Friday, January 9, 2009

Food for thought on the soon-to-be economic stimulus package

Click on image to enlarge

Yesterday, President-elect Obama made clear that a huge fiscal stimulus plan -- apparently valued at up to $800 billion -- was his top priority, and that Congress can't move fast enough to pass it, lest the current recession lasts for years and the unemployment rate reach double digits.

That's $800 billion on top of the federal government shelling out a trillion dollars on Wall Street bailouts and assorted other urgent measures over the past few months. And it comes as the Congressional Budget Office projects that the federal deficit in the current fiscal year will total $1.2 trillion, or 8.3% of the Gross Domestic Product -- that's before dollar number one is spent through the new stimulus plan

We're starting to talk about real money, and at least some of Obama's Democratic allies in Congress seem to think Obama's proposals are not bold enough!

I'm on board with the "vast stimulus plan" that Obama proposes, because we are clearly still experiencing a deteriorating economy and severe liquidity crisis, It would not be smart to let the down slide get out of control. But I am also beginning to worry about going overboard. Pols and pundits are competing daily with doom and gloom talk about this situation being the "worst since the Great Depression" and summoning the ghost of FDR to certify the need for even more sweeping action. Today, for example, Paul Krugman said Obama's plan "falls well short of what’s needed."

I grew up around people who worshipped FDR and voted Democratic their whole lives. But my parents, aunts and uncles also took it as an obvious fact that the world war, not the New Deal, ended the Depression. They still valued the New Deal for the many ways it offered help and hope to average Americans in the midst of the Depression, but they were under no illusions about New Deal spending having magically revived the economy. They knew because they lived through it all.

The bar graph above shows how right they were. (It's from the Heritage Foundation, a nest of conservatives, but it's a handy graph to illustrate the point, so sue me.) The unemployment rate was above 35% (!) in FDR's first year as President, 1933. It did decline significantly over the next several years and then rebounded. It never fell below 20% until the first year of the war economy, 1941. Not until 1942, the first year of total war mobilization, did it fall to a "normal" 5.5%.

Today, the unemployment rate hit 7.2%, and most forecasters expect it to go higher, possibly to 10%. Anything above 6% is unacceptable, and 10% would mean a severe crisis for many Americans. So swift, effective action is essential. But the current recession is not even remotely in the same league as the Great Depression.

Even it it were, the fact is that the New Deal, by itself, did not restore growth and prosperity. It did mitigate the effects of the Depression on those hardest hit. It created vitally important parts of a social safety net. It mandated badly needed industrial reforms and regulations to protect workers, consumers and borrowers. Those were great achievements, but they don't provide a model for what we need to do now.


  1. FDR cut unemployment dramatically in his first term so doesn't that show the New Deal worked?

  2. With the Supreme Court making much of the New Deal unconstitutional it is hard to say that the New Deal did not work, it wasn't really given a chance. Another note is that LBJ changed the way the unemployment rate is determined. Now people no longer employed and who have given up looking for work are not tallied, before they were. Our actual unemployment is higher but how high I can't say.