5 May 2016 "The Role of Fiscal Policy in Re-Stimulating the post-Depression Era American Economy"
There are many varying opinions from economists, historians, and
economic historians alike regarding fiscal policy, or the government’s
adjusting its tax rates and spending in order to affect an economy, during the
Great Depression. When observing the incredible impact this economic crisis had
on the United States, it becomes necessary to question what exactly it was that
stimulated the recovery of a country in such crisis. Though Christina Romer, in
her claim that fiscal policy was not the main cause of the United States’
recovery, is fairly justified, I have to disagree with her statement. By
directly observing the impact of President Herbert Hoover’s policies versus the
impact of President Franklin D. Roosevelt’s policies, one can see how important
the shift in fiscal policy was to the overall recovery of the United States
from its Great Depression. The fact remains that had there not been a shift
from a very laissez-faire economy to one tied closely with actions of the
government, the United States perhaps might have suffered from a much longer,
much more devastating economic Great Depression.
In the 20th century, shortly after
the end of the First World War, the United States, thanks to various economic
factors, plunged into what has been dubbed the worst economic downturn ever
experienced in the West. Unemployment in the United States was at an all-time
high, the stock market crash of Wall Street devastated the country’s financial
credit resources, and the international monetary system, which had previously
linked currencies to the price of gold, fell, resulting in severe deflation of
international currencies around the globe.[1] Though
the Depression was certainly felt the hardest in the United States, it affected
the entire world’s economy by reducing global production and trade
substantially, causing severe hyperinflation in some countries, and forcing
certain countries within Europe into periods of severe unemployment set to
rival that of the United States.[2]
There were many
approaches taken to attempt to solve the crisis of the Great Depression, and
some worked better than others. The implementation of austerity measures, which
included strategic moves such as restriction of government spending, destruction
of resources in order to maintain high prices, restriction of international
trade, and an increase in taxation, arguably only exacerbated the problems of
the Depression. In fact, some economists believe that it was these austerity
measures that prevented the United
States from recovering from its Great Depression. The United States, they
believe, could very well have recovered from its economic crisis, but it was
because of the policy implemented by presidents Herbert Hoover and Franklin D.
Roosevelt that it was kept so long from its road toward recovery.[3]
Beginning his
presidency of the United States in the very midst of the Great Depression,
Franklin D. Roosevelt’s approach was to be immediately concerned with involving
the government in the country’s economy. Whereas his predecessor had attempted
to maintain a “hands-off” approach, seeking to allow the economy to correct
itself, Roosevelt believed that it was up to the government and the American
people to take an active role in pulling themselves out of the Depression and
getting the country back to economic stability. As Hannsegen and Papadimitriou
explain: “the period from the Great Crash in 1929 to the beginning of
Roosevelt’s first term in 1933 offered little evidence that the economy could
recover on its own”.[4]
Things looked bleak for the United States, and Roosevelt was determined to
actively change that.
More than a
formalized program, the New Deal can be understood as a series of relief
efforts that both provided direct relief to those suffering and also enabled
the government to have more power than it had been allowed in the past. It
helped the unemployed, reformed the banks that had fallen with the crash of the
stock market, and used the power of the government to stimulate the American
economy in whatever way possible.[5] It
was extremely controversial, and remains an issue contested today: was
Roosevelt right to push the American government to become so deeply involved in
the economy? Or did the New Deal come dangerously close to socialism in the
United States? And were these relief efforts even beneficial to the country in
the long run?
John T. Flynn has
a particularly strong view against the actions taken by Roosevelt during his
presidency. In fact, he does not even allow the idea that there were any
positive outcomes from the policy implemented by Roosevelt. This opinion is strictly
based on the negative repercussions that Roosevelt’s fiscal policy had on the
United States. Not only were the New Deal’s fiscal policies not new, but
Roosevelt, Flynn claims, was saved from the floundering of his fiscal policy by
the Second World War. In 1938, all of Roosevelt’s “promises had been defaulted
on. The cities were filling with idle workers. Taxes were rising. The debt was
soaring. The war rescued him and he seized upon it like a drowning man.”[6] In
other words, Roosevelt’s policy worked only temporarily. Because it was not
necessarily new policy at all, and was only a new interpretation of old
policies, it was doomed to eventually fail. When it eventually did begin to
fail, Roosevelt was lucky enough to have World War II to fall back on as an
excuse.
