Lessons from the Roosevelt Recession

At $1.08 billion in FY 2012, the federal deficit is distressingly large to most Americans. In the current election, both Republicans and Democrats are proposing austerity measures. Before either side develops proposals to cut deficit spending (and don’t worry, we have plenty of time), we might want to take a look once again at our country’s last great economic disaster. In 1937, just as the New Deal began to raise the country from the Great Depression, Franklin Roosevelt decided to cutback on spending in order to balance the budget. The recession that followed should serve as a compelling warning against hasty adoption of austerity measures today.

After a landslide victory in 1932, Roosevelt entered the White House determined to carry through on his pledge to provide “a new deal for the American people.” The first components of this economic recovery plan included programs that alleviated the most pressing concern: jobs. Through aid programs like the Federal Emergency Relief Administration (1933), the Civilian Conservation Corps (1933), and the Works Progress Administration (1935), the Roosevelt administration provided tens of millions of jobs to unemployed Americans. That’s right, the government can put people to work. In the early 1930s, government employment significantly helped reduce unemployment.

In 1937, however, the federal government reversed its expansionary fiscal policy, choosing instead to emphasize the importance of balanced budgets. Historian Alan Brinkley attributes this balanced budget impulsion to Treasury Secretary Henry Morganthau. Believing that New Deal programs had sufficiently improved the nation’s economic health, Morganthau pressured Roosevelt to reduce spending. To the chagrin of many members of the administration who helped formulate successful expansionary fiscal policy from 1933 to 1936, Roosevelt agreed with Morganthau. With an eye on balancing the budget, the administration significantly reduced spending and simultaneously raised taxes. By 1937, the United States federal government had nearly balanced its budget.

This premature contractionary policy resulted in another severe economic downturn. Unemployment rose once again and industrial production slowed. In response, the administration once again reversed course in 1938 and increased spending. The reversal of New Deal expansionary fiscal policy, however, had already caused another economic decline. The United States would not emerge from this new decline until World War II once again reduced unemployment through government spending.

Deficit spending is a temporary fix, but it must last long enough to bring us out of a recession. Morganthau and several other members of the administration incorrectly predicted that full employment was approaching in 1937, leading them to advocate for fiscal conservatism.

Today, the desire to reduce budget deficits is not driven by a notion that we have escaped the Great Recession. Rather, voters are fully aware that (even with declining unemployment) a significant amount of growth is required before the United States can be considered to have escaped the economic downturn. In this environment, more short-term deficit spending is needed. The American Recovery and Reinvestment Act, although weaker than necessary, helped stimulate employment and economic growth, as did other spending measures that the Obama administration enacted in recent years. While these programs increased the size of the federal deficit, they actively worked to jumpstart the nation’s economy.

Once the recession is behind us, we can return to the economic policies of President Clinton and balance budgets and even run surpluses. Further, long-term adjustments should be enacted to ensure that revenues align with projected spending for budget items such as Social Security, Medicare, Medicaid, and the military. But in order to avoid the Obama (or possibly, Romney…) Recession of 2013, we should shy away from a complete reversal of temporary expansionary fiscal policies.  

A Balanced Approach to Deficit Reform

Yesterday, the Wall Street Journal published an article highlighting that 80 prominent U.S. CEOs recently announced their suggestions for responsible deficit reduction. These CEOs are calling on Congress to embrace both spending cuts and revenue increases. The CEOs predict that neither party would be able to avoid raising taxes in the coming years.

The statement endorses neither candidate, and it does not put forward a specific tax and spending reform plan. But it does recommend eliminating or reducing tax loopholes and expanding the tax base. Some liberal tax reform organizations are skeptical of the CEOs’ statement. These organizations claim that these individuals’ and their companies’ dependence on tax loopholes and reduced rates secured during the Bush Era.

