For FDR the Key Economic Question was Jobs, not Debt

For FDR the Key Economic Question was Jobs, not Debt

Roosevelt historian David Woolner shines a light on today’s issues with lessons from the past.

In another parallel between the Great Recession and the Great Depression, the final proposal of President Obama’s National Commission on Fiscal Responsibility and Reform brings to mind a similar economic reform body that Franklin Roosevelt created in the spring of 1938. Like President Obama’s, FDR’s national economic body was inspired by deep concerns over the long-term health of the US economy. These concerns came in the wake of a sharp economic downturn in the fall of 1937. Often referred to as the “Roosevelt recession“, the downturn came about in large part because of the administration’s decision to cut federal spending and restrict the money supply. These moves sprang from a misguided fear of inflation in the wake of the rapid rate of economic recovery under the policies of the New Deal. As a result, FDR and his economic advisers decided it was time to cut federal spending, balance the budget and reign in the money supply. The consequences were disastrous, leading to a steep decline in industrial production and national income and a dramatic increase in unemployment — the first and only increase in FDR’s entire twelve-year tenure in office. Moreover, even though the “Roosevelt recession” was brought to a swift end through a massive federal program of spending and lending, it nevertheless shook the administration’s confidence and led the President to call upon Congress to establish a “Temporary National Economic Committee” to conduct a “thorough review” of the American economy.

The Temporary National Economic Committee, or TNEC, held Congressional hearings from December 1938 until March of 1941. Unlike today’s commission, however, TNEC’s primary concern was not the deficit. (Although there were those within the Roosevelt administration, such as Henry Morgenthau Jr., who still clung to the fiscal orthodoxy that demanded balanced budgets and an end to deficit spending.) It was rather on “the concentration of economic power in American industry,” and the perplexing problem of “why we have not had full employment and full utilization of our magnificent resources.”

Over the course of the next three years, the committee (which included Congressional representatives from both parties and officials from within the administration appointed by the president) heard from hundreds of witnesses and compiled an enormous set of data on the US economy, which has proved to be an invaluable resource to economic historians. Even before the committee finished its work in 1941, three main points of view emerged about how best to revive a stagnant economy. One view argued that trusts and monopolies were inevitable, and that the best way to deal with these large concentrations of economic power was through federal regulation. A second view held that monopolistic practices, such as the setting of prices and wages, inhibited economic growth by creating a climate of under-consumption, and that the best means to counteract this was for the government to pursue the breakup of large trusts and monopolies. The third view held that the best means by which the government could have the greatest impact on the economy was through taxation and spending — in other words, a compensatory fiscal policy.

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In the end, it was this third view — which essentially endorsed Keynesian economics — that emerged as the predominant message from the hearings and from the committee’s recommendations. Part of this was due to the observation that FDR’s decision for the government to spend its way out of the recession in the spring of 1938 was the right one, as the 1937-38 recession came to a rapid end in the wake of an increase in economic stimulus. Keynes’ ideas were also given a boost by the 1938 publication of the widely read book “An Economic Program for American Democracy“. It placed Keynes’s ideas in layman’s terms and added further sanction to the idea that government spending — even deficit spending — was a legitimate and effective tool with which to combat the twin miseries of a recession and unemployment. And finally, by 1941 there was the overwhelmingly empirical evidence provided by the massive federal spending that went into the emerging war effort, which ultimately brought unemployment down to less than 1% and would lead to the enormous wartime and postwar expansion of the US economy.

In essence, then, the committee’s entire focus was not on how to reduce the size of the federal debt, but rather on how government might take direct measures to restore the economy and put people back to work.

Indeed, in his letter to Congress proposing the establishment of the committee, FDR noted:

Unhappy events abroad have retaught us two simple truths about the liberty of a democratic people.
The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is fascism - -ownership of government by an individual, by a group, or by any other controlling private power.
The second truth is that the liberty of a democracy is not safe if its business system does not provide employment and produce and distribute goods in such a way as to sustain an acceptable standard of living.
Both lessons hit home.
Among us today a concentration of private power without equal in history is growing.
This concentration is seriously impairing the economic effectiveness of private enterprise as a way of providing employment for labor and capital and as a way of assuring a more equitable distribution of income and earnings among the people of the Nation as a whole.

As we continue to struggle, much as FDR’s generation struggled, with continuing high unemployment and an economy that is not expanding at a rate strong enough to bring it down, it seems fundamentally misguided to repeat FDR’s mistake of focusing on cutting federal spending at the very time when most economists agree we need it the most. This is not to say that examining how best to reduce the long-term deficit is a bad idea. We do need to put together a sensible strategy to keep the long-term deficit — which means health care costs — under control. But by placing so much emphasis on it now, and by allowing the deficit hawks to dominate the national discourse, we run the risk of making matters much worse. In the midst of this ongoing and disturbingly precarious economic malaise, what we really need is not a debt reduction commission, but an economic mobilization commission, dedicated to the idea that it is high time the federal government waged war on the real enemy of this crisis: the lack of jobs.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.