Thursday, June 26, 2014

About Time To Read Up On Franklin Delano Roosevelt?

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).


  1. Don't speak German, but here is what Wikipedia says about 1937 -more or less it says that the depression did not end in 1937-(

    By 1936, all the main economic indicators had regained the levels of the late 1920s, except for unemployment, which remained high. In 1937, the American economy unexpectedly fell, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938.[20] A contributing factor to the Recession of 1937 was a tightening of monetary policy by the Federal Reserve. The Federal Reserve doubled reserve requirements between August 1936 and May 1937[21] leading to a contraction in the money supply.

    The Roosevelt Administration reacted by launching a rhetorical campaign against monopoly power, which was cast as the cause of the depression, and appointing Thurman Arnold to break up large trusts; Arnold was not effective, and the campaign ended once World War II began and corporate energies had to be directed to winning the war.[22] By 1939, the effects of the 1937 recession had disappeared. Employment in the private sector recovered to the level of the 1936 and continued to increase until the war came and manufacturing employment leaped from 11 million in 1940 to 18 million in 1943.[23]

    Another response to the 1937 deepening of the Great Depression had more tangible results. Ignoring the pleas of the Treasury Department, Roosevelt embarked on an antidote to the depression, reluctantly abandoning his efforts to balance the budget and launching a $5 billion spending program in the spring of 1938 in an effort to increase mass purchasing power.

    My read, and feeling, is that FDR was weak and anti-business. The US did not recover from the depression until WWII so his policies one way or another were not very effective.

    1. 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…).

      What 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.

  2. How's psychology witn 177% and neverending cuts?

    Beautiful plans, need to adjust to political realities to succeed and be implemented by the right people.

    Enjoy (i am sure you will approve).

    Is it applicable by the current goverment? No. The current goverment is "compromised", by its own past and the events of the last years (a lying Roosvelt is a bad Roosvelt. A Roosvelt that has been slashing salaries and raising taxes is a bad Roosvelt).

    Mario Monti came to power as the "professor", the "EU expert on competition", promicing swift receovery through reforms. The first reforms he passed, went unhindered. Then his predictions on growth proved wrong and even the Confindustria (the association of Italian industrialists), started protesting. The next batches of Monti's reforms, contained some tax increases (VAT, property tax). The population started turning against him and so did the parliamentary forces that were behind him. Monti would announce reforms. Said reforms would be hailed by EU the the european press. What the press didn't say, is that the same reforms, would then had to pass through 2 filters. The parliament and the Senate. In each, the reforms would lose elements of the initial intent. The final law, was quite different compared to the draft. Mont's promices for growth kept falling off mark, pubblic discontent grew (people when they see a hand in their wallet, don't believe it's a reform), the center-right threatened with removing support. At the end, Monti had to step aside...At the upcoming elections, Monti lost by a good margin, his declared electoral target.

    In Greece, Monti is called "Samaras", with the aggravation, that his party has been responsible for part of the greek woes and his coalition partner, PASOK, has been responsible for an even bigger part of the woes. But ironically, they were the 2 parties called to "reform" their past "achievements".

    To add to the problem, the same 2 parties, have still a part of their core, tied to the past and to the interests of the past. The wonderful report above, was funded by the Stavros Niarhos (Onassis' main rival) foundation, a shipping magnate. The smiling members of the report, are more or less, very well known in the greek society.

    The shipping companies, are the same that don't pay any taxes (they pay only as physical persons) and haven't paid yet the "voluntary" one-off contribution of 400 meur (it corresponds to 20 euro per ship per day, for 1 year). The same magnates spend 10 beur a year for new ships.

    Then you have Antenna TV group. As most of the tv magnates in Greece, has been in close and mutual support with both PASOK and ND in the past years and as most, has never paid 1 cent for the use of state tv frequencies.

    Viohalco, recently transferred its base of operations to Belgium.

    The National Bank of Greece, a private bank in reality, has received the lion's share from the financial support to recapitalize the banks.

    End part!

  3. Hardly the sight of "Roosvelt" to the commoner that doesn't have to eat. Plans are only good when you have the right people at the right time to implement them. This time, will be, after the country will be stabilized and hopefully, the greek voter will not vote with fear anymore, so he will be able to send to the trash his current saviours and past sinners. Even more, since in Greece, there is never, a leader that can unite everyone behind them. Best situation, is to have half of the population with him.

    Ιn another example, Bobolas (notorious to all greeks, for taking all the state construction contracts, as well as owner of Pegasus Pubblishing and share holder of Mega Channel TV), got 7 meur of state financing to make an aeolic park. The project will create 1 (one) working post.,815-%CE%B5%CE%BA%CE%B1%CF%84-%CE%BA%CE%B1%CE%B9-%CE%B4%CE%B7%CE%BC%CE%B9%CE%BF%CF%85%CF%81%CE%B3%CE%B5%CE%AF-1-%CE%B8%CE%AD%CF%83%CE%B7-%CE%B5%CF%81%CE%B3%CE%B1%CF%83%CE%AF%CE%B1%CF%82%E2%80%A6.html

    One has to wonder, wasn't anything else, where state money could be used in, to give jobs to the 1.2 million disoccupied? But certain ties (especially Bobolas-PASOK), can't be broken, because they 're too involved. If Bobolas was to empty the sack, it would political demise.Βobolas was also the up until recently, employer of Potami's leader.

    For a "Roosvelt", to come, Greece must be out "of danger", he must be a new political force not tied to the same persons. Otherwise, you will see a lot of brilliant reports, stay on paper. A good thing that happens with traditional defaults, is that the existing political system, collapses overnight. In Greece, this not only hasn't happened, but it is the same, that is trying to "save" the country. Now, it's trying, because it's scared of the unknown, but you can't cancel the past. They are tollerated by the population, not followed. Tolerated, until they don't need them anymore.

    Once, i remember your blog, posting a brilliant article, from a greek blog. So amazing. Little you knew, who the source you got it from was... I don't remember her name, but i remember her legal transgressions in construction permits in an aegean island, as well as how she was boosted by George Papandreou as a "golden girl" of PASOK.

    End part2

  4. 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.

    Karamanlis, 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.

  5. 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.

    Logically, 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.