Sunday, February 8, 2009

Stupid Republican Tricks: New Deal Edition (UPDATED)

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It has become a common trope among conservatives that the New Deal “failed”–that is to say, it didn’t really fix the Great Depression and may have actually prolonged it. According to this line of thinking, it was really World War II that solved the Great Depression.

The “New Deal failed” argument is being used to argue the economic stimulus package, basically asserting that, if massive government spending didn’t work then, it probably won’t work now, so we should find some other way to resolve our economic crisis.

First, did the New Deal actually fail, or is this argument just a smokescreen being used to undermine an economic stimulus bill that Republicans don’t like? Even if you go by these figures from the right-wing Heritage Foundation, you see that unemployment drops by more than 57% between when FDR implements the first New Deal and when the U.S. enters World War II. Considering that the New Deal was a program designed to create jobs and reduce the massive unemployment rate, it’s hard to imagine how that would constitute a failure.

But what bothers me more is the WWII part of this argument, because it just doesn’t make any sense. Economically, what was the Second World War but a massive government spending program that absolutely dwarfed the New Deal in terms of cost? I mean, that’s how World War II helped the economy–it led to the government investing unprecedented amounts of money in the war effort. Millions of new jobs were created, particularly in the manufacturing sector, where America was suddenly producing everything from military uniforms to bullets to tanks and bombers.Plus, the millions of soldiers deployed in the war effort were sustained by federal spending, since the government paid for everything from the food they ate to the clothes they wore.

You can’t deny that World War II was a far bigger government spending program than the New Deal–at the time, the war effort cost $288 billion while the New Deal cost just $32 billion. In today’s dollars, WWII cost $3.6 trillion while the New Deal cost just $500 billion. And not only was the Second World War massive government spending, it was massive deficit spending; between 1941 and 1945, adjusted for inflation, the national debt quintupled.

So when conservatives argue that the New Deal didn’t fix the economy but World War II did, they’re actually saying that the massive government spending program did more good for the economy than the smaller government spending program. They have no trouble arguing that it took the equivalent of $3.6 trillion in government spending to fix the Great Depression, yet are balking at an $800 billion economic stimulus package today.

I agree that the New Deal didn’t fix the Great Depression and that it took the WWII war effort to really end the crisis. But that argument contends that we should be spending more money to fix this crisis, not less; I worry that our $800 billion stimulus package isn’t enough, not that it will be too much. And, despite what conservatives may argue, history isn’t on their side here.

UPDATE: Nobel laureate Paul Krugman has more about the conservative “New Deal failed” delusion:

Net stimulus of around 3 percent of GDP — not much, when you’ve got a 42 percent output gap. FDR might have been more of a Keynesian if Keynesian economics had existed — The General Theory wasn’t published until 1936. Note in particular that in 1937-38 FDR was persuaded to do the “responsible” thing and cut back — and that’s what led to the bad year in 1938, which to the WSJ crowd defines the New Deal.

Implications for Obama: be inspired by FDR, but don’t imitate him slavishly. In particular, your economic policy should be bolder, not more cautious.

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