Why FDR Didn’t End the Great Depression – and Why Obama Won’t End This One

President_Barack_ObamaAlan Nasser writes at CounterPunch:

From Cambridge University in 1932-1933, John Maynard Keynes observed a promising new U.S. president presiding over what he saw as half-baked and confused policies, while labor insurgency was mounting. Roosevelt’s measures were, Keynes conceded, without precedent, but novelty was not enough. Long-term commitment to direct federal employment was required. For Keynes, this was the bottom line. (For a detailed analysis of Keynes’s prescriptions for eliminating unemployment, see Alan Nasser, “What Keynes Really Prescribed,” CounterPunch subscription edition, volume 19, number 19, 2012)

Existing programs were not only too small, but they were also either temporary (Civilian Conservation Corps and Civil Works Administration) or irrationally tied to the severely weakened states’ ability to raise substantial revenues on their own (Federal Emergency Relief Act and Public Works Administration). CWA had come closest to the kind of commitment Keynes thought indispensable, but it suffered two fatal defects: it was temporary, designed only to help workers get through the harsh winter of 1933, and of all these programs it was the object of Roosevelt’s greatest suspicion. Roosevelt feared that CWA would raise workers’ expectations of what they could permanently expect from government.

 The Dawn of the New Deal and Keynes’s 1933 Letter

The president’s instincts were solidly anti-federalist; there must be no permanent direct government provision of what it is the proper function of the private sector to provide. (1) Roosevelt wanted relatively small, temporary federal efforts on behalf of workers, with the states primarily responsible for the provision of social benefits in the long run. Keynes urged large, permanent programs supplying employment during both economic contractions and expansions, provided directly by the federal government. He communicated his concern to Roosevelt in an open letter published in The New York Times on December 31, 1933. (2)

In the letter he expressed his extreme distress at Roosevelt’s timid policy. “At the moment your sympathizers in England are nervous and sometimes despondent. We wonder whether the order of different urgencies is rightly understood, whether there is a confusion of aim, and whether some of the advice you get is not crack-brained and queer.” He then outlined his alternative analysis.

The basic issue, Keynes insisted, is “Recovery,” whose object is “to increase the national output and put more men to work.” An increase in output depends on “the amount of purchasing power… which is expected to come on the market.” Recovery depends upon increasing purchasing power. There are, Keynes pointed out, three factors operating to raise purchasing power and output. The first is increased consumer spending out of current income, the second is increased investment by capitalists, and the third is that “public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.”

Since the vast majority of consumers are workers, increased consumption expenditure is impossible on the required scale during a period of high unemployment and low wages. Business investment will eventually materialize, but only “after the tide has been turned by the expenditures of public authority.” Government investment in employment-generating public works must come first. Only after large-scale government investment can private investment be expected to kick in.

A compelling logic is implicit in that observation. According to the orthodoxy Keynes is criticizing, a revival of aggregate investment by the class of capitalists is necessary and sufficient to constitute recovery. But investment by an individual capitalist in a severe downturn would be irrational. So each capitalist will defer investment until there is evidence of recovery, i.e. evidence that the other capitalists have undertaken productive outlays. Uh-oh: a structural contradiction is in place. If each investor refrains from investment until all the others invest, no capitalist will invest. Each will die waiting for the others to come across. In the absence of an external impetus to the private investment system, the depression will be endless. Recovery is possible, then, only if a force external to the private market gets the ball rolling. Enter government to the rescue. “[T]he tide has been turned.”

Hence Keynes’s conviction that only government expenditures on a grand scale can breathe life back into a depressed economy. Keynes suggested as an example of what he had in mind “the rehabilitation of the physical condition of the railroads.” He would later, in a 1938 letter, recommend a national program of public housing as a project on the required scale.

The crisis was not merely economic. Keynes had witnessed the rise of revolutionary movements in response to the protracted inability of capitalism to meet the needs of working people. He had written about both the Bolshevik revolution and the tendency of austerity to spawn revolt from the Right. Keynes was antipathetic to both fascist and worker rule, and feared revolutionary consequences should the New Deal fail. “If you fail,” he wrote Roosevelt, “rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out.” The political stakes were high, as they must be under conditions of protracted capitalist austerity.

