“End” of the Recession No Time to End Government Spending

By Roosevelt Institute |

fdr-obama-taleNow’s not the time to choke off the economy’s lifeline.

In April 1938, FDR addressed Congress on stimulating the economy. In his words:

“Let us unanimously recognize the fact that the Federal debt, whether it be twenty-five billions or forty billions, can only be paid if the Nation obtains a vastly increased citizen income. I repeat that if this citizen income can be raised to eighty billion dollars a year the national government and the overwhelming majority of state and local governments will be ‘out of the red.’ The higher the national income goes the faster shall we be able to reduce the total of Federal and state and local debts. Viewed from every angle, today’s purchasing power — the citizens’ income of today — is not sufficient to drive the economic system at higher speed. Responsibility of government requires us at this time to supplement the normal processes and in so supplementing them to make sure that the addition is adequate. We must start again on a long steady upward incline in national income.”

“All the energies of Government and business must be directed to increasing the national income; to putting more people into private jobs; to giving security and the feeling of security to all people in all walks of life.”

If I were the head of the US government, the first thing I would do would be to introduce a Job Guarantee program and set about restoring jobs and a living income to those who are without either. This would immediately boost aggregate demand and give business firms a reason to start investing and producing. You can’t do this by “internally deflating” your economy a la Ireland or Estonia.

Sign up for weekly ND20 highlights, mind-blowing stats, event alerts, and reading/film/music recs.

Franklin Delano Roosevelt understood this better than any of our current leaders. He knew that workers’ wages are not just a cost but a source of INCOME. The mainstream economics profession continues to ignore the income side of the wage deal. Supply and demand are not independent variables, just as fiscal policy cannot be viewed outside the broader construct of the economy as a whole. Mass unemployment occurs when there are not enough jobs and hours of work being generated by the economy to fully employ the willing labor force. This is because there is insufficient aggregate spending. Government spending is the one obvious remedy.

He might not have been an economist, but FDR intuitively understood the concept of the “fallacy of composition.” One firm might be able to cut costs by lowering wages for their workforce, and because their demand will not be affected they might increase hiring. But if all firms do the same thing, total spending falls dramatically and employment drops.

Without the current level of fiscal support, the US economy would be in much worse shape. The obvious conclusion is that more is needed to reduce unemployment further. But our current crop of leaders continue to proclaim the need for the US to outline a “credible path” for deficit reduction in order to appease the bond gods, especially now that we’re officially “out” of a recession. (Try to explain that to the millions who remain unemployed.)  It’s a sad reflection of our priorities as a society.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

The Roosevelt Institute brings together thousands of thinkers and doers—from emerging leaders in every state to Nobel laureate economists. We reimagine the rules that guide our social and economic realities. Follow us on Twitter @rooseveltinst and like us on Facebook.