Debunking the Debunkers: The Truth about the New Deal

            As Congressional Republicans and their puppeteers (Rush Limbaugh and his like) decry the Obama economic stimulus plan as if it were a step in the direction of a socialist state, the specific allegations have gotten ever more outrageous. 

            I’ll only mention in passing that outrageous claims appear to be the order of the day for that dysfunctional wing of the GOP.  Last week, one Bush apologist (neo-con Frank Gaffney) went so far as to claim on a cable news broadcast that one reason the invasion of Iraq was justified was “circumstantial evidence” that Saddam Hussein had been behind the 1995 Oklahoma City bombing. 

            The similarly absurd claim regarding economics has been mouthed repeatedly of late by party hacks and their mouthpieces.  The claim is that Franklin D. Roosevelt’s New Deal caused the Great Depression. 

            This charge is made to buttress attacks on President Obama’s plan to infuse the economy with an $800 billion stimulus plan that he wants to augment with major spending initiatives in the fields of energy, education, and health care. 

            Before I address and refute the New Deal charge, a brief primer on economics is in order. 

            What almost every economist, irrespective of political leanings, now willingly acknowledges, is that nothing is ever static in the world of supply and demand.  To be more specific, the economy of any society is cyclical in nature.  That is, it fluctuates from periods of recession to periods of inflation, with periods of relative calm marking the points between the two extremes.

            These cycles are the result of variations in the speed by which items (call them widgets, where a widget is a saleable commodity) are produced and sold.  In an inflated economy, widgets are in high demand and are produced quickly to meet that demand.  The result is spiked prices (supply and demand), spiked incomes (greater productivity coupled with greater demand for more work) and the ultimate reduced value of each unit of currency.

            Inflation is the part of the economic cycle that eventually wears on a society’s ability to sustain itself, since the more prices and wages increase, the less value each unit of currency has.  Thus a particular widget (a loaf of bread, for example) can quickly cost twice as much (in real terms) as it used to, which is unsettling, at the least, for the consumers in that society.

            Recessions represent the other end of the cycle.  In a recession, demand subsides dramatically and production similarly softens.  In a recession, widgets are not sought in great abundance and are not produced in sizeable quantities.  Production is thus down, which results in fewer available jobs (with less need for workers to produce the widgets).

            Recessions also wear on a society because with increased unemployment, the available currency to spend on widgets is reduced, and, as prices are reduced to meet the lowered demand, profits also drop.  Thus, in a recession, wages will fail to provide enough income to purchase the widgets needed to sustain an acceptable lifestyle, which can be exceedingly unsettling for the society as a whole, not to mention the suddenly unemployed workers in it.

Happily, the two extremes of the economic cycle have a self-regulating tendency.  Thus each recession inevitably brings on conditions that heat up the economy, and every inflation, in turn, brings on conditions that cool it off. 

For example, an economy in recession will ultimately produce innovation from one or more of its widget producers that will spur a renewal of energy throughout the economy, while an inflationary economy will ultimately price itself into a state of exhaustion that will lead to a general slowing down of economic activity. 

            But modern economies also have built-in mechanisms to control these cyclical excesses. The first of these mechanisms is the regulation of the flow of money.  Thus, during periods of inflation, when the flow of money is too rapid, the cost of money can be increased (in the form of higher interest rates), thereby slowing down economic activity.  During periods of recession, on the other hand, the cost of money can be decreased (lower interest rates), thereby causing the economy to heat up.

            This built-in mechanism is dubbed monetary policy, and in the United States it is controlled by the Federal Reserve Board.  The “Fed” is responsible for regulating the cost of money, which, in theory at least, softens the extremes of the cycles and keeps them short.

            But modern societies also have governments (elected or otherwise) which are responsible for providing for the national interests of the society.  These governments have the power to raise and spend funds, thereby providing a second means of reacting to and affecting the society’s economy.

