The key difference between then and now is a president who learns from his economic mistakes.
Two recent articles in the New York Times make reference to the perilous state of the US economy and the possible political consequences for President Obama in 2012. In a piece entitled “Employment Data May Be the Key to the President’s Job,” Binyamin Appelbaum notes that no American president since FDR has won reelection with an unemployment rate higher than 7.2 percent on election day. He goes on to observe that, as most economists agree, we are unlikely to see a significant drop in the current rate over the next 12 to 18 months. President Obama must defy this historic trend if he wishes to keep his job.
In his editorial “The Mistake of 2010,” Paul Krugman is similarly pessimistic about the state of the US economy and the prospects for significant gains in employment over the coming year. He takes issue with the Federal Reserve’s recent assertion that quantitative easing has avoided the mistake that the Fed made in 1937. At that time, out of fear of inflation, it engaged in what Krugman calls a “premature fiscal and monetary pullback that aborted an ongoing economic recovery and prolonged the Great Depression.” Krugman insists that not only was the original fiscal stimulus not large enough, but thanks to the deficit hawks on Capitol Hill and elsewhere, conventional wisdom has it that public enemy number 1 is no longer unemployment, but the deficit. The tragic result is that the possibility of further spending to stimulate the economy has all but vanished from the public discourse. Seen from this perspective, he argues that we have already repeated a version of the mistake of 1937 by withdrawing fiscal support much too early. He also fears that pressure from conservatives and European central banks over possible inflation may lead the Fed to reverse course and raise interest rates, even though we have a long way to go before we pull ourselves out of the current economic malaise.
Krugman calls all of this the “economic mistake of 2010,” which he likens to a partial replay of the Great Depression. But there is one important difference. In the “Roosevelt Recession” of 1937-38, FDR and his economic advisers were quick to recognize their mistake. Instead of stubbornly holding course, they promptly reversed themselves and went back to Congress in the spring of 1938 to demand a massive increase in government spending. This spending was to put some of the millions who had lost their jobs due to the misguided policies of 1937 back to work. Within a few months, the downward spiral that was initiated by the 1937 pullback was over and the economic recovery — that had been running at an average annual rate of 14 percent between 1933 and 1937 — resumed.
Sadly, it seems highly unlikely that this President and Congress will draw the same lesson from the recession of 1937-38 that FDR and his advisors drew from their experience. Steeped in a bitter partisan divide and arguing not about how much the government should spend, but rather about how much it should cut, there appears little chance that we will see any meaningful attempt to alleviate the plight of the millions of Americans still suffering the burden of unemployment. With such gridlock in Washington, perhaps we would all do well to reflect on what FDR said as he struggled with those who criticized his policies and demanded he cut back on the New Deal:
Governments can err, Presidents do make mistakes, but the immortal Dante tells us that divine justice weighs the sins of the cold-blooded and the sins of the warm-hearted in different scales. Better the occasional faults of a Government that lives in a spirit of charity than the consistent omissions of a Government frozen in the ice of its own indifference.
David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.