Saturday, January 24, 2015

My Economic rant for the day.........

Pragmatism is indeed an American tradition/philosophy and many a president has deferred to such a policy in their tenure. FDR was no exception. However when one digs past the ‘myth’ that encapsulates the 32nd president it is evident that there are many fault lines that run through his presidency. I won’t get into his abuse of democracy in loading the Supreme Court with judges favourable to his political stance, or his anaemic response to the Holocaust, nor will I address the way he was consistently manipulated by Stalin in a series of dealings that set the stage for the Cold War. He did however have the foresight to realize that the US was the ‘Arsenal of Democracy’ and endeavoured despite much local opposition (many of whom argued along pragmatic lines) in assisting the UK and later the USSR (via the Atlantic Charter, Cash and Carry, Lend Lease etc) in their war efforts. This in spite of a popular (and arguably utilitarian) belief that such intervention was not necessarily in the best interests of the nation.

However there is much debate surrounding the efficacy of the New Deal, an initiative driven by an early form of Keynesian deficit spending, in turning around the economy. To begin with many people believe erroneously that FDR’s predecessor Herbert Hoover was a do-nothing President who steadfastly argued that the economy would turn around on its own. This is not the case. Hoover intervened significantly – he raised the top tax bracket from 25% to 63% (an increase that Obama can only dream about) and upped corporate tax. Like FDR (with the TVA program) Hoover championed big construction projects (most noteworthy the Dam that bears his name today). He greatly increased federal building programs and through his support of the Federal Farm Board provided the foundation for the Agricultural Adjustment Act (a cornerstone of the New Deal). These attempts at fiscal activism did not help, neither did the protectionist Smoot-Tawley Tariff that was designed to safeguard local US industry.

Hoover was an interventionist at heart and the record shows clearly that he clashed with Treasury Secretary Andrew Mellon, who favoured a hands-off-approach during the ten years in which he held this post.
What Roosevelt did was extend the policies of Hoover in an attempt to increase consumption. The economy did improve (but then the base was so low to begin with) but unemployment rates continued in the double digits until 1942 when the war effort was in full swing. US GDP rates finally matched their 1929 levels but this did not occur until 1937 and then subsequently dipped again when the US went into a secondary recession (at the time when the New Deal was in full swing). Also private consumption remained low (Wasn’t this the point of the New Deal?).

In researching FDR’s economic initiatives it appears as though many of the policies were cosmetic and made more sense politically than economically. The nation had to be assured that government was working for them and that’s what Roosevelt did. However the Depression dragged on for a considerable amount of time and the New Deal (following on from Hoover’s proto-‘New Deal’) seems to have delayed the natural recovery that is evident with all economic cycles (and that Obama and co. disingenuously take credit for in today’s context)

In the early 1920s, 1960s and 1980s significant economic downturns were cut short by tax reduction policy (+ managed spending). This however was not the policy followed by either Messrs Hoover or Roosevelt.
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