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Obama, in His Failure to Learn a Lesson of History, is Forcing All of Us to Relearn the Lesson

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It’s been a perennial argument on BC Politics as to what were the causes of the Great Depression and why it lasted so long. The conservatives blame FDR and the liberals defend him. So I decided to look again, and I found a few interesting, indeed disturbing, parallels between the political worlds of then and now.

Now most of us realize that the Great Depression was actually a double-dip depression. We were largely out of it by 1936 with the implementation of FDR’s New Deal. Here’s a description of what drove the initial recovery…and why it didn’t last:

The common view among mainstream economists is that Roosevelt’s New Deal policies either caused or accelerated the recovery, although his policies were never aggressive enough to bring the economy completely out of recession. Some economists have also called attention to the positive effects from expectations of reflation and rising nominal interest rates that Roosevelt’s words and actions portended. However, opposition from the new Conservative Coalition caused a rollback of the New Deal policies in early 1937, which caused a setback in the recovery.

Hm. A “new” political coalition, and a conservative one at that, forced a rollback of New Deal policies. What kind of conservatives were these who belonged to this

Conservative Coalition?

In the United States, the conservative coalition was an unofficial congressional coalition bringing together the conservative majority of the Republican Party and the conservative, mostly Southern, wing of the Democratic Party. It was dominant in Congress from 1937 to 1963 and remained a political force until the mid 1980s, eventually dying out in the 1990s.

Okay, so they were the conservative wing of Congress, and this was in the days when there were liberals and conservatives in both parties. But what kind of policies did the Conservative Coalition support? Well it was something called a “Conservative Manifesto” issued by one of the leaders of the CC. It called for the following:

1. lowering taxes on capital gains and undistributed profits,
2. reducing government spending and balancing budgets,
3. restoring peace to the relationship between labor and industry,
4. resisting government competition with private enterprise,

5. recognizing the importance of profit in private enterprise,
6. protecting collateral as a prerequisite for credit,
7. reducing taxes,
8. maintaining states’ rights,
9. aiding the unemployed in an economical and locally responsible manner, and
10. relying on American free enterprise.

Now these are rather sugar-coated as political statements and goals are wont to be, because the earlier reference to the Conservative Coalition states that the Manifesto included several statements of conservative philosophical tenets, including the line “Give enterprise a chance, and I will give you the guarantees of a happy and prosperous America.” The document called for a balanced federal budget, state’s rights, and an end to labor union violence and coercion.

Now this is where I started holding my head in my hands. A liberal president is elected to clean up an epic economic mess left by the preceding conservative administration, and he passes policies to fix the mess. A new conservative movement that is strongly opposed to the liberal president’s policies, and they are dead set in their support of things like tax cuts (and capital gains cuts), states’ rights, union marginalization; and even though the Republican core of their organization is the minority party in Congress, they are able to get conservative Democrats to support them and use procedural obstruction to get their way in Congress!

Is this sounding familiar yet? But what follows is really what bothers me, because FDR was never able to ever fully implement his New Deal policies thanks to the Conservative Coalition. It took WWII to do that!

America’s entry into the war in 1941 finally eliminated the last effects from the Great Depression and brought the unemployment rate down below 10%. In the U.S., massive war spending doubled economic growth rates, either masking the effects of the Depression or essentially ending the Depression. Businessmen ignored the mounting national debt and heavy new taxes, redoubling their efforts for greater output to take advantage of generous government contracts.

I’ve said for some time that WWII was the greatest taxpayer-funded stimulus in history and as such it was quite successful, and the reference seems to validate my claim. Of course, not all economists agree about all this. But the Keynesian view fits the entire process much more closely than the view of the Austrian school that has to tap-dance to explain away this or that problem.

About Glenn Contrarian

White. Male. Raised in the deepest of the Deep South. Retired Navy. Strong Christian. Proud Liberal. Thus, Contrarian!
  • Gordon Trenchard

    Your source is Wikipedia? Seriously?

    And the economic theory you repeat from them isn’t current, it’s totally out of date. For at least the last decade the general belief among economists is that Roosevelt’s spending took a serious recession and turned it into a depression.

    Gordo

  • joe

    I think Obama can bring us out of this depression if only he could be Fdr. Unfortunately Obama was probably afraid of been branded a socialist and therefore gave the money to the bankers and the private sector who sat on it, instead of using the public sector to get us out of the depression. The stimulus money could have taken us out of the depression if only Obama had used some of the money for government projects and given the rest to us the consumers and asked us to go shopping.

