Depression Ahead: FDR and Obama

Depression Ahead: FDR and Obama

The picture is dreadfully clear. The economy is headed downward and there is little to turn it around, except a fiscal stimulus which has yet to be enacted. Monetary policy, for the first time since the Great Depression, is totally ineffective (a condition economists call a liquidity trap). In short, if there ends up being no fiscal stimulus, which of course I doubt, the chances are that we would have a repeat of the Great Depression, maybe not so bad, maybe worse. Bush has been imitating Hoover, doing a little, just as Hoover did. In 1932, Hoover instituted the Reconstruction Finance Corporation (RFC), which loaned to state and local governments and made loans to banks and businesses. It helped a little, but basically, it was too little, too late.

Also, we should keep in mind something that is not always realized: Roosevelt did not get us out of the Great Depression. He did more than Hoover, much more, but he, too, did too little. What he did do helped improve the economy from where it was when he was inaugurated, in March, 1933, but we were still deep in the depression when, in 1937, fearful of the deficit, and still addicted to the orthodoxy of trying to balance the budget (and ignoring the new Keynesian ideas, whose "General Theory" was published in early 1936), he raised taxes and cut back spending. The result was a disaster–the economy plummeted almost to the levels that existed when he came to power. This is known as the recession within the depression and it lasted 13 months. Only the massive spending of World War II got us out of the Great Depression.

In short, many good things occurred under Roosevelt–such as Social Security, FDIC, the Wagner Act, TVA and even WPA–but he was far too conventional and far too timid, at least in his efforts to create a recovery. I fear that political pressures, along with own his natural caution, may lead Obama to imitate, in a negative way, the president many hope he will be, Franklin D. Roosevelt, by being more timid than what the times call for–BOLDNESS.

Even with a well thought-out and appropriate stimulus package, unemployment is likely to approach 10%. And this is a minimalist way of looking at the job situation. It leaves off those who were looking for jobs and stopped because they thought there simply were no jobs available–the so-called discouraged workers; it excludes all those working part-time who want to work full time. These figures are collected and the Times should print them along with the official rate, but it doesn’t. No one, to my knowledge, adds in to this calculation the decline in hours worked, when employers make relatively small cutbacks–stay home this Friday, etc. When I last looked at what was collected, the increase of the more inclusive measure was much greater than the increase of those officially unemployed. We’re talking, right now, of more than 10% "unemployed" by the broader measure, pushed up the most by those working part time who want to work full time.

And of course, distress is not measured simply by loss of employment. Even those employed have been losing their savings and watching, as we in New York are doing, city and state cutbacks that affect us, such as the cutbacks announced in subway service and the announcement of substantial increases in fares to be imposed. Add to the people hurt in this way, many of those in retirement, who are now finding it difficult, as their savings are being wiped out, many of whom may be forced to seek employment, if there are jobs to be had. In short, personal distress is widespread and growing. How people will fare depends on how large, how quickly and how intelligently a fiscal stimulus will be put in place. As Krugman has put it, if you think we need a $500 billion dollar stimulus (or whatever figure he used), increase it by 50%. We can always reimpose monetary restraints if we over-stimulate. Think BOLD, Obama.

[I’ll leave to future entries further comments on the special aspects of this decline, thoughts about the kind of stimulus needed, thoughts about GM, and a few pet programs which I know won’t come into existence, but should.]