Seeing as how this is the 100th blog at this site and something of a milestone, let’s use it to publish a select recounting of US economic history from the time of FDR right up to the present. Near the blogs’ end, it will be possible to contrast two competing approaches to policy.
John Maynard Keynes was a British economist and philosopher. His book The General Theory of Employment, Interest and Money, published in 1936, was to have a profound impact on our country during the time of the great depression and as will be noted, much more recently as well.
Keynes was an advocate of policy that involved a mix of both private and government involvement, but with a decided emphasis on the former. However, he correctly saw that from time to time, the private sector made decisions and acted in ways that disrupted free markets and created economic distress (1). At such times, Keynes believed that it was the responsibility of government to act in ways that got things back on track. Basically, this was to be done by the federal government pumping money back into an economy that had slowed to the point where there was either stagnation or even worse, negative growth as defined by a GDP of less than zero.
No president made more robust use of Keynes’ policy that FDR at the time of our great depression. His government-sponsored projects included, among many others, the construction of the Holland Tunnel and the Grand Coulee Dam. All of these endeavors put people back to work and money in their pockets; money that was pumped right back into the economy with the purchase of necessities.
By 1936, there were multiple signs that this Keynesian-based approach was working. The economy was on the rebound but at a cost of a growing national debt that reflected the aforementioned government spending. This downside was alarming and had to be weighed against a continuation of outlays. With this in mind, and mistakenly believing that the recovery was on solid footing, FDR “took his foot off the gas”; i.e. he cut back on spending. The result was that the recovery stalled and then went into reverse. This trend persisted until 1939 when the government jumped in again, this time in support of industries that had started to ramp up production in a prelude to our entry into World War II. (2)
Now, fast-forward to late 2007 when signs began to emerge that we were headed into a recession. Then-President GW Bush an avowed conservative, urged Congress to take what can only be seen as a Keynesian approach to deal with this looming threat. The result was the passage of the Economic Stimulus Act of 2008. Enacted with the support of members of both parties, it included a tax rebate for the lower and middle classes, incentives for businesses and more flexibility in the government’s purchase of home mortgages (3). Regrettable, this course of action proved to be too little and too late so that by the Fall of 2008, we officially entered into a recession that included the near-collapse of our banking industry. That resulted in passage of The Troubled Asset Relief Program (TARP) (4), otherwise known as the “bank bailout”.
The president who inherited this state of affairs was Barack Obama. When he entered office, he had the great good fortune to have Ben Bernanke at the Head of the Federal Reserve, a man who had steeped himself in the history of the great depression and how FDR had addressed it. His input was influential in moving the new president to adopt a similar Keynesian approach. Prominent within it was an $880 billion stimulus package and a continuation of GW Bush’s tax cuts. Part of the former was used to both shore up and re-structure General Motors and Chrysler and return them to profitability. This saved hundreds of thousands of jobs within the two companies and across their various suppliers. The latter cuts kept money in consumers’ pockets and circulating as the economy tried to “re-boot”.
By mid-2010, the trend of jobs being lost at a rate of 750,000 a month had been stopped and jobs began to be added. The GDP lifted out of negative numbers and started to show small signs of positive growth. Technically, the recession ended in 2011 and the signs that we have an ongoing recovery continued to improve right up to the present. En toto, this has served to provide at least a partial validation of Keynes’ approach to dealing with economic crises through government intervention, much to the dismay of staunch fiscal conservatives who, as shall be shown, hate any government involvement.
All this history has been recounted to set up what is a sharp contrast between Keynesians and the economic policies of conservatives. Remember that the former preferred to let the private sector drive the economy, with government stepping in occurring only on an “as needed” basis. Not so with strict conservatives who insist that the government keep its hands off the economy while letting free markets sort out and fix whatever had gone wrong in the first place.
The problem with conservatives’ approach is that it lacks political viability. In a democratic society, voters have little patience with a hands-off policy that depends on free markets to eventually self-correct. The electorate looks instead towards a federal government that is forcefully proactive in dealing with the human suffering that attends economic disruptions. In 2012, Barack Obama was returned to office, in part, because a majority of Americans saw him as the proactivist as compared to Mitt Romney.
With the control of both houses of Congress in place, the GOP has a great chance of capturing the presidency in 2016 if it puts forward a candidate with a message of continued proactivism wherein the tools of government are used to better the lives of all Americans. The problem is that for such a person to gain the nomination, s/he will have to fight through strong headwinds generated by Tea Party members who are adamantly opposed to just such an activist leading the party.
1. The private sector’s bundling and selling off rafts of toxic home mortgages is a recent case in point.
2. Of course, we did not enter the Second World War until December of 1941. However, by 1939, our industries were producing materials for our soon-to-be allies in Europe that were sent to them as part of FDR’s “lend/lease” program.
3. A significant part of the recent home financial crisis involved the purchase by the Fannie Mae and Freddie Mac-government agencies, of too many mortgages that were risky at best. When many borrowers defaulted, taxpayers were stuck with the cost.
4. TARP was passed in late 2008 and the distribution of its funds occurred once Obama had taken office. This program was strenuously opposed by many Congressional Republicans. Additionally, its passage was viewed by some pundits as the “tipping” event that triggered the rise of the Tea Party and its anti-government movement.