  • sorin

    Yeah i guess wikipedia or google is the source. :) Good luck

  • troll

    the more that I read about the Depression years following the trough with their high growth rates the less apt I find comparisons with today’s stalled-out economy

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Whatever the case may or may not be, Glenn, it is a good thing to see you writing an article on a subject that has been hotly disputed in the comments section. That’s how it should be, and an attempt at articulation is always the best start.

    And now that you’ve opened the proverbial Pandora’s box, may the best man or woman win!

  • Glenn Contrarian

    Thanks, Roger – I’ll take that at face value.

  • Glenn Contrarian

    To the editor –

    The fifth paragraph – the one that begins with “In the United States” – should be blockquoted since it is entirely a quote. The fault is mine since I used italics instead of blockquotes and you did your best to take care of it. I’ll try to remember to use blockquotes in the future.

    Thanks –
    Glenn

  • Glenn Contrarian

    For those who scorn my use of the Wikipedia, you should bear in mind that the writers provide references. For instance, if you’ll check, the first paragraph that I quote is referenced from a book called Franklin D. Roosevelt and the New Deal (1963) p. 262-63, by William E. Leuchtenburg.

    I realize that when you don’t what my article says, it’s a lot easier for you to use a broad-brush accusation and simply dismiss the whole because I used the Wikipedia. BUT you’re being too lazy by half in that you’re not checking to see what references are used by the Wikipedia.

    Next time, dig a bit deeper before you start posting assumptions…because I’ll call you on it every time.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    I meant it, Glenn, and no, I’m not your enemy.

  • http://www.presidency.ucsb.edu/data/budget.php Kenn Jacobine

    Glenn,

    Your theory has so many holes in it I do not know where to start.

    Here is a good one though. You say conservatives formed a coalition to force FDR to accept spending cuts. You also state that these same conservatives were for tax cuts. Yet the data (click on my name) indicates that federal receipts continued to increase through the decade. The fact is that FDR raised taxes enormously to pay for his programs. You give more credit to the conservative coaliton than it deserves.

    After 3 years of FDR’s policies the economy experiencing another downturn is a testament to the fact that all he did was reinflate the bubble. If the economy was that vulnerable to government spending cuts than the recovery was an illusion. All the malinvestment from the easy money policies of the Fed in the 1920′s had not been liquidated like it needed to be for the economy to move on.

    Obama is making the same mistake today. Spending cuts will bring about liquidation and recovery. He doesn’t have the sense or courage to do it though.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    … then the recovery was an illusion.

  • Glenn Contrarian

    Kenn –

    I’m in a bit of a hurry right but I’ll help educate you on the numbers when I get the chance. But I do know this – your “bubble” theory cannot stand for the simple reason that our WWII industrial buildup was a government-driven economic stimulus writ large, and you know it. If your “bubble” theory were true, then we would have been driven into an even deeper depression as soon as the war ended.

    And you know it.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Wasn’t there a dire need in the immediate aftermath of the war for industrial production in all sectors to rebuild the war-devastated nations (and the corresponding demand)? And which country but America could better fill the need?

  • James Pound

    The government can get us out of a recession Hmm
    The government spends money they initially took from us. hmmm
    If they did not take money from us there arguably would be more money to spend.
    If we had more money to spend people would spend it.
    If people spend their are jobs and more money to spend.
    Wash Rinse Repeat

    So the government takes our money (taxes (aka legalized theft)) and causes us to be dead broke after bills and the higher cost of things, we don’t spend, jobs get lost, government spends money (our money) to create new jobs and says it is doing us a favor. Given that their are inefficiences in any transfer of money, wouldn’t it be better to NOT give the government money and just spend it ourselves, thus staving off the depression before it starts?

    Or is it that the government wants to feel useful so they create a problem (recession) via taxes that they can then solve via stimulus.

    Hmm

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Sounds like a vicious circle to me.

  • Kenn Jacobine

    I was in the Smokey Mountain National Forest tonight. Contractors were there repaving a road that was perfectly fine. Your tax dollars wasted.

    Glenn,

    Did Americans who worked during WWII spend their money on consumer goods? No. There was rationing and a wartime economy. People saved their money and this is what was needed all along to spur recovery. What was produced during the war was a bubble. It was called armaments. But people saved their money and thus capital was available to expand the economy after the war.

