With the economy still struggling five months after the passage of the stimulus bill, critics of the Obama administration are already heralding it a failure. With unemployment topping 9 percent, they argue that the stimulus plan was fatally flawed; that it should have included less expenditure and more tax breaks; that it is impossible to spend our way out of this crisis. Having run up record deficits, the best thing President Obama can do now, they insist, is rein in government spending and cut the deficit. And this argument is not confined to Republicans; even some of the members of the President’s own party are beginning to express concerns about the deficit.
In such a political environment, the possibility that Congress might support a second stimulus bill seems remote at best. Yet history—and a number of well known economists—suggests that this is exactly what we need to do, and do in a hurry.
In the mid-1930s, Franklin Roosevelt found himself under similar pressures. After four years of sustained economic growth and a drop in the unemployment rate of a record nine percentage points, FDR chose to turn away from the novel ideas of British economist John Maynard Keynes and return to fiscal orthodoxy by cutting government spending. The result was an economic contraction and the onset of the “Roosevelt recession.” Unemployment shot up, the stock market lost roughly 30 percent of its value, and corporate profits plunged. FDR paid a heavy price at the polls in 1938, and it would not be until the onset of World War II—and the massive increase in government spending that accompanied it— that economic activity would return to pre 1937 levels.
Critics of the New Deal and of President Obama’s economic policies frequently point to this as an argument against New Deal style programs, insisting that it was not the New Deal but World War II that got us out of the Great Depression. They infer from this that government spending to stimulate the economy “does not work.” What they fail to see is that World War II did not mark the end of the New Deal Keynesian experiment, but rather its beginning and ultimate fulfillment.
The lessons from the past suggest that a second stimulus bill may be the single most important step we can take towards an economic recovery — and that a further cut in spending at this critical juncture could be disastrous.
David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.