Although the CEOs’ statement can be criticized for its lack of detail, I think it is a valuable contribution to the current political debate. There is a need for frank debate and the realization that deficit reduction requires revenue increases in addition to spending cuts. Of course, Krugman would disagree with these CEOs for promoting austerity at a time that he believes demands significant deficit spending; however, I am optimistic that these business leaders are at least adopting a realistic perspective on what deficit reduction actually requires of all of us.

http://online.wsj.com/article/SB10001424052970203937004578076253372633058.html

Tonight's Language on China

In tonight’s final presidential debate, I have noticed a new evolution in Governor Romney’s approach toward China. He has continued his specifics criticisms of China’s production of counterfeit products and manipulation of currency; however, in doing so, he is choosing to emphasize partnership over opposition. In previous debates and campaign ads, Romney has stressed the need to be “tough on China.” He also included this toughness in his overall plan for the American economy, a tactic that he did not rely on in this debate. Tonight, although continuing to condemn several specific forms of “cheating,” he has stressed a more collegial approach to our economic partnership with China. Interestingly, Obama has chosen to emphasize the ways in which his administration has been “tough” on China through taking cases to the WTO (and winning), including the infamous tire case from class. The exchange on the issue seems to demonstrate America’s clouded perspective on the world’s most populous country. 

The China Questions

See below for a short NPR piece on five questions that will most likely play a major role in tonight's debate. According to the author, these will be:

• Should China be labeled a "currency manipulator"? 
• Are we narrowing the trade gap with China? 
• What about those jobs being "shipped to China"? 
• What challenge does China's strategic ambition pose for the U.S.? 
• Should we be worried about China's push to modernize and expand its military capabilities?

In light of our most recent class discussions, it will be very interesting to see the debate over the first question. This has been a major component of Romney's "tough on China" approach in lieu of the more overtly protectionist policies that Obama has touted, such as the U.S. tariff on imported Chinese tires; according to this article, however, the concern about Chinese currency manipulation is an outdated one that has diminished as a result of broader economic forces (the recession) and U.S. efforts in 2005 to prevent the practice. 

We will see if Obama will respond to Romney's proposals with these counterarguments. Judging from past performances and campaign ads on the candidates' China policies, however, it is more likely that the exchange will consist of Romney accusing Obama of accommodating "cheaters" and Obama accusing Romney of supporting outsourcing and increasing the trade gap through his career in business.

http://www.npr.org/blogs/itsallpolitics/2012/10/19/163263452/five-debate-worthy-facts-about-china

The Politics of Collective Action from Two Sides

The case of the American Crystal Sugar Company and its employees demonstrates the multidimensional nature of collective action in the United States through the lens of both workers and farmers. The employees of ACSC rejected the company’s proposed contract a year ago, and ever since, ACSC has operated through the use of replacement workers. The interesting component of this situation is America’s domestic sugar industry’s reliance on trade barriers to ensure its survival. Sugar producers in the United States successfully lobby Congress to restrict sugar imports, allowing their market positions to endure.

The union that represents ACSC employees traditionally joins sides with ACSC and lobbies for protective barriers that bolster the company’s position; however, in light of the continued lockout, the union will now lobby Congress to eliminate these obstacles. This effort at retaliation demonstrates that protectionist legislation is vulnerable to fluctuations in political preferences. When one party feels that it has missed out on the gains of legislation, it can retaliate and potentially cause the statutes in their entirety to collapse.

Business (in this case, represented by farmer cooperatives) and labor can both advocate for protectionist barriers that reinforce domestic profits. As the case of the American Crystal Sugar Company may ultimately reveal, however, the continuation of this legislation depends upon the mutual support of all beneficiaries.

For more on this unique situation, see: http://www.npr.org/blogs/thesalt/2012/10/19/163098202/sugar-beet-labor-battles-spill-out-onto-the-national-stage  

The End of American Affluence?

