"When fighting a slump concentrate on demand and output."

An interesting post on the FT by Samuel Brittan:

"Lessons from the original New Deal

By Samuel Brittan

Published: December 18 2008 18:36 | Last updated: December 18 2008 18:36

President-elect Barack Obama is reported to have responded to the Fed’s brave new anti-depression manifesto by saying that the Fed might soon be running out of ammunition. This need not be so if the new administration co-operates in the last resort course of financing some of the budget deficit by money creation ( YES. THE HELICOPTER CLUB ). It is in any case clear that the incoming president intends to supplement monetary stimulation by greatly increased public sector activity. The hints to this effect immediately made historically conscious observers look back to President Franklin Delano Roosevelt’s New Deal of the 1930s as a prototype.

I hope that Mr Obama and his advisers will copy its better rather than worse aspects. But although, if one is not too partisan, one can extract a common element in analyses of the Great Depression there is still very little consensus about the New Deal, which attempted to tackle it. There are still many Republicans for whom it is a socialist conspiracy and many Democrats for whom it is an article of faith. The academic world is just as split. A majority of political historians give a favourable verdict, while a majority of economists are more doubtful. The one matter of agreement is that Roosevelt was a master politician who won four presidential elections in a row.

The starting point has to be the fact that Roosevelt was no kind of theorist, but embarked on a series of sometimes contradictory improvisations ( TRUE ). There is not even agreement on which of the policies of the 1930s were or were not part of the New Deal. For instance, the insurance of bank deposits was part of the Congress-initiated Glass-Steagal Banking Act of 1933 and made permanent in a subsequent 1935 act. It is this one measure more than any other that was said to have made the US depression-proof (although not of course recession proof). Yet Roosevelt himself accepted the measure only reluctantly because, in the words of Professor Eric Rauchway, he feared that “the government would one day find itself forced to pay out too large a sum for failed banks”( HE WAS RIGHT, BUT IT WAS STILL A GOOD IDEA ) (The Great Depression and New Deal: A Very Short Introduction, OUP).

This illustrates the president’s instinctive opposition to budget deficits, although he came at times to accept them as a regrettable necessity( VERY TRUE. HE WAS FAIRLY CONSERVATIVE, BUT PRAGMATIC ).

The New Deal can be divided into three overlapping phases. The first ( 1ST ) heroic phase began when Roosevelt took office on March 4 1933. He began with a six-day enforced banking holiday followed by an emergency act that gave federal authorities increased power over the banking system. He himself then embraced the view that he was saving capitalism rather than destroying it ( HE WAS ). The emergency act also cut the dollar’s link with gold, which was then repegged at a lower rate ( GOOD IDEA ).

This de facto devaluation, together with a subsequent inflow of gold from Europe, facilitated a recovery in the money supply from its catastrophic fall in 1930-32 to resume a more expansionary if erratic course.

These monetary measures were accompanied by a whole alphabet of new agencies to promote employment and relieve distress. Whatever free market rhetoric might assert, I cannot find it in me to condemn Roosevelt for attempting to accelerate job creation more quickly than monetary policy could do on its own at a time when unemployment was near 25 per cent and the best known popular song ran: “Buddy can you spare a dime.” ( I AGREE ENTIRELY )

The first phase gradually gave way to a second ( 2ND ). The more enthusiastic New Dealers were not content with economic recovery and wanted to construct a new economic system, which was not so much socialism as corporatism ( THEY DID THAT ), that is a system in which market forces were replaced as far as possible in the determination of prices by political negotiation between unions and employers’ bodies. Under the National Recovery Act enforceable codes could be issued to do just that – until the NRA was declared unconstitutional by the Supreme Court in 1935. The fight over these measures prompted a more radical phase in the president’s rhetoric in 1936 when he welcomed the hatred of “malefactors of great wealth”.

There followed a third phase ( 3RD ) as the second world war approached in which the New Deal ran out of steam. There was a lurch into financial conservatism in 1937-38 when the administration cut social spending in a renewed attempt to balance the budget and the Fed tightened policy prematurely.

Taking the New Deal period as a whole, the expansion in demand was accompanied by a much larger rise in wholesale prices and a correspondingly lower recovery in output and employment than on previous occasions. Indeed unemployment did not regain its 1929 low until 1943, well into the second world war. Milton Friedman attributes this disappointing experience at least in part to deliberate measures to raise prices and wages by encouraging unionisation. John Maynard Keynes himself gently and wittily reproached the president for unnecessarily antagonising business.

I would draw a simple moral. When fighting a slump concentrate on demand and output ( FINE ). Do not interfere with prices and wages ( YES ); and above all avoid doing anything that wittingly or unwittingly strengthens business, labour or agricultural lobbies ( FINE )."