Thursday, 02/11/2010 - 12:03 pm by David Woolner
Roosevelt historian David Woolner shines a light on today’s issues with lessons from the past.While most economists would agree that it is important for the Obama administration to work toward bringing the long-term deficit under control, a look at the past reinforces the notion that in the short term what we need now is more stimulus, even if this means increasing the current government deficit.
FDR’s initial response to the Great Depression provides an interesting case in point, for Roosevelt came into office as something of a fiscal conservative. In keeping with the fiscal orthodoxy of the time, he called for a balanced budget during his campaign, was reluctant to deficit spend once in office, and even pressed for the successful passage of the
1933 Economy Act as one of his first major pieces of legislation-an act which cut federal spending by nearly 250 million dollars during the first months of his administration.
The unprecedented nature of the economic crisis facing the nation, however, soon led the President to seek additional expenditures in support of recovery programs like the
Civilian Conservation Corps (CCC), which taken together soon outstripped any reductions achieved in the Economy Act. Still, FDR’s desire to avoid excessive deficits and to work towards a balanced budget remained. As a consequence, the initial New Deal efforts to stimulate the economy were not as aggressive as many economists now feel they should have been. This argument becomes even more compelling when one takes into consideration the fact that much of the deficit-as is the case today-was due to the fall off in tax revenue that came with the down turn in the economy. In fact, when we factor in the tax increases that FDR instigated as a means to keep the deficit somewhat under control, we see that the Roosevelt Administration’s fiscal polices prior to 1935 were not all that different from those pursued by Hoover between 1929 and 1931.
Further evidence of FDR’s inherent fiscal conservatism can be seen in his decision to cut federal spending at the start of his second term-a move which resulted in the so called “
Roosevelt recession” of 1937-38 and which led to the first increase in the unemployment rate since his assumption of office in 1933. Stunned by this unfortunate turn of events, FDR began to heed the advice of those who advocated the economic policies of
John Maynard Keynes. In 1938, therefore, the President would submit a budget that called for an increase in federal spending but without any concomitant increase in federal taxes. The resulting deficit, the President argued, was necessary to enhance “the purchasing power of the nation” so as to expand the economy-and the tax revenues that would flow from it-and reduce unemployment.
moreBraintruster David Woolner is senior vice president of the Franklin and Eleanor Roosevelt Institute.
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