Americans maintain a tremendous optimism about their economic futures – most likely a product of the cultural and political emphases on equal opportunity and the rewards of hard work under our system. This optimism, most would agree, is a positive component of our “national viewpoint.” Some, however, argue that this optimism needs to adjust to the more dismal reality of our economic future. One prominent journalist who would be in this group is Robert J. Samuelson, who recently published “The Withering of the Affluent Society” in the Summer 2012 edition of The Wilson Quarterly. Samuelson’s article, although by no means the most cheerful piece of writing, raises important questions about how Americans should adjust to a future that might not deliver the levels of economic mobility that we are inclined to anticipate.

Samuelson shows that the mid-twentieth century bolstered our confidence in bright economic futures. The “Affluent Society” that arose during the 1950s saw the expansion of a strong middle class. There are two primary types of income mobility: “relative mobility,” which refers to an individual’s change in economic position relative to their parents’, and “national mobility,” which refers to a change in standard of living of an entire nation. In the mid-twentieth century, we grew accustomed to increases in both forms of income mobility.

Recently, however, promises that the future will be brighter and that we will have more than our parents has become more and more hollow. Vice-President Joe Biden infamously remarked recently that middle-class Americans have “been buried” recently (even, as Republicans point out, during Mr. Biden’s party’s time in office). Since 2007, median household income has declined. It was also declining from 2000-2004. America’s characteristic economic optimism must confront this reality, and it may already be doing so. According to Gallup, in 1996, 34% of Americans who did not already consider themselves “rich” believed they would become rich someday. In 2003, that number fell to 31%, and in 2012, it is at 28%. Thus, as time continues, more Americans are realizing that their future and, importantly, their children’s futures, might not bring more affluence. This has led to movements like Occupy Wall Street, which reflect a frustration and pessimism about the economic future.

Samuelson recently produced another article that relates his concern about the withering of affluence to the current election. In Samuelson’s opinion (and I checked, he opts not to vote in elections in order to maintain a level of journalistic neutrality), both candidates are avoiding informing the American people about the reality of times ahead: Obama is neglecting to answer serious questions about the future of Medicare and Social Security while Romney is refusing to provide details as to how his plan to reduce tax rates will affect programs and the budget.

I don’t find this situation surprising. Americans are used to optimistic times. They prefer to hear that it is “Morning in America,” as Reagan framed it, than to hear that difficult economic times are inevitable. This American optimism is a valuable characteristic when it fuels drive and advancement. It is not valuable, however, when it prevents us from confronting the real challenges before us. Candor about future difficulties is the first step necessary in order to confront and overcome problems. And then we can enjoy dreaming about future progress while simultaneously experiencing prosperity in the present-day.

References:

http://www.wilsonquarterly.com/article.cfm?aid=2199

http://www.gallup.com/poll/154619/americans-having-rich-class-years-ago.aspx

http://www.ocregister.com/opinion/romney-374860-spending-obama.html

The Macro Effects of Income Inequality

This NYT article argues that income inequality, the impetus for Occupy Wall Street and a frequent topic of debate in today’s discourse, may harm more than just those at the bottom of the pay scale. Many economists now argue that increasing income inequality is also harmful for overall economic growth. Since the 1970s, inequality in the United States has continued to increase at an alarming rate. Until now, inequality has often been viewed as only dangerous for those in the lowest income groups; however, we are now seeing that inequality is detrimental to a country’s overall competitiveness.

Redistributive policies are the solution to reducing this harmful rise in inequality. But the question that divides liberals and conservatives is: how do these policies affect the economy as a whole? Stiglitz (quoted in this article) and other liberal economists agree with the overall argument that redistribution reduces inequality and produces a more prepared workforce and a society that is more conducive to economic growth. Conservatives, however, contend that redistribution slows growth by reducing incentives to build and invest in business.

My take on the issue is in line with Stiglitz’s. If, in the process of increasing a nation’s overall GDP, trade and economic policies concentrate income in the hands of a relatively small segment of the population (as we have found in the case), government should then redistribute a portion of these gains among the entirety of the population in order to both ensure equity in income distribution and produce an environment conducive to education, trust, and overall growth.