The stakes are no less high now. The current contraction emerged from a political-economic settlement, the post-Golden-Age period from 1974 to the present, resembling in relevant respects the Depression-prone economy of the 1920s.

Read more here.

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  • DoomedNY

    Very interesting, i’ve heard alot about Keynesian economics but not the actual story behind it. Thanks.

  • alizardx

    The only kind of economic fix Obama’s interested in is what is implied by the phrase “the fix is in”.

    n FDR’s time, “post-presidential payoffs” were not much of a thing, and he needed social stability for his heirs a lot more than he needed more money. Obama wants to cash out on his political career the way Bill Clinton did, But on a much larger scale. Our freedom and assets are what he’s got to sell

    Keynesism is returning because it’s becoming increasingly obvious that neoliberal economics do not work for any other purpose than justifying upward transfer of wealth, and the undermining of social stability that results is already setting off alarm bells within the heads of the smartest members of the elites.

    • American Cannibal

      Ain’t that the truth, brother.

    • kowalityjesus

      I’ve heard it said that this post-Weimar quick and inorganic Keynsian-like growth and mobilisation of manufacturing from the top would have crashed had not war broken out. I don’t think it was sustainable, and it would have proven hollow given a few more peaceful years. I am glad you point out the pernicious actor of the Fed though. To me, the warmer and drier it is under the umbrella of the Fed’s fiat currency [think: people on gov't payroll, and real estate developers], the manifestly colder and wetter it necessarily is for everyone not standing under it.

      • American Cannibal

        More precisely, the umbrella is for asset holders. Everyone else can go hang.

      • alizardx

        When jump-starting a car, one should know when to remove the jumper cables.

        The Federal Reserve and essentially unregulated finance for the big players are simply subsets of a government policy intended to facilitate neoliberal upward wealth transfer… a few centuries ago, it was called “squeeze the peasants” and be surprised when they showed up with pitchforks – or when external forces applied the final correction to the mistakes of the elite.

  • kowalityjesus

    “Wages turned into effective demand, then, is the direct cause of a revival of production and employment. But niggardly wages will not do. The nation’s human and non-human resources are vast, and marshalling them for production at full employment calls for aggregate household spending power sufficient to that task.”

    Since we aren’t manufacturing much besides paper money, we can’t expect to increase our wealth. At this point, without a manufacturing basis, increasing general wages is just enlarging the chute that sends all of our money to China. In order to compete with SE Asia, we need low wages, as well as fewer frivolous regulations OR a new economic paradigm of austerity and patriotism encouraging things like buying domestic goods and reusing items/shopping at good will. Notably, reusing and repairing is a behavior people acquired from living during the depression of the 1930s. Today we don’t have that silver lining from our own situation arguably because of our perpetual access to cheap goods. Friedman said in “The World is Flat” that in a few years there will be no reason why Chinese laborers should be paid any less than American. So maybe we should campaign for Chinese labor laws to indirectly raise our own wages!

    “The Great Depression’s lesson that only public employment on a grand scale could remedy persistent joblessness was cast aside as incompatible with born-again free market fundamentalism. Obama’s remarks at the December 3, 2009 ‘jobs summit’ express the current elite consensus that any politically acceptable remedy for intractable joblessness must be market-based: ‘While] government has a critical role in creating the conditions for economic growth, ultimately true economic recovery is only going to come from the private sector.’ That’s a recipe for endless depression.”

    There is some merit to the idea that ‘a[n economic] reaction will not ignite unless there is a critical mass reached,’ but the law of diminishing return applies here. In order to actually recover the loss of appropriating money from Govt coffers to people doing government jobs, the activity of their spending has to foster more growth and tax revenue than it cost. The bigger the infusion the bigger the risk. However this notion is utterly foreign to our current economic “stimulus” which has long abandoned any premise of EVER recovering the currency it is hemorrhaging overseas and into the shitter.

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