            Government spending and the taxation imposed on the populace to support that spending is a separate regulating mechanism of any modern economy.  And all governments tax and spend, because all governments are responsible for some services (at a minimum fire-fighting, police protection and national defense).

            Thus the economic cycles that naturally occur can be augmented or reduced in large part by the amount of taxing and spending a society’s government determines to undertake on behalf of its populace.  A government’s collective decisions on taxing and spending are referred to as its fiscal policy.

            Now we need to add a little history to our primer.  While no pattern is absolute, what has become clear over the last century or so (perhaps longer, but for purposes of this lesson let’s deal with what might be called the “modern economic era”) is that the typical economic cycle lasts about ten years.  In other words, within a typical ten-year period, a society’s economy will be mildly inflationary for a couple of years, experience a mild recession for a couple of years, and, for the intervening six years or so, experience moderately sustained growth.

            Less frequently, the extremes get out of control.  And every now and then, things go haywire and the extremes of the cycle erupt into major crises.  Recent history suggests these crises tend to occur every 50 years or so.  The Great Depression was a classic example of things gone haywire. 

The bubble of extravagant prosperity that had existed in the “roaring 20s” burst with the stock market crash of 1929.  That crash was really just a sudden realization that the markets had been leveraged beyond the ability of stock holders to cover their loans. 

The panic that then set in caused the succeeding run on the banks and the ultimate loss of consumer confidence that brought the economy to a sudden grinding halt.

The Depression was so severe that emergency measures by the federal government were essential.  They came in the form of massive government spending, much of it stimulative, but much of it also strictly geared to keep major segments of the society functional.  Thus did welfare arise as the antidote to capitalism’s failings.  Without the safety net of government entitlements and welfare that the New Deal created, the country was a likely candidate for either revolution or third-world status.  Either result was a very real possibility.  And only because FDR acted aggressively was neither realized.

In addition to the federal safety net that FDR created, he also began massive federal work programs, many of which were the equivalent of today’s infrastructure projects.  Thus were the Hoover Dam and the Tennessee Valley Authority, for example, constructed during the Great Depression, largely through federal deficit spending.  The resulting deficits were massive, but they hardly caused the depression.  At the least, they put people to work, giving families much needed income and, perhaps even more significantly, much needed hope.

Did the New Deal cure the Great Depression?  No.  But it certainly reduced its impact.  Unemployment, at the downright scary rate of 25% when Roosevelt began his first term, had dropped to 9 percent four years later.  It continued to hover at or slightly above that figure for the next four years, primarily because, in response to criticism from the political right, FDR significantly reduced government spending during his second term. 

When did the Great Depression finally end?  It ended when the most massive form of government spending imaginable was imposed on the country, courtesy of World War II.  Conservatives ignorantly claim that the war, not the New Deal, ended the Great Depression, as if they have proved a great point.  But the war’s impact on the economy proves the exact opposite reality, since only with the massive government spending that the war required was the country’s normal economic cycle (engendered by renewed full employment) finally restored. 

With the end of the war, economic expansion continued apace, aided by a return of the populace’s renewed confidence in the capitalist system (buoyed by the victory in the war).  Thus did the country get back on track, and the ten-year economic cycles again became the norm.

And so, properly understood the New Deal was the perfect antidote for the economic meltdown that was the Great Depression.  It worked to stop the downward spiral, with fewer businesses requiring fewer workers to produce fewer widgets that could not be afforded even at lower prices, that the depression had become.

The New Deal validated the positive impact an aggressive government can have in battling the extreme ends of the economic cycle.  It established that when private industry shuts down, for whatever reason, and when recessionary psychology threatens to lead to a cessation of economic activity, an infusion of government spending, even if that spending produces massive deficits, is an absolute necessity.

Fears of deficit spending in the current economic meltdown are thus exposed to be wholly unfounded.  No country in the world has more capacity to recover from an economic crisis than the United States.  It can lead the way back from a feared worldwide depression.  But it won’t happen nearly as quickly or nearly as certainly without an infusion of massive spending that only the federal government can initiate.