to harness popular goodwill to political action.
By contrast, the $787 billion fiscal stimulus that passed through Congress last week was almost too prescriptive, since Obama had allowed the House Democrats to write the cheques themselves: so, for example, there was $335m for STD prevention, $400m for research on global warming, $198m for Filipino veterans of the second world war. Noble of them, I’m sure, but how much is all of that guaranteed to “get America back to work”? Yet Obama mocked those who made such complaints: “You get the argument, well, this is not a stimulus bill; this is a spending bill. What do you think a stimulus is? That’s the whole point.”
In other words, Obama is backing the most primitive interpretation of Keynes’s theories: that any form of government spending amounts to an economic stimulus. He is almost blind to supply-side economics, which suggests that if you want to encourage profitable job creation, you should concentrate on reducing companies’ payroll taxes – and then leave individual businesses to decide how best to employ the funds released.
Instead, the young president seems to want to take us back to some of the failed policies of the 1930s, under the mistaken impression that they were a great triumph. He illustrates with dreadful clarity George Santayana’s most-quoted aphorism: those who cannot remember the past are doomed to repeat it.
Dominic Lawson
Here’s something new: instead of the customary attempts to put an optimistic gloss on the state of the economy, our governments are doing exactly the opposite. Over here Ed Balls tells us, more or less, that this is the worst recession since dinosaurs roamed the primordial swamps. Meanwhile President Barack Obama declared last week that “if we don’t act immediately, our nation will sink into a crisis that at some point we may be unable to reverse”. As The Economist commented, with some alarm: “The notion that [America] might never recover was previously entertained only by bearded survivalists stockpiling beans and ammunition in remote log cabins.”
Obama’s dire assessment was on the surface the more surprising – wasn’t he supposed to be the great uplifter of the national mood, in the spirit of Franklin D Roosevelt’s “The only thing we have to fear is fear itself”? It seems all the odder because Obama has explicitly drawn on folk memories of FDR’s New Deal, telling television viewers to “keep in mind that in 1932, 1933 the unemployment rate was 25%”.
Obama is probably right to assume that those same memories have it that the massive state interventionism of the New Deal triumphantly restored America to full employment. That’s why he felt comfortable in asserting, on the eve of the launch of a $2 trillion (or so) injection of taxpayers’ money, “There is no disagreement that we need . . . a recovery plan that will help to jump-start the economy.”
He might, therefore, have been surprised to see an advertisement in the national papers, signed by more than 200 eminent economists, which declared: “With all due respect, Mr President, that is not true. Notwithstanding reports that all economists are now Keynesians . . . we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s.” The sorry facts bear this out. The unemployment rate in the US was still 19% in 1939. Over the following four years the number of unemployed workers declined dramatically, by more than 7m. This had a very particular reason: the number of men in military service rose by 8.6m.
You might say that it is always possible to find 200 economists to disagree with anything, but in fact the practitioners of the dismal science are genuinely divided on this one. When the US Journal of Economic History polled economists on the proposition that “Taken as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression”, 49% agreed. These would be the ones who might have recalled the damning remark of FDR’s own Treasury secretary, Henry Morgenthau. In 1939 he confided: “We have tried spending money . . . it does not work . . . we have just as much unemployment . . . and an enormous debt to boot.”
The trouble, 70 years on, is that America’s debt is already enormous, even before Obama’s “jump-start” has begun to hoover up the taxpayers’ trillions.
Perhaps Obama will not repeat some of the errors of the New Deal. Roosevelt (and indeed Hoover) recalled the anger caused by the wage cuts during the depression of 1920-1 and cajoled employers to keep wage rates stable, even as output dropped. This is a policy supported by the Keynesians of today, who argue that lower wages lead to lower demand, which leads to lower output, which leads to more unemployment, and so on ad infinitum.
In practice, however, if labour costs do not come down in a recession, then employers are even less willing to hire staff. The US government of the 1930s augmented this error with protectionist tariffs – designed to keep out imports from countries that had not sought to maintain wage rates, regardless of profitability.
Unfortunately, it may be that Obama will indeed leap into the same elephant trap: the president issued an executive order this month requiring federal agencies to put in place agreements that set “wages, work rules and other benefits” when awarding big construction projects. Perhaps this is payback for the unions’ support for Obama during the election. Admittedly the White House has sought to strip out many of the “buy America” clauses that Congress had attached to its stimulus bill, but when the gold-plating of federal contracts reduces any beneficial effect they might have on overall employment rates, we can be certain that the protectionist chorus will then belt out again, fortissimo.
This fear was not the reason the Dow Jones index plunged by almost 5% between the moment the Treasury secretary, Tim Geithner, began to announce the details of the “rescue” package and when he had finished speaking. There was a stunning lack of detail in the plan to inject up to $2 trillion into the financial system – prompting the observation even from a firm supporter of his, the Nobel prize-winning economist Paul Krugman, that it reminded him of “an old joke from my younger days: what do you get when you cross a godfather with a deconstructionist? Someone who makes you an offer you can’t understand”.
How would the Treasury secretary invest the hundreds of billions earmarked to “rescue” the housing market? “We will announce details in the next few weeks.” How, exactly would he construct the announced $1 trillion public-private partnership to absorb the banks’ “toxic debts”? “We are not going to put out details until we have the right structure.” With apologies to Obama the author, this might be described as the opacity of hope.
It is, in fact, a dangerous mix of messages, and not just because it erodes the public’s sense that the administration knows what it is doing with all the billions it is throwing at the banking system – a complaint which over here is proving ever more damaging to our own government’s fading prospect of reelection.
You simply can’t tell the public on the one hand that there is an imminent danger of economic meltdown if your plans are not implemented – and on the other, give the impression that those plans are little more than scribbles on the back of an envelope. Obama is much more able to get away with such a mismatch between promise and practice – he has a fresh mandate and the high level of opinion poll support which tends to attach to that. Yet, for the same reason, he will never have had a better opportunity to harness popular goodwill to political action.
By contrast, the $787 billion fiscal stimulus that passed through Congress last week was almost too prescriptive, since Obama had allowed the House Democrats to write the cheques themselves: so, for example, there was $335m for STD prevention, $400m for research on global warming, $198m for Filipino veterans of the second world war. Noble of them, I’m sure, but how much is all of that guaranteed to “get America back to work”? Yet Obama mocked those who made such complaints: “You get the argument, well, this is not a stimulus bill; this is a spending bill. What do you think a stimulus is? That’s the whole point.”
In other words, Obama is backing the most primitive interpretation of Keynes’s theories: that any form of government spending amounts to an economic stimulus. He is almost blind to supply-side economics, which suggests that if you want to encourage profitable job creation, you should concentrate on reducing companies’ payroll taxes – and then leave individual businesses to decide how best to employ the funds released.
Instead, the young president seems to want to take us back to some of the failed policies of the 1930s, under the mistaken impression that they were a great triumph. He illustrates with dreadful clarity George Santayana’s most-quoted aphorism: those who cannot remember the past are doomed to repeat it.