    BTW – we could do the same thing today without war. Its called market based (higher) interest rates, and allowing the malinvestment to be liquidated. In this way people would have incentives to save more money to rebuild the economy and businesses and investments that are bogging balance sheets down would be brushed aside thus allowing winner businesses to hire again. To believe that we can solve our problems by comtinuing with the same policies that got us into trouble in the firat place is insanity.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Was that the only source which energized American economy after the war, just individual savings?

    Just asking.

  • http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html Kenn Jacobine

    Why don’t any of you liberals scream out about the practices of the Fed? I mean because of Ron Paul the Fed is now divulging the extent of its corruption. $1.2 trillion additonally was given to Geithner’s buddies on Wall Street.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Don’t count me among that illustrious group. I was always opposed to Obama’s appointments of the Wall Street guys on general principle.

    And insofar as Greenspan and Bernanke are concerned, I’ve always seen then as engaging in Orwellian doublespeak.

  • http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html Kenn Jacobine

    Well, New Deal programs which fixed prices artificially high like the NRA and AAA were long gone.

    Keynesians believed a mammoth stimulus was needed after the war in order to employ all the returning soldiers. Instead government spending was slashed and the economy took off. The exact opposite happened.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    After the war? Aren’t you stretching it a bit? Why would Keynesian economics be of any use when it’s been specifically designed to to deal with crises?

  • Glenn Contrarian

    Roger –

    Wasn’t there a dire need in the immediate aftermath of the war for industrial production in all sectors to rebuild the war-devastated nations (and the corresponding demand)? And which country but America could better fill the need?

    This is actually a quite common misconception – but Britain’s industrial sector was anything but a shambles. While the Battle of Britain did some damage, overall, Britain’s industrial center was hardly hampered at all, and all through the war they boosted their output as much as they were able.

    While her northeastern quarter was devastated, the rest of France did not suffer too greatly – Paris and its surrounds, in particular, was also largely untouched – I strongly recommend a great historical book called “Is Paris Burning”, which showed how Hitler was demanding that Paris be blown to bits before it was surrendered, but the German general in charge of Paris refused to do so…which was why the liberating troops still had their parade through the Arch de Triomphe.

    After the first couple months of disaster in Operation Barbarossa, Stalin ordered the gargantuan task of moving all that was left of Soviet industry east of the Ural mountains…and they did it.

    Even Italy and the rest of southern Europe didn’t suffer that badly – yes, there was significant damage, but nothing like the devastation that stretched from the Rhine to the line that stretched from the outskirts of Leningrad to the outskirts of Moscow to the banks of the Volga.

    While Europe’s manufacturing sectors suffered greatly, those same sectors bounced back very quickly. The great German armaments maker Krupp is known today as Thyssen-Krupp (and you’ve probably ridden in many Thyssen-Krupp elevators). The Mitsubishi cars that go on our highways are direct descendants of the Mitsubishi Zero that shocked our ill-prepared pilots for the first several months of the war. And then there’s the Volkswagen, the ‘people’s wagon’ that was first manufactured in Nazi Germany.

    The point?

    The rest of the world had suffered greatly – but human beings show a great capacity for recovery. Indeed, the manufacturing sectors of nearly all the developed world recovered fairly quickly. We were the best off, of course, and we had the most prestige…although even by the end of the war we were still not always making the best of everything – our tanks really sucked, but we just had a lot more than Germany could field on the western front. Both Germany and Japan were just starting to produce submarines significantly better than ours. We all know that the ME-262, if Hitler had not meddled, might have changed the entire air war in Europe – we had nothing to compare, not even the P-51 Mustang.

    Here’s a site that shows the GDP’s of the different nations from 1938-1945.

    Yeah, WWII is my best subject – and Kenn is blowing Austrian-school smoke.

    I’ll end with a little history of the Marshall Plan:

    The Marshall Plan was originally scheduled to end in 1953. Any effort to extend it was halted by the growing cost of the Korean War and rearmament. American Republicans hostile to the plan had also gained seats in the 1950 Congressional elections, and conservative opposition to the plan was revived. Thus the plan ended in 1951, though various other forms of American aid to Europe continued afterwards.

