Echoes of the transformative presidency of Franklin Delano Roosevelt are everywhere. The European Commission’s Ursula von der Leyen pledges a “Green New Deal” to help revive the EU economy; Britain’s prime minister Boris Johnson has cast his plan to get Britain moving again as his own version of the 1930s government stimulus programme.
The history of the Depression, which helped birth modern macroeconomics through the scholarship of John Maynard Keynes and Milton Friedman, has often been consulted in times of economic crisis. Some economists label the aftermath of the 2008 financial crisis the Great Recession as an echo of that most totemic of crises. The writings of John Steinbeck, who chronicled the lives of workers in the Dust Bowl, have kept the imagery alive, as did the photographers hired to capture the results of the agricultural stimulus provided by the New Deal.
We should be suspicious of modern day politicians who lay claim to FDR’s mantle. Roosevelt’s presidency transformed American democracy — his civil service reforms and the force of his personality created what we think of as the job of the president. None of his successors as US president have been able to fill his shoes or come close to achieving what he did.
The New Deal was a different vision of what America could be. As well as a programme of infrastructure spending, it introduced social security, providing citizens with protection against old-age poverty. It also brought in a minimum wage and laid the foundations of the US mortgage market, letting the less well-off own their homes. It gave the federal government new purpose and powers — FDR created an arts programme that paid for sculptures, paintings and murals; prohibition was repealed and eventually, food stamps were introduced.
The legacy of the New Deal as a tool for economic stimulus, however, is contested. Some argue fiscal stimulus did not work during the Depression because it was not tried. FDR attempted to balance his programme of spending with tax rises too soon, choking off the recovery. Others argue the growth from his spending plans was much larger than the contractionary impact of tax rises: receipts rose because Americans returned to work.
So far, this is a reason to be encouraged today. Public deficits have exploded across the world. Never before in peacetime have governments spent as much money without taxing as today — the IMF estimates that this year global public deficits will rise by 6.2 percentage points to 9.9 per cent, higher than after the 2008 crisis.
Monetary policy too, worked very differently in the 1930s. During the Depression governments pegged currencies to gold. Even in the midst of crisis, the Federal Reserve raised interest rates to try to keep the value of the dollar stable against the yellow metal. Monetary shortages were chronic and many parts of the US resorted to printing scrip to keep commerce going. When countries bowed to the inevitable and left the gold standard it provided stimulus.
Today, central banks have opened the floodgates. Wealthy households, which have been able to maintain their incomes while reducing outgoings, have cash to spend. The chief lesson from the 1930s is not to reverse course too soon: premature tax and interest rate increases will delay the recovery. If politicians want to demonstrate they truly are heirs to FDR, however, they must propose a new social contract, enact the legislation to enable it and build the institutions to sustain it. That, rather than half-baked analogies, would really be a modern-day New Deal.