With the US economy suffering through its deepest slump since the Great Depression, the Obama administration has designed a political strategy to match, with echoes of the campaign rhetoric deployed by Franklin Roosevelt in the 1930s.
Throwing out the standard presidential playbook dictating an aspirational pitch to centrist voters, the White House is cementing a high-risk message that strikes firmly at wealth and privilege.
“There is surging sentiment out there among voters that the economy is weighted towards the wealthy,” said a senior White House official. “Public opinion has changed dramatically.”
The White House strategy will make the 2012 election a generational test of the Republican push of the past three decades for cutting taxes, in ways their critics say have been constantly skewed towards the highest earners.
The after-tax income of the wealthiest 1 per cent of US households increased by 275 per cent over the past three decades, compared to an average of 62 per cent for all Americans, the independent Congressional Budget Office reported this week. For the poorest 20 per cent, the growth was only 18 per cent.
The “Occupy Wall Street” protests that are spreading raggedly across the US and the world have thrown a spotlight on mounting popular anger at economic stagnation and income inequality.
But the factors driving the White House go further, to their inability to strike any substantive deals on their terms with congressional Republicans emboldened by their smashing victory in last November’s mid-term elections.
The failure of the economic recovery to yield many jobs during its mild upswing of the past two years has also transformed the political calculus for a president facing a perilous re-election battle.
“In normal circumstances, this pitch might be suicidal. But these are not normal circumstances,” said William Galston of the Brookings Institute.
Mr Galston has been reading the speeches of Franklin Roosevelt’s winning campaign for the 1936 presidential election and finds striking comparisons to the emerging line from Mr Obama.
“Roosevelt wasn’t just saying: ‘I am fighting for you.’ It was: ‘I am fighting against them,’” he said.
All sides of politics have been regrouping since the fraught negotiations in August over the country’s borrowing limits that bought the US to the edge of sovereign default.
While Mr Obama was widely depicted as weak in his dealings with Congress, the clash damaged the Republican majority in the House of Representatives even more. Congressional approval ratings are now in single digits.
Although they have offered little fresh on policy, Republicans are tweaking their public message, with the hardline house majority leader, Eric Cantor, recently acknowledging the need to address the rich-poor gap.
Mitt Romney, the frontrunner in the Republican race to challenge Barack Obama in 2012, has taken to saying that he is standing up for the “middle class” because the rich “can look after themselves”.
For the White House, this is just the terrain that it wants to fight on. “The Republicans want to give the average millionaire a $200,000 tax cut, while the middle class is struggling,” said the White House official.
The majority of Republican voters polled by the White House agree with the president, the official added, meaning “they hold a different opinion from their lawmakers and their candidates”.
Mr Obama has been barnstorming the country for the past month, highlighting a jobs package which his aides acknowledge little of which has any chance of passing.
The aim is put Mr Obama back at the centre of the debate after a period in which he seemed marginalised and ineffective, the worst position a sitting president can be in.
“Let’s re-emphasise what powers we have! What we can do on our own! Push the envelope!”
William Daley, the White House chief of staff, said in an interview with Politico, the Washington publication.
Despite Mr Obama’s battered standing, senior Republicans remain wary of a rejuvenated president.
“What the president wants to turn this into is the proposition that you may hate us, but you will hate these people more,” said a senior Republican congressional official. “We need to make sure we do not allow him to turn this election into an anti-incumbent election.”
Besides the inherent risk in making wealth the central issue in a country which has prided itself on the ability of anyone to get rich, Mr Obama must also surmount a credibility gap in taking on Wall Street.
“He has blown hot and cold on the finance sector, so he is widely regarded as having fallen between two stools,” said Mr Galston.
In the White House, there is no doubt that it is entering the election year with its back against the wall.
“You can just feel this electorate is very volatile,” Mr Daley told Politico. “So strap yourself in.”
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Sophie: It's late here, but when I return, I am going to address this disastrous gamble of the President and point Mr Galston to some additional reading. In the meantime, I leave this for them:
For the rest of you, I leave you the reading pleasure of Ms Amity Shlaes:
What Paul Krugman Misses About 1937 Redux: Echoes
What if it just keeps going? That’s the question Americans are asking as they consider last month's 9.1 percent unemployment rate, still so high 33 months after the crash of September 2008. Scholars of economic history are asking another question: Are we repeating 1937?
That year, when Americans were expecting their economy to finally pull out of the Great Depression, the stock market dove again, with the Dow Jones Industrial Average dropping from the 190s in March 1937 to less than 100 in March 1938. Nonfarm private unemployment, the measure of Roosevelt's industrial economy, increased to more than 18 percent. Industrial production plunged by a third.
