A popular meme these days is that we’re about to make the same mistake FDR did during Great Depression 1.0 – that of pulling back government stimulus too soon. The argument goes that the Great Depression was ending by 1937 until FDR pulled the rug out of the recovery by trying to reign in deficit spending. That being the case, we should sneeze at our multi-trillion dollar deficit and spill even more red ink to finance public works projects aimed at getting the recovery going. Bruce Bartlett is currently getting some press for this prescription.
Well, it might be right. But I see a couple of problems with the story even if you buy the Keynesian analysis that government pump-priming can be something other than distortionary – particularly with Bartlett’s version.
First, the idea that FDR was a deficit hawk is misleading. It seems to be true that he was worried about deficit spending – at least in the sense that he worried his voters were worried about it – but one can be a deficit hawk and still a fan of massive government spending and economic micromanagement, and FDR was pretty clearly a fan of both spending and micromanagement. The attempts to paint FDR as some kind of cautious conservative when it comes to pump-priming just aren’t going to work, even if you’re in a position to believe that he was serious about tackling the deficit in 1937. Our objections to Obama aping FDR aren’t objections to deficit spending per se, in other words, they’re broader objections to the whole idea of government massively interfering with markets. FDR’s temporary fit of concern about deficits isn’t going to answer the broader objections.
Now, I follow the logic that debt is a good thing if it gives you capital to grow: you borrow when you’re poor to get the resources you need to get rich, and then pay back when you’re rich. Fine. But this obviously only works if you spend your loan wisely. Squander it and you’re twice as poor as you were before. So another burden of proof that these new fans of stimulus spending need to meet is that of showing that the current stimulus spending is actually doing any good. In FDR’s case, as Bartlett points out, the problem was that once he cut public works programs to try to balance the budget, unemployment shot back up into the double digits. I am willing to buy that as evidence that a lot of the employment at the end of the Depression was maintained by the government. But what evidence is there for that in the current stimulus? My understanding is that a lot of the stimulus money hasn’t been spent, and that what has been spent has been spent mostly to shore up already-existing government jobs. There hasn’t been any massive public works investment like there was in the 30s – and so it’s hard to see how cutbacks in federal spending are going to throw anyone out of work. The percentage of employment that is accounted for by direct government payouts now is not so different from the percentage accounted for by direct government payouts before – in CONTRAST to the situation FDR faced in 1937. The stimulus of the noughts, to the extent that we had one, was in keeping the financial system from collapsing, not in paying people to dig pointless ditches.
OK, so maybe people like Bartlett are arguing for public works projects as a way to cut some of the existing unemployment. But if that’s the case, then isn’t the FDR experience more like a counterargument? What FDR’s budget cuts show, if anything, is that government-provided jobs have a way of NOT turning into self-sustaining economic activity. Cut the budget even a little, and people have nowhere else to go. That’s NO ONE’s idea of a road to sustainable recovery! To the extent that government spending works to stimulate the economy, then only by getting cash flowing again so that the inarguably more efficient private sector can start investing. 1937 shows us that far from stimulating the private sector to do that, government provision of jobs just causes stagnation. If in 1933 the government “creates” a bunch of jobs that by 1937 have still not led to a situation where jobs can create themselves, then it’s fair to conclude that the jobs created in 1933 were just proxies for handouts – a covert dole. Unless Bartlett is arguing that we want a bunch of people stuck on the government payroll approximately forever, I’m not really seeing the point of holding FDR up as an example to follow.
I think the most galling thing about these arguments is that somehow the government always gets as much time as it needs to claim credit for jobs recovery, but if the private sector can’t deliver by tomorrow capitalism is pronounced dead on arrival. The financial crisis became apparent about a year and a half ago. If employment hasn’t recovered yet, well I’m not any happier about it than anyone else, but a year and a half is hardly the 4 years* that we’re giving FDR to build his track record now, is it? So how about this – pull back the stimulus and if in 2013 unemployment is still 10% or more, we can talk about massive public works investment. But since signs show that unemployment is abating even without this investment, what would the argument POSSIBLY be for starting it?
*Actually it’s a lot more than that, since full recovery from the Depression didn’t come until 1951-2. So apparently the government gets a 20-year handicap from its fans.