Some economists take
an approach that is centered less on an attack on Roosevelt himself, and deals
more with his policy. They claim that the efforts to reduce competition such as
the NIRA and the NLRA, rather than stimulating it, actually stunted the growth
of the United States, keeping it within its depression much longer than necessary.[7] By
taking such control of the economy and not allowing it to flourish on its own
and control its own prices, these economists believe, Roosevelt’s fiscal policy
led the United States into a Depression much deeper and with repercussions much
more significant than they might have been. Had the economy been left alone, it
would have eventually corrected itself, and these economists firmly believe
that the outcome of Roosevelt’s approach to fixing the economy led to more
negative long-term consequences.
While these
arguments are certainly justified, I still have to find myself in disagreement
with them. It is certainly fair to argue that the repercussions from
Roosevelt’s fiscal policy were extremely detrimental to the United States,
especially in such an economically stressful time as World War II. However, I
firmly believe that had the United States not had Roosevelt’s fiscal policy to
pull it so quickly out of its Great Depression, it would not have so easily
recovered and would instead be faced with even worse economic consequences from
the Second World War. It is a fact that war is expensive, and though arguably the
war might have provided extensive employment for those without jobs—for
example, going into the army or working in a factory making war supplies—the
lack of relief provided to the people of the United States would have rendered
these jobs obsolete in solving the true social problem caused by the Great
Depression. The type of jobs available during the war would have only continued
to leave out the dependent and the truly disadvantaged—those such as the
elderly who were supported by New Deal policies like Social Security.
Roosevelt’s
economic policy was so much more than simply giving power away to the
government. It stimulated the economy in a way that was quickly successful; in
short, Roosevelt’s New Deal, though flawed, was enough to pull the United
States up to a place it had been unable to reach during the Great Depression.
Though fiscal policy was certainly not the only thing that helped correct the
problems of such a catastrophic economic downturn, I think the fact that the
economy immediately began to improve after the implementation of Roosevelt’s
fiscal policy is very telling. This I believe is significant proof that fiscal
policy played more than an insignificant role in stimulating recovery of the
United States.
References:
Christina
D. Romer, “Great Depression”, Encyclopaedia
Britannica (December 20,
2003)
Chris
Edwards, “The Government and the Great Depression”, Tax and Budget
Bulletin No. 25 (September, 2005)
A.A.
Berle, “The Social Economics of the New Deal”, The New York Times
Magazine (New York, USA) 29 October
1933
John
T. Flynn, The Roosevelt Myth (New York: the Devin-Adair Company, 1948)
Greg
Hannsgen and Dimitri Papadimitriou, “Lessons from the New Deal: Did
the New Deal Prolong or Worsen the Great Depression?”, The Levy
Economics Institute of Bard
College Working Paper,
No. 581 (October, 2009)
[3] Chris
Edwards, “The Government and the Great Depression”, Tax and Budget Bulletin No. 25 (September, 2005)
[4] Greg
Hannsgen and Dimitri Papadimitriou, “Lessons from the New Deal: Did the New
Deal Prolong or Worsen the Great Depression?”, The Levy Economics Institute of Bard College Working Paper, No. 581
(October, 2009)
[5] A.A.
Berle, “The Social Economics of the New Deal”, The New York Times Magazine (New York, USA) 29 October 1933
[7] Greg
Hannsgen and Dimitri Papadimitriou, “Lessons from the New Deal: Did the New
Deal Prolong or Worsen the Great Depression?”, The Levy Economics Institute of Bard College Working Paper, No. 581
(October, 2009)
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