Friday, September 23, 2011

The undeniable value of stimulus

and why do smart Republicans always lie about this?

The New York Stock Exchange infamously crashed in October 1929, seven months after Republican President Herbert Hoover took office. Hoover was the former Secretary of Commerce. In the wake of the crash, banks began to fall like dominoes. There was no FDIC and millions of Americans lost all their savings when their banks failed -- which caused an obvious snowball effect ('I can't pay my employees because I lost all my money in the bank'. 'I can't pay my mortgage b/c I lost all my savings and my job'). My great grandfather who had been a prosperous painter lost his life savings and 3 houses. He never recovered financially and died in 1972 with $500 to his name.

The Hoover administration responded to the bank failures and subsequent recession with austerity -- they did nothing. Hoover believed unemployment payments would be addictive and discourage work. He did agree to deport all Mexicans from the United States on the belief they were taking "American" jobs, and he insisted on balanced budgets. Does all this sound familiar?

Hoover lost reelection in a landslide to FDR who took office in March 1933. FDR immediately began instituting The New Deal. Here is the effect of the New Deal on GDP:

the New Deal Graph
(The Y-Axis is GDP expressed as a percentage increase over the lowest GDP in 1933. Note that in 1929, the GDP is nearly 40% ABOVE the 1933 low, and this was surpassed in 1936)

This graph comes from an article by Paul Abrams written in response to Republican criticisms to Obama's 2009 stimulus program.

Note the downturn in 1936 and 1937. As Abrams explains,
This is as close to a "scientific experiment" as there can be in macroeconomics: from '33 to '36 Roosevelt unleashed the New Deal and what passed at the time as massive spending. The GDP grew every year by double-digits.

Then, in a reversion to his true roots as a fiscal conservative, FDR decided that it was time to slash spending to balance the budget. The economy contracted. Then in '38, realizing the error of his ways, Roosevelt started spending again, and GDP grew every year thereafter.
The next time someone tells you the New Deal was a failure, ask them to explain this graph.

I am as concerned about systemic Federal deficits as anyone, and unlike all these Republican self-described 'fiscal conservatives' my concern didn't start on January 20th, 2009. But now is not the time to back off on Federal spending -- at least now when it comes to building projects. We have neglected our infrastructure for 30 years. With the rest of the world running to US debt to keep their money safe, the US can borrow money at a net rate of zero percent. Now is the time for a trillion dollar construction bill to rebuild highways, airports and to build out a modern high speed rail system to connect regional cities like Saint Louis and Chicago.

Unfortunately for the U.S., Republicans have dug in on opposing anything Obama wants and Obama has abdicated his leadership role for so long now that there is little hope his new found voice can save us from what appears to be the makings of a global depression.

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