Monday, September 05, 2011

FDR was Hoover, too

We've all heard by now that FDR cut spending in 1937, sending the economy into a sharp recession that reversed much of the rapid economic growth his New Deal policies had helped spur in his first term. 

What's less well known, I think (at least to me), is that when he reversed course after this disastrous bout of balanced budget fever, he did so only fitfully, with ambivalent half measures, and the economy sputtered on with weak growth and unemployment near 20% until 1941, when wartime spending kicked in. Moreover, his assault on big business, via populist denunciations and new corporate taxes -- driven mainly by a need in 1935-36 to cover his left flank and stave off a feared populist third-party challenge -- left a widespread perception that he'd driven away the confidence fairy. David M. Kennedy summarizes in Freedom from Fear: The American People in Depression and War, 1929-1945:
Yet so far as the economy was concerned in 19838, Roosevelt's actions looked for the moment to be something considerably less than revolutionary. The president may have planted the seeds of the "Keynesian Revolution" in American fiscal policy, but it would be some time before they would fully flower. In the meantime, Roosevelt seemed to have wrought the worst of all worlds: insufficient government spending to effect recovery, but sufficient government sword-rattling to keep private capital cowed. "The President won't spend any money," an exasperated Jerome Frank exclaimed. "Nobody on the outside will believe the trouble we have with him. Yet they call him a big spender. It makes me laugh." As for private businessmen, they still hesitated to make new investments. Why, the president mused on night at dinner, did they lack confidence in the economy? Eleanor replied tellingly, "They are afraid of you."  Deprived of adequate public or private means of revival, the economy sputtered on, not reaching the output levels of 1937 until the fateful year of 1941, when the threat of war, not enlightened New Deal policies, compelled government expenditures at levels previously unimaginable.

Part of the relative legislative paralysis stemmed from Roosevelt's loss of control of Congress, which he had played so masterfully throughout his first term.  First, he sparked near-universal rebellion with his court-packing scheme in 1937, then he declared war on conservative southern Democrats,  launching a totally failed effort to unseat them via primary challenges, and finally, he suffered a strong Republican comeback in the 1938 midterms.  The result, though hardly dysfunctional by current standards, was inhibiting:
Despite the lamentations of later critics, the fact was that further structural reform was for the moment a political impossibility. Deficit spending was about the only policy on which the fractious Congress, liberals and conservatives alike could unite, and even then Congress didn't want too much of it. Neither, apparently, did Roosevelt. He was a decidedly reluctant an an exceedingly moderate Keynesian. He was still hemmed in by intellectual limitations, scarcely more able than Herbert Hoover had been to think his way out of the box of orthodoxy and boldly repudiate the dogma of the balanced budget.

In short, Roosevelt's second term looked something like the second half of Barack Obama's first term. Of course, these setbacks came after the New Deal had already stabilized the banking system, put millions of people to work, instituted unemployment insurance and social security, and established workers' right to organize.  But then, the 111th Congress had an accomplishment or two under its belt before being washed away on an electoral tidal wave.

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