The problem then was monetary, some economists now say. Paul Krugman, in his New York Times column on June 2, argued that monetary and fiscal tightening caused the 1937 downturn, and might be squeezing the breath out of the economy now, precluding job creation. Krugman cites Gauti B. Eggertsson of the New York Federal Reserve Bank, who recently published blog posts and papers noting that the later 1930s, as now, saw higher commodity prices. Officials considered these rising prices a signal of inflation, and pressed for tightening. They erred.
This version of history holds, to some extent.
Or: Up to a point, Lord Krugman. After spending heavily during the 1936 election, President Franklin D. Roosevelt was now feeling more like a thrifty "Dutch householder," as the journalist Anne O'Hare McCormick wrote, and his administration cut executive-branch employees. His Treasury secretary, Henry Morgenthau, claimed that the government had "licked the Great Depression." Tax increases, themselves a form of fiscal tightening, were passed into law. In January 1937, Americans began to make their first payments into Social Security, taking away cash that workers might have spent on food, housing, clothing, liquor or cigarettes.
On the monetary side, the Fed doubled reserve requirements on banks, seeking to make them less vulnerable to failure. What the Federal Reserve didn't anticipate was that this would make the banks nervous, leading them to amass yet more reserves and taking money out of circulation. The Fed and the Treasury also fiddled with the gold-standard system for fear of inflation.
But two other factors are omitted from this narrative. The first is the price of labor. The Wagner Act, the great modern labor statute, became law in 1935. It made possible the closed shop, under which only unionized workers were allowed into a unit. In 1937, after Roosevelt was safely elected, labor leader John L. Lewis and his Congress of Industrial Organizations began using their new power to its full extent. Labor's tour de force in this period is memorialized in the photos we still recognize today of sit-down strikes at the General Motors Co. plant in Flint, Michigan. Strike days in 1937 totaled 28 million, up from 14 million during the election year.
Such labor stoppages, and the threat of more, led companies to raise wages more than they could afford to. Harold Cole of the University of Pennsylvania and Lee Ohanian of the University of California, Los Angeles, have demonstrated that wages in the latter half of the 1930s were well above trend for the entire century. Employers also hired less: Even as unionization increased, nonfarm unemployment did as well.
The second under-discussed issue is what scholar Robert Higgs has called "regime uncertainty." Roosevelt's victory in 1936 had been so convincing that people believed he might do anything. FDR reinforced this suspicion with an inaugural address so aggressive that modern presidential advisers would never allow it on the teleprompter. Roosevelt told the nation he sought in government "an instrument of unimagined power." That scared markets and small businesses.
Roosevelt relished hunting down big firms through regulatory action and blaming new sectors, such as utilities, for slowdowns -- on some days. Other days, he invited business leaders into the Oval Office and talked about partnership and a "breathing spell."
This inconsistency itself posed a problem. The diary of an Ohio lawyer named Daniel Roth, which was recently republished, captures the pervasive anxiety of the period. "We are having a bad steel strike in Youngstown and the mills have closed," Roth wrote on June 22, 1937. "The state and federal governments seem to support the labor unions and there has been a complete breakdown of law and order. Business is very quiet."
From the U.K., John Maynard Keynes wrote to FDR that it was all right to nationalize utilities or to leave them alone -- but what, Keynes asked, was "the object of chasing the utilities around the lot every other week?”"
In this respect, the 1938 midterm gains by Republicans were important because they signaled to Americans that there were limits to Roosevelt's power. And Roosevelt's decision to turn his attention to Adolf Hitler and Josef Stalin, and away from the supposed excesses of big business, contributed as much as anything else to the eventual recovery.
Addressing these last two areas in today's economy is not hard. To make employment less expensive, the government can undo the health-care law, our modern version of the Wagner Act, so that employers needn't worry that hiring implies accepting costs they can't control or even predict. Another boost to hiring would be a more reasonable National Labor Relations Board, not the current one, which chases companies such as Boeing Co. around the equivalent of Keynes's lot trying to drive up wages. Another would be to cut taxes for employers, big and small. Uncertainty would diminish if both parties publicly committed to a smaller and less intrusive government.
The problem isn't a single "Mistake of 1937" or "Mistake of 2011." It is the mistakes, multiple, of both periods.
FDR Was a Great Leader, But His Economic Plan Isn't One to Follow
By Amity Shlaes
Sunday, February 1, 2009 One evening in the 1930s, a 13-year-old named William Troeller hanged himself from the transom of his bedroom in Greenpoint, Brooklyn.