    The years 1948 to 1952 saw the fastest period of growth in European history. Industrial production increased by 35%. Agricultural production substantially surpassed pre-war levels. The poverty and starvation of the immediate postwar years disappeared, and Western Europe embarked upon an unprecedented two decades of growth that saw standards of living increase dramatically. There is some debate among historians over how much this should be credited to the Marshall Plan. Most reject the idea that it alone miraculously revived Europe, as evidence shows that a general recovery was already underway. Most believe that the Marshall Plan sped this recovery, but did not initiate it.

    Who opposed the Marshall Plan? The Republicans. I guess Kenn will now claim that the economic stimulus called the Marshall Plan actually hindered growth in Europe.

  • Glenn Contrarian

    Kenn –

    Keynesians believed a mammoth stimulus was needed after the war in order to employ all the returning soldiers. Instead government spending was slashed and the economy took off. The exact opposite happened.

    Yes, spending was slashed in the several years following WWII, from 1956-1951, and in 1952 the government started to significantly increase spending once more. Funny thing is, during the years of government austerity our GDP was ALSO slashed.

    So…Kenn – if our GDP also dropped greatly – as it did – how, exactly, can you say that our economy “took off”?

    Hm?

    This is from a chart showing the GDP per capita from 1940-1970:

    1942 11,999.11
    1943 13,771.49
    1944 14,705.52
    1945 14,381.68
    1946 12,675.67
    1947 12,323.25
    1948 12,645.35
    1949 12,364.94
    1950 13,224.86
    1951 14,007.01
    1952 14,296.55
    1953 14,709.99

    And here’s the GDP from those same years, in millions:

    1942 1,618,200
    1943 1,883,100
    1944 2,035,200
    1945 2,012,400
    1946 1,792,200
    1947 1,776,100
    1948 1,854,200
    1949 1,844,700
    1950 2,006,000
    1951 2,161,100
    1952 2,243,900
    1953 2,347,200

    And here is a chart of our government’s budgets for those years.

    Yep – government spending dropped dramatically from 1946-1951…and so did our GDP. But I guess in Kenn’s world, this is known as an economy “taking off”.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    You’re being flippant, Glenn. Neither Germany, France or Japan could possibly compete. US had a monopoly on markets in terms of resources, labor pool, not to mentioned having suffered no devastation to speak of. Britain was no match either, because oil had become the major source of energy, while the UK’s energy economy was coal-based, not only inefficient but quickly becoming obsolete. If you want me to provide you with sources, I certainly can, but I don’t think you’re that ignorant

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Cont’d

    It wasn’t until mid seventies that US hegemony in markets was seriously challenged, by Japan and Germany, in electronics and automobile industries. Never mind France, because you bringing it up only displays your ideological bias. It was since then that workers wages started being frozen, which trend continues till the present — way before Reagan time. American business enterprise could no longer afford to be “good corporate citizen” because it was dog-eat-dog time. The rest is history, mergers and acquisitions during the Reagan era being nothing else but an icing on the cake, culminating in what’s commonly referred to nowadays as “global economy.”

    So get off your high horse, Glenn, and don’t be giving me any history lessons. Furthermore, I don’t appreciate at all you being disparaging to Kenn, however you may disagree. Kenn is not a dummy, and whatever view he brings to the table, it deserves consideration, to say the least.

    You say you pride yourself on being a gentlemen and above board. Well, you haven’t been living up to that credo of late. It’s time for a change.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    … get of …

  • http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html Kenn Jacobine

    There are lags economically speaking. The point is that when all the G.I.s came home there was not massive unemployment like the Keynesians predicted. By the late 40s GDP began to take off. Understand that government spending is included in the GDP number. So GDP is not the most accurate indicator of an economy’s health.

    You are really weird about government stimulus. It is like you believe our economy can never be healthy without it. You totally ignore the growth we experienced in the 19th Century without it. The only times we had economic downturns was when the government inflated the currency and even then it had the good sense to let the economy correct itself. Most crisis were over very quickly. None lasted as long as the Great Depression.

  • Glenn Contrarian

    Roger –

    Did you not see what I pointed out? America was number one in the years following WWII – no argument there – but the manufacturing sectors of the rest of the world was not damaged beyond repair, but instead recovered fairly quickly.

    We had NO ‘monopoly’ in terms of resources or labor pool – far from it! You know better than that – you’re just using hyperbole.

    I’m first to say we suffered no devastation – but I’m also pointing out how quickly the rest of the world recovered. Furthermore, we were NOT the only ones who didn’t suffer any damage – look at Spain, Portugal, Switzerland…and Sweden and Norway didn’t suffer much at all.

