For those familiar with the New Deal, recent economic reports showing that the recovery is slowing, coupled with the refusal of the Senate to pass legislation (which President Obama supports) to extend unemployment benefits and provide additional federal aid to America’s struggling cities and states for fear of adding to the federal deficit sound like history repeating itself.
In 1937, after five years of sustained economic growth and a steadily declining unemployment rate, the Roosevelt Administration began to worry more about possible inflation and the size of the federal deficit than the ability of the economy to sustain the recovery. As a consequence, in the fall of 1937, FDR supported those in his administration who advocated a reduction in federal expenditures (i.e. stimulus spending) and a balanced budget. The results — which included a massive reduction in the number of people employed by such programs as the WPA — were catastrophic. From the fall of 1937 to the summer of 1938, industrial production declined by 33 percent; wages by 35 percent; national income by 13 percent; and not surprisingly, the unemployment rate rose by roughly 5 percentage points, with an estimated 4 million workers losing their jobs.
The economic downturn caused by the decline in federal spending was commonly referred to as the “Roosevelt recession,” and to counter it, FDR asked Congress in April of 1938 to support a substantial increase in federal spending and lending. Unlike the current situation, Congress backed FDR’s request, and as a result, the recovery was soon underway again.
Equally important, the lessons drawn from the 1937-38 recession convinced FDR that deficit spending and monetary expansion were critical to economic recovery. In essence, the Roosevelt Administration, through hard experience, finally endorsed Keynesian economics, and over the course of the next seven years, government spending on the economy — increasingly fueled by the demands of World War II — would grow to unprecedented levels, all but wiping out unemployment (which fell to below 2 percent by 1943) and turning the United States into a global super-power in the process.
Many economists agree that there is a real danger that the reluctance of Congress to pass even the modest measures of new spending called for recently will not only stall the recovery but also lead to a possible double dip recession. The lessons from 1937-38 certainly back this assessment, but unfortunately, it appears that the deficit hawks in Congress are more interested in playing on people’s fears and lack of understanding of the federal government’s role in the economy than in learning from the past.
President Obama is right to back this new round of spending, but if he is to overcome the reluctance of those even in his own party to add to the federal deficit, he must do more to convince the American people, as FDR did, that deficit spending during a major economic crisis is not only necessary and right but can also lead to an extended period of economic expansion and prosperity. If there is any lesson to be learned from the years 1933 to 1945, it is surely that — just ask any member of the Greatest Generation.
David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.