William's father was laid up in Kings County Hospital awaiting surgery for an injury he'd suffered on the job at Brooklyn Edison. A federal jobs program was paying William's older brother Harold for temporary work. But the amount wasn't nearly enough to make ends meet. Gas and electricity to the family's apartment had been shut off for half a year. Harold told a New York Times reporter that both hunger and modesty had driven William to act. "He was reluctant about asking for food," read the headline in the paper.
The surprising part of this story is not that it happened; most Americans know that after the 1929 stock-market crash, hard times sometimes led to suicide. The surprising part is that William Troeller killed himself not in 1930, when Herbert Hoover was president, but in 1937, in Franklin D. Roosevelt's second term. The New Deal was almost five years old, but the economy was not back. In fact, the country seemed farther from recovery than before. A new sense of futility was overcoming Americans. The British magazine the Economist sneered that the United States "seemed to have forgotten, for the moment, how to grow."
The date matters, because our new president has made it clear that his model is Roosevelt. Barack Obama has spoken of creating 3 million jobs with his stimulus plan. As a new president in 1933, Roosevelt spoke of creating "one million jobs by October 1" through his spending packages. At about $850 billion, Obama's stimulus represents about 5.9 percent of gross domestic product. The spending programs of Roosevelt's National Recovery Administration amounted to almost precisely the same share. Then as now, the country was in what we might call an "illions" moment, when a nation contemplates federal spending of a magnitude previously unimaginable. The only difference is that today, we're discussing trillions instead of billions.
It's reasonable that a new executive in a downturn would want to evoke Roosevelt the leader. Like no other president, Roosevelt inspired those in despair. He kindled hope with his fireside chats on a then-young medium, radio. The new president gives radio talks, but they are also made available on this era's young medium, the Internet.
But Roosevelt the economist is unworthy of emulation. His first goal was to reduce unemployment. Of his own great stimulus package, the National Industrial Recovery Act, he said: "The law I have just signed was passed to put people back to work." Here, FDR failed abysmally. In the 1920s, unemployment had averaged below 5 percent. Blundering when they knew better, Herbert Hoover, his Treasury, the Federal Reserve and Congress drove that rate up to 25 percent. Roosevelt pulled unemployment down, but nowhere near enough to claim sustained recovery. From 1933 to 1940, FDR's first two terms, it averaged in the high teens. Even if you add in all the work relief jobs, as some economists do, Roosevelt-era unemployment averages well above 10 percent. That's a level Obama has referred to once or twice -- as a nightmare.
The second goal of the New Deal was to stimulate the private sector. Instead, it supplanted it. To justify their own work, New Dealers attacked not merely those guilty of white-collar crimes but the entire business community -- the "princes of property," FDR called them. Washington's policy evolved into a lethal combo of spending and retribution. Never did either U.S. investors or foreigners get a sense that the United States was now open for business. As a result, the Depression lasted half a decade longer than it had to, from 1929 to 1940 rather than, say, 1929 to 1936. The Dow Jones industrial average didn't return to its summer 1929 high until 1954. The monetary shock of the first years of the Depression was immense, but it was this duration that made the Depression Great.
This outcome is worth reviewing, component by component, for what it suggests about individual Obama administration projects. The first of these would be ambitious spending on infrastructure. Obama has said that he wants to "put people to work repairing crumbling roads, bridges and schools." In addition, he would like to modernize 75 percent of government buildings, as well as equip tens of thousands of schools with new technology.
Roosevelt, too, proceeded boldly on infrastructure. The budget of his Public Works Administration was so large that it shocked even the man who ran it, Interior Secretary Harold Ickes. Sounding a bit like Republicans today, Ickes said of his $3.3 billion allowance: "It helped me to estimate its size by figuring that if we had it all in currency and should load it into trucks, we could set out with it from Washington for the Pacific Coast, shovel off one million dollars at every milepost and still have enough left to build a fleet of battleships."
New Deal public-works spending did have a short-term effect, creating jobs and economic activity during Roosevelt's first term. Americans took heart at the sight of schools, swimming pools and auditoriums rising in nearly every county in the country. FDR so pumped up the federal government that 1936 was the first peacetime year when it spent more than states and towns. A master of timing, he even managed to get unemployment down to a low of 13.9 percent in November of that year, the month of the presidential election. The voters rewarded him by giving him 46 of 48 states.
But many of the jobs that the early New Deal produced were not merely temporary but also limited in economic value. It was in these years that the political term "boondoggle," to describe costly make-work, was coined. It came from "boondoggling," the word for leather craft projects subsidized by New Deal work-relief programs. As was the case for the Troeller brothers, work-relief earnings were usually not sufficient to offset other Depression losses.
