This very interesting paper (in German) outlines the measures which FDR took, starting in 1933, to get the US economy out of its depression. FDRs first priority was, as any leader's should be, to kindle spirits, courage and optimism in the society ("the only thing we have to fear is fear itself"). He used the instrument of 'fireside chats' to bring his message across. Secondly, FDR stigmatized the financial sector as 'unscrupulous money changers' that needed to be brought under control. And, thirdly, he stressed that investment, and only investment, would get the US out of its dire straits.
I used to think that FDR was the champion of deficit spending. Far from it!
FDR embarked on the celebrated ‘New Deal’ after taking office in 1933. From 1933-37, nominal GDP rose 63% and inflation-adjusted GP rose 43%. Unemployment declined from 25% to 14%. However, the government’s share of the economy – contrary to all myths – remained flat during this time (revenues, expenses, budget deficit)!!! Public spending on consumption even declined from 59% to 56% of total public expenditures! What really prompted the turn-around was private sector investment which grew by 140% during the period in real terms. Obviously, government policy and FDRs fireside chats had a lot to do with the optimism which prompted the private sector to invest, but psychology is half the game in the economy.
The generally accepted school of thought nowadays is that, when in depression, no one other than the state can trigger the stimulus required to get the private sector going again. That may be true when there is no leadership around.
If there is leadership à la FDR around, the private sector will undoubtedly live up to the role which it is supposed to play in a market economy --- not as a predatory tiger to be shot. Not as a cow that is to be milked. But, instead, as a healthy horse, pulling a sturdy wagon (paraphrasing Churchill).
I used to think that FDR was the champion of deficit spending. Far from it!
FDR embarked on the celebrated ‘New Deal’ after taking office in 1933. From 1933-37, nominal GDP rose 63% and inflation-adjusted GP rose 43%. Unemployment declined from 25% to 14%. However, the government’s share of the economy – contrary to all myths – remained flat during this time (revenues, expenses, budget deficit)!!! Public spending on consumption even declined from 59% to 56% of total public expenditures! What really prompted the turn-around was private sector investment which grew by 140% during the period in real terms. Obviously, government policy and FDRs fireside chats had a lot to do with the optimism which prompted the private sector to invest, but psychology is half the game in the economy.
The generally accepted school of thought nowadays is that, when in depression, no one other than the state can trigger the stimulus required to get the private sector going again. That may be true when there is no leadership around.
If there is leadership à la FDR around, the private sector will undoubtedly live up to the role which it is supposed to play in a market economy --- not as a predatory tiger to be shot. Not as a cow that is to be milked. But, instead, as a healthy horse, pulling a sturdy wagon (paraphrasing Churchill).
First, I am rather ignorant about FDRs New Deal. In fact, the paper which I linked was about the first analysis I read about this period. Secondly, the paper does cover the period 1933-45. I chose only the first period because it seemed so fitting. Yes, the paper says that, beginning in 1937, there was a slump. It attributes that to FDRs fear of budget deficits. The deficit was then running at 2% (!) and FDR wanted to balance the budget, i. e. he introduced the famous austerity. In general, my understanding has always been that it was not FDRs New Deal but rather WW2 which returned the US to economic strength (that ought to be cause for some pondering…).
ReplyDeleteWhat fascinated me about the 1933-37 period was that FDR managed to get private investment going, really going, without any significant deficit spending. I think the most important ingredient for an economic recovery is optimism. Somehow, FDR – with his speeches and fireside chats – kindled optimism among the population.
The other fascinating thing is FDRs first inaugural speech. If only Barack Obama had taken this as a prototype for his first inaugural speech. By and large, what FDR said then would have been transferable to January 2009 almost 1:1.
If you want a more "greek"-related recovery near Roosvelt's time, it was under Karamanlis Sr, after the civil war. But Karamanlis had a low public debt at the time to use for public investments. His plan though, was efficient enough, to receive the congatulations (in written), from none other than Andreas Papandreou, who at the time was an economist in USA.
ReplyDeleteKaramanlis, was known at the time, with the motto "shut up and dig". And it worked. A factor that made it work, was that he was popular, strong willing, charismatic and had a clear idea on what he was doing. He created problems with his plan (the cement-growth of Athens, is the result of his policy that attracted people to the cities from the country), but at the time, it was more important to rebuild and return to growth, than to look at the collateral damage. Karamanlis had a clean sheet as political past, he was never involved in any scandal,not even a shadow of it.
Since today public investment is not an option, at such high debt levels, private investment is the only option. However, this, won't come, until, 1) debt situation is cleared, 2) banks become solid again. The tale of the public sector that makes investments disappear, is no longer as valid as before. It is now much easier to start a business in Greece than before. The main issue of public sector now, is efficiency. The new personnel, for several years now (many years before the crisis), is hired through written exams. However, the older personnel, can't change the way it was used to easily nor are ready for new methods (they don't have/know how to oeprate computers and there isn't money for trainning/equipment). The goverment is introducing judgement (abolished from PASOK in 1981) for public servants and productivity bonus, which should help. But, the one thing that could shake up the employees, would be to abolish the constitution provision that protects them from being fired. And this can't be done without constitutional amendement. The current goverment can't do that. You need to go to elections after having declared that the next parliament will have power to change the constitution.
You know, mr. Kastner, why D' Estaing said that "a dictatoship could do the troika program"? Because, dictators don't worry about the fate of the party nor do they have members who worry about being re-elected. For the same reason, Monti's draft laws were passing through 2 filters and now Renzi asked 1000 days to implement the reforms. Diluting in time, makes it more "friendly". Nobody wants his party to vanish into oblivion when elections come.
If you allow me a last, comment. A HUGE difference between Greece and USA, is that USA is the homeland of capitalism and Greece is the homeland of leftist populism and intellectual ruling, since 1981. If you dare say the word "liberal" in Greece today, you will get an angry look, since the left has managed to pass to the commoner the false notion, that the troika program is the essence of "neoliberalism". You raise tax? It's liberalism. You have the state interfere in the private sector wages? It's liberalism.
ReplyDeleteLogically, for Greece to have a political leader to go forth, there must have happened before: 1) a rule of SYRIZA, that will destroy once and for all the myth PASOK created in 1981, where the left can magically make money appear out of thin air, 2) a new party in the right or a complete overhaul of current New Democracy, with new politicians and new program, that isn't afraid to take positions that aren't PASOK-like, out of fear of being called "junta", "extreme right" and similar.