Over the past several weeks, President Barack Obama has repeatedly stated that our current economic situation is the worst since the Great Depression. But as Amity Shlaes, author of The Forgotten Man: A New History of the Great Depression points out, some aspects of the economy were worse then than now.
“During the Great Depression, one in four people were unemployed,” said Ms. Shlaes during a recent interview. “There weren’t many two-income families. If the breadwinner was unemployed your family was unemployed whereas now if you’re married it’s terrible that you need both incomes but at least one partner may remain employed.”
Still, there are some parallels between our current economic conditions and those of the 1930s. Some of the solutions being proposed now also can trace their roots back to the days of Roosevelt. The idea that government can provide the fix to an economic crisis was first born out of Depression-era policies.
“It was [President Herbert] Hoover who created the Reconstruction Finance Corp. upon which some iterations of the TARP are modeled,” said Ms. Shlaes. “The idea of pumping liquidity through various banking tools comes out of our experience with the New Deal. The concept that you can throw in a lot of social reform when you have a credit crisis is New Deal. When [White House Chief of Staff] Rahm Emmanuel says something to the effect that “a crisis is a terrible thing to waste” that tracks right along with the New Deal.”
Even before President Obama was sworn in there were comparisons to Roosevelt including a Time magazine cover made to show Obama as FDR with the headline “The New New Deal.” Comparisons to FDR have been almost inevitable for every president since 1945 according to Ms. Shlaes because of the transforming effect he had on presidential politics.
“FDR set the format for the modern government and for the modern Democratic party which said we will identify certain constituent groups and we will serve them loyally with gifts such as entitlements,” said Ms. Shlaes. “That pattern is not good for the budget but it also is not good for the people because it is divisive – it says you’re favored and you’re not. My book is called The Forgotten Man and it says there is always someone who doesn’t happen to fall into that group who is not rich but doesn’t get a mortgage break or financial aid either. Many Americans would like to see the country be econ-blind, color-blind, and in every way treat every man and woman the same. That’s classical liberalism and that’s what we gave up with FDR. The Forgotten Man traces how specifically FDR did this defining [of special interests] in the 1936 election. All presidents have had to struggle with that.”
One of the heroes in The Forgotten Man is Andrew Mellon, who was Secretary of the Treasury under Presidents Warren Harding, Calvin Coolidge and Herbert Hoover. Mellon is someone from whom we can learn a great deal in part because of how he was able to place the events of the Great Depression into the context of American economic history.
“He was under assault by the federal government for tax reasons, for antitrust reasons, and for various other pretexts that governments prosecute during downturns,” said Ms. Shlaes. "He wasn’t a bad man. Most of what he did was totally within the law. One of the themes of the New Deal is that crisis is forever and there would always need to be more programs. Reporters approached Mellon when he was turning 80 during one of his trials and said, ‘Mr. Mellon, a comment on your 80th birthday.’ They may have expected something really negative – here he was an old man and in court during the Depression. Instead Mellon said, that The Great Depression is just 'a bad quarter hour' in the glorious history of American economic growth. That was a rebuttal to those who were saying crisis was permanent and therefore required permanent bailout. Mellon was also saying I will not have my context altered by the political elite. Mellon was thinking to himself: I feel proud to say the Depression is just a little part of the American story because that is my forecast, and I have a pretty good record of forecasts."
“We often talk about how FDR was a light in the dark. Mellon was also a light – to those who thought about business, about the small entrepreneur. It was a wonderful thing for Mellon to say at that gloomy moment in the mid-thirties.”
When asked, Ms. Shlaes also offered a few thoughts for President Obama on how to deal with the current economic crisis based on the lessons learned from the New Deal.
“Crisis perpetuates itself. To assume that all the laws of economics no longer hold just because of this crisis is probably not the right move. What we’re after is a format for growth of the economy. Politically this argument will be considered absurd, but the reality is if we made the U.S. relatively competitive by cutting the capital gains tax, the corporate tax and lower income taxes, and by establishing thorough, reliable regulation of financial markets, you would see growth. We would be able, at least conceivably, to put this period in context as our own ‘bad quarter hour’ as Mellon said. What we run the risk of with the current policy, Democrat or Republican, is prolonging the current downturn by treating the whole experience as a national crisis, almost a personal crisis. It is New Deal narcissism to turn this into something about us as if we’re alone in the world. We’re not alone in the world. We have to compete with Europe and Asia and to indulge all our desires for reform when we need to stay relatively competitive is probably unwise and too costly.”
Click here to listen to the interview with Amity Shlaes.
Amity Shales – Photo courtesy of the Council on Foreign Relations