After the 1936 election, Roosevelt found himself appalled at the budgetary deficit he had run up and turned frugal. Infrastructure spending slowed. Monetary authorities feared inflation and doubled reserve requirements at banks. The "Depression within the Depression" of the Troellers' time began. This cynical cycle -- spend on construction, hold election, tighten, confront new joblessness -- is familiar nowadays, especially in Latin America. But then, to Americans, it came as a bitter surprise.
Another similarity also stirs concern. Obama is focusing on our country's most promising innovation, one that is among the most likely to generate recovery jobs -- the Internet. He wants to use stimulus dollars to give poorer Americans access to that technology. Specifically, the president wants to achieve the goal of "expanding broadband across America." The listener gets the impression that Obama wouldn't mind if the federal government ran some of this business if such involvement is what it takes to get universal access. Equity first.
In Roosevelt's day, there was also an appealing new technology: electricity. Power was the industry that symbolized growth -- the Dow Jones utilities average was expected to lead the old industrial average into recovery. After all, access to electricity was so desirable that power companies' operating revenue rose even during the Depression. There were also private companies ready to supply power to the rural unwired. One was the Commonwealth and Southern Corp., fashioned by venture capitalists and industry leaders explicitly to raise the vast sums of capital necessary to light the South.
Here Roosevelt, too, combined a stimulus project with his goals for social equity. He created the Rural Electrification Administration to wire the countryside. He also created the Tennessee Valley Authority to provide hydropower. One can picture private and public working together, and that's what Commonwealth and Southern imagined, too, at first. At a tense meeting at Washington's Cosmos Club in 1933, the company's chief executive, Wendell Willkie, begged a TVA officer, David Lilienthal, to strengthen public-private cooperation. Instead, Lilienthal waged war on Willkie, using the TVA's tax-free status to compete for customers and fighting Commonwealth and Southern in the courts. In 1935, Roosevelt signed a utilities law that so restricted private capital raising that it was known as the "Death Sentence Act."
At the time, observers told themselves that the shift caused no economic loss. But the stock indexes told the real story. Instead of matching or outperforming the industrial average, the Dow Jones utilities average lagged behind. The great "stimulator," government, had emerged as an opponent. The effect, beyond the tragic unemployment, was to slow down the creation of new companies. Even the New Dealers despaired. "We have tried spending money," Treasury Secretary Henry Morgenthau said to the House Ways and Means Committee in the late 1930s. "We are spending more than we have ever spent before and it does not work. . . . I say, after eight years of this administration, we have just as much unemployment as when we started . . . and an enormous debt to boot."
What the New Deal record tells us is that it's worthwhile imagining an alternate Washington program. A program that's merely about budget balancing is wrong in an hour when banks are wildly deleveraging. But Obama could put market reform before spending. It's time to keep plans to strengthen the regulation of markets and widen regulators' mandate so that they monitor most of what's traded and derivatives don't slip through the cracks.
What about spending? The Depression tells us that public works are probably less effective than improving the environment for entrepreneurs and new companies. The president has already put forward a big tax cut for lower earners. He might offer a commensurate one for higher earners. He might expand the tax advantages he is currently offering to companies -- wider expensing of losses, for example -- and make them permanent. A discussion that permits the word "trillion" might also include the possibility of bringing down U.S. corporate taxes, taxes on interest, dividend and capital gains -- again, permanently. The cash that a relatively competitive United States draws from abroad will move the country forward faster than any stimulus.
So the Depression and the New Deal are both worth going back to, but for different reasons than many suspect. We may rely on the best of the New Deal, the matter-of-fact bravery our parents and grandparents showed then, to help us through today's unexpected challenges. But we don't have to repeat New Deal stimulus experiments, because we know that they didn't work.
How FDR's 'Most Dangerous' Law Affected Economy: Echoes
One of the least-covered aspects of the recession of 1937 is the then-new monetary law under which the country was operating. Marriner S. Eccles of Utah had agreed to be Federal Reserve chairman, but only on condition that President Franklin D. Roosevelt oversee passage of, and sign, new legislation redefining the Fed's job.
In 1935, at a luncheon of the National Republican Club in New York, Theodore Roosevelt, the son of the late president, criticized his cousin Franklin and predicted that the new law, the Banking Act of 1935, was another step toward dictatorship.
Another critic, Thomas F. Woodlock, an editor at the Wall Street Journal, worried about the Fed gaining a new power: the ability to change the ratio of reserves it required member banks to keep on hand. He was also appalled that member banks would be permitted to lend on real-estate mortgages.
Woodlock said that of all the New Deal measures, the new Fed law was "the most dangerous in its possible consequences."