    Most Americans have the misconception that we were somehow the world’s sole supplier of everything in the years following WWII – but we were far from it. We were the biggest manufacturer, true – but it would be folly to think that the rest of the world couldn’t have gotten along without us.

  • Glenn Contrarian

    Gee, Kenn – are you suddenly backing off from “the economy took off”?

    I never said our economy can’t be healthy without stimulus. I am point out, however, that austerity measures don’t work as advertised, whereas stimulus measures – when used as emergency measures as Roger pointed out are their purpose – DO work as advertised…as long as they’re big enough.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    You say quickly, I say not.

    So what’s your bloody point?

  • Glenn Contrarian

    Roger –

    I say quickly in the context of what they had just gone through.

    And I’ve noticed that even while you’re disagreeing with me, your tone is not insulting. I do appreciate that.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    OK, Glenn, but why is “quickly” important to you here? What difference does it make to your argument? Again, what’s your overall point?

  • http://blogcritics.org/writers/dr-dreadful/ Dr Dreadful

    You say quickly, I say not.

    Who says potahto?

  • Clavos

    Let’s call the whole ting off…

  • Clavos

    or thing…

  • http://blogcritics.org/writers/dr-dreadful/ Dr Dreadful

    You live too close to the Caribbean, Clav. It’s starting to show, man.

  • Clavos

    Mon, Dread, Mon…

  • Clavos

    An interesting perspective on Obama’s dwindling support among Iowa Democrats, penned by Steffen Schmidt, an Iowa State Poli Sci prof who is himself a Democrat. The op-ed piece was published in The Des Moines Register.

  • Clavos

    Apropos of the above, Commentary today notes that Obama as hit a new low in the latest Rasmussen Presidential Index poll of “likely voters:” 45 percent “strongly disapprove” of the job he’s doing, while 56 percent disapprove overall.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    It’ll mean nothing to our diehards.

  • http://blogcritics.org/writers/dr-dreadful/ Dr Dreadful

    Clav:

    Mon, Dread, Mon…

    You really want to argue about this with a guy who calls himself “Dread”? :-)

  • http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html Kenn Jacobine

    Glenn,

    Your poition is what Hayek called “the fatal conceit”. How can any mere mortal know how big the stimulus should be? Markets never operate well when bureaucrats are directing them. That is the whole point, without market mechanisms like supply and demand it is impossible to know what is the most efficient and effective use of resources. That is why we have booms and busts because interest rates (supply and demand of/for money) are not determined by the market but by the central planners at the Fed.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    It’s futile as far as I’m concerned. I posed a simple question and am still to be graced with a semblance of response.

  • Glenn Contrarian

    Kenn –

    Then what would you call it when just after the Conservative Coalition forces FDR to roll back into the second dip of the Depression, and when Obama’s stimulus money ran out and the Republicans wouldn’t consider a penny more in revenue increases, we start going back down into the second dip of the recession?

    Funny how your so-called “bubble” always seems to burst after grand austerity measures are implemented….

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Will you ever get around to answering a simple question?

  • Clavos

    An interesting comparison of the accumulation of debt by the Bush and Obama administrations, using figures from the Department of the Treasury.

    Whoda thunk? Turns out that, just as we taxpayers/citizens had noticed, the present administration is seriously outspending the previous one.

  • Clavos

    Yet we still are sliding into a double dip — or worse…

  • http://blogcritics.org/writers/dr-dreadful/ Dr Dreadful

    Uh-huh, Clav, so politicians spend money like it’s going out of fashion because the law says they can; some are better at it than others. What else is new?

  • Clavos

    There is nothing new under the sun, Doc — not in several millenia, at least.

    Just setting the record out in the light of day — nothing more

  • http://blogcritics.org/writers/dr-dreadful/ Dr Dreadful

    Did you set it out four years (or eight years) ago, Clav? To show how much better at it than Big Willie Dubya was?

    The next president will likely find himself or herself spending even more profligately, because they won’t have a clue what else to do about the inevitable crisis they’ll inherit.

    Nothing will change – in fact it will only get worse – with an economy structured the way the US’s is, in which the government has to spend more than it brings in just to pay the bills.

    And in which the only way to even hope to change that is to gut Medicare and Social Security, which the powerful (and growing) Silver Horde will not allow; and defense, with regard to which the average Republican politician will scream in horror if one so much as suggests that sewing one fewer brass button on a marine’s dress blues might be a realistic way to save money.