This language was extreme. But the Fed did indeed play around with its new toy and raised the share of money the banks had to set aside. Some scholars blame the Fed's increased reserve requirements for the "depression within the Depression."
Recession Repeat Lurks Without White House Truce: Amity Shlaes
By Amity Shlaes
“Fat cats” is what President Barack Obama just called bankers. He also invited them to the White House this week.
The reason for the mixed message is that the president is cross with banks: they have refused to heed his orders to lend. The dynamic of preachy executive and elusive lenders recalls the mid-1930s, when a petulant Franklin Roosevelt gave a label to banks’ puzzling behavior: “capital strike.” (Mo: I argue that a capital strike is employed by more than just banks. Some of us might even call an extreme capital strike "Going Galt.")
In the 1930s, the capital strike was followed by the depression of 1937-38 within the Depression. Today too, capital ponders going on strike. And without big policy changes the economy will face similar consequences.
Consider the parallels. In 2009 government seems to be spending enough for the cash to flow all around. The scope of this effort to drown the nation in money is unprecedented. In the mid-1930s Washington was also dumping dollars around in a then-unprecedented fashion. In 1936, federal outlays outpaced state and local spending for the first time with the nation not at war.
Another similarity: a government that won’t say when the spending will stop. The Obama administration is generous with timetables when it comes to foreign policy, but withholds them when it comes to domestic budgeting.
Withholding was also a feature of the mid-1930s. In a comment reminiscent of presidential adviser Lawrence Summers, Senator Robert Wagner of New York told citizens in 1935 that that the U.S. would “maintain our public efforts until private businesses take up the slack.”
A third big parallel is exceedingly low interest rates.
Flawed Assumption
What causes the strike? For one thing, White House assumptions that the banks are the same institutions that they were at the start of the economic crisis. Bear Stearns, Lehman Brothers and Countrywide Financial may be gone, but the bitterness of their experience has been internalized by commercial and investment banks alike. So they hesitate.
Observing that banks maintained what had once been considered ample reserves, 1930s monetary authorities reasoned that increasing reserve requirements on paper would have little effect: their increase was merely a de facto recognition of an accumulation that had already occurred.
The authorities forgot these bankers had been burned. The wary banks reacted by stashing away yet more cash. The result was an unforeseen tightening and less cash in the economy.
Election cycles also contribute to capital strikes. Banks today know that whatever the White House says, it has to stop pouring out the cash eventually, probably after midterms. Banks in the 1930s held onto cash because they knew Roosevelt would stop spending after the 1936 election, and he did.
House Winnings
High taxes, or the prospect of tax increases, do damage as well. In 1937, a tire company executive explained the effect of Roosevelt’s confiscatory rates upon the investor: “He will not risk financing new ventures if the government take is greater than that of the average gambling house.”
Infantilizing the private sector also makes it shut down. In the 1930s, Roosevelt, like Obama, alternated between coddling banks and companies and giving them the equivalent of a good spanking. Both can be counterproductive. The editors of Time magazine formally recognized that by printing a regular rubric over its weekly reports: “Last week the U.S. Government did the following for and to U.S. Business…”
The insistence on executive discretion is a real killer as well. Adolf Berle, Roosevelt’s assistant secretary of state, sounded for all the world like Hank Paulson or Timothy Geithner when he argued in the late 1930s for a “modern financial tool kit.” Tool kit means “let me fiddle around” and not “let us agree together on rules and abide by them, together.”
Dow’s Retreat
The results of the 1930s capital strike were wicked. The Dow Jones Industrial Average erased two years worth of gains, heading to Hoover-era levels. Unemployment, in the lower teens, leapt to almost 20 percent.
What stops a strike? Not the too-big-to-fail doctrine. Then and now, it is better to make clear the private sector is responsible for itself. That’s what current calls for return to the old Glass-Steagall Act separation of the banking and brokerage businesses are about.
Business wants autonomy and respect. In a February 1939 New York Times article, a writer, Howard C. Calkins, gave voice to the longing for White House consistency: “By ‘following through’ its apparently revised attitude toward business generally the government would be going a long way toward rebuilding the confidence of business men, in the opinion of many in Wall Street.”
In the late 1930s the government finally did back off. That was in part because of New Deal fatigue. Roosevelt critics made gains in the 1938 midterms. But it was also because the White House needed a partner, an equal, to prepare for World War II. Companies that had recently been in court fighting the administration for their lives now were winning enormous Lend- Lease contracts from that same administration.
Traditional explanations for the Depression’s end focus on war spending or monetary easing. It is this truce, however, that is relevant today.
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