Konczal and Grunwald: Could the Stimulus Have Been Better Without Being Bigger?

Sep 10, 2012

We've all heard the standard arguments about the stimulus: progressives think it should have been bigger, while conservatives think it was a pork-filled monstrosity. But in the latest episode of the Roosevelt Institute's Bloggingheads series, Fireside Chats, Mike Konczal talks to Michael Grunwald, author of The New New Deal, about four stronger criticisms of the bill from the left.

We've all heard the standard arguments about the stimulus: progressives think it should have been bigger, while conservatives think it was a pork-filled monstrosity. But in the latest episode of the Roosevelt Institute's Bloggingheads series, Fireside Chats, Mike Konczal talks to Michael Grunwald, author of The New New Deal, about four stronger criticisms of the bill from the left.

Konczal notes that it probably wouldn't have been possible to pass a larger stimulus through Congress, but his first question is "Why didn't we have a WPA? President Roosevelt went out in one month and hired like four million people," so if we're facing a similar jobs crisis now, "why don't we just go and hire five million people to do whatever?"

Next, the Michaels discuss President Obama's rhetorical pivot toward deficit reduction and "the idea that you couldn't pass the first stimulus, you couldn't do more to expand the economy, without also bringing down the long-term debt," which led Obama to "straitjacket himself on this issue of worrying about the bond market."

Third, Konczal argues that "President Obama very much looked at how to attack the problem of unemployment as a budgetary phenomenon as opposed to using every lever at his disposal," including the Federal Reserve and the nationalized GSEs. Rather, he chose to "kick the can on housing, hoping unemployment would come down in two years."

Finally, Konczal says "the New Deal brought in kind of a new contract with government" that involved the creation of a safety net and a much stronger role for the federal government in the economy. He and Grunwald explore whether Obama's policies have the potential to create another paradigm shift that is "fundamentally a new kind of social reality, a political reality."

For more, including details on what was actually in the stimulus and how it reflected President Obama's broader agenda, check out the full video below:

 

Construction image via Shutterstock.com.

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What's the Best Liberal Case Against Principal Reduction?

Aug 21, 2012Mike Konczal

Binyamin Appelbaum has an article in the New York Times about the administration’s terrible response to the housing crisis.

Binyamin Appelbaum has an article in the New York Times about the administration’s terrible response to the housing crisis. The administration “tried to finesse the cleanup of the housing crash, rejecting unpopular proposals for a broad bailout of homeowners facing foreclosure in favor of a limited aid program — and a bet that a recovering economy would take care of the rest.” This has several responses, including David Dayen at firedoglake, as well as Ezra Klein writing about the administration's response from a balance-sheet recession and housing point of view. That got a response from Dean Baker arguing that this balance-sheet recession point of view, and the subsequent focus on mortgage debt reduction, is a distraction from better policy.

With President Obama pushing for a wider refinancing plan and the debate over refinancing and principal reduction back in the headlines due to the book Bailout and the fight over the GSEs, it might be useful to formalize the best liberal case against principal reduction. It'll give us a set of arguments to wrestle with so that we can then work backwards toward better arguments. So what is the best case? I see three broad arguments.

1. Wealth Effect Means It Doesn't Matter

This is the approach Dean Baker takes, and I think it is influential among many liberal wonks. The housing crashed destroyed a lot of housing value, leaving us feeling poorer, which means we spend less. An important way to understand this argument is that if every house during the housing bubble was paid for with cash instead of a mortgage, and we had the same housing bubble and crash but no mortgage debt overhang, our recession and slow recovery would look virtually identical. Reducing housing debt in our situation won't help the economy as a whole (though it will help the individuals involved), because housing debt hanging on the economy isn't the drag.

Foreclosures are still bad in this argument (and Dean has been at the forefront of fighting against foreclosures), but they only need to be stopped in the sense that all bad things should be stopped; housing crisis policy will help some and hurt some, but it isn't a check on the recovery. It is not necessary and isn't effective in getting us back to full employment.

I think there are some empirical problems with this argument. The elasticities people are finding are an order of magnitude bigger than realistic expectations. Declines in housing prices are nonlinear against wealth distribution. Something else is in play. See this interview or this paper for more on these arguments. The administration seems to be moving in this balance-sheet direction. Let's say we reject this wealth effect argument -- should we change policy?

2. Fiscal and Monetary Uber Alles

Christina Romer would say no. She, like many, would argue that housing debt is probably a drag on demand, but we should respond to it with fiscal and monetary stimulus. She would stay out of the policy in the purple circle above, which is the mapping I use around here to approach how people think of the recession. Romer, from September 2011:

[One argument is that the] bubble and bust in house prices has left households burdened with too much debt. Until we deal with this problem — perhaps by providing principal relief to the 11 million households whose mortgages are larger than the current value of their homeswe’ll never get the economy going.

The premise of this argument is probably true: recent evidence suggests that high debt is holding back consumer demand. But it doesn’t follow that the government needs to directly lower debt burdens to stimulate job growth.

Recent research shows that government spending on infrastructure or other investments raises demand even in an economy beset by over-indebted consumers. Another effective approach is to aim tax cuts and government payments at households that would like to spend, but can’t borrow because of their debt loads (such as the poor and the unemployed).

History actually suggests that the “tackle housing first” crowd may have the direction of causation backwards. In the recovery from the Great Depression, economic growth, which raised incomes and asset prices, played a big role in lowering debt burdens. I strongly suspect that fiscal stimulus will be more cost effective at speeding deleveraging and recovery than government-paid policies aimed directly at reducing debt.

There's a general critique of the president's stimulus program that argues it was too focused on tax cuts instead of long-term investments, which have a better bang for the buck. The same critique can be used on spending money on principal reduction. It's money that by definition isn't spent (it was already spent), so you need second-order effects for it to go. We'd prefer just giving people money (tax cuts) over principal reduction in the same sense that we'd prefer infrastructure over tax cuts.

And one doesn't need to be a conservative worried about helping the "losers" or someone who is uncomfortable with the fairness of mortgage debt reduction to think there are better ways to spend this money. Consider having $250 billion dollars to spend, one benchmark put forward as the amount of money that could have been spent from TARP. You could hand it out in some manner to pay off underwater debts, perhaps a matching scheme with the banks. That wouldn't reduce overall mortgage debt that much because there is a lot of it.

Meanwhile, with $250 billion dollars, you could build 5,000 miles of high-speed rail. You could fund universal pre-K for a decade. You could take the 13 million people unemployed under the traditional unemployment measure and give them a basic income of almost $10,000 for two years. You could build infrastructure, create social goods designed to foster egalitarianism, or tackle poverty. These are all better investments for us to make, plus they build a better society and they get us to full employment faster. Tackling mortgage debt produces none of these benefits.

When Geithner's argued against principal reduction, saying that it would be "dramatically more expensive for the American taxpayer, harder to justify, [and] create much greater risk of unfairness," he followed it up by saying "The whole foreclosure crisis across the country now is really driven by what happened to unemployment and what happened to the income of Americans. The best things we can do now to help mitigate that risk is to help get the economy. growing again, bring unemployment down as quickly as we can, put people back to work." I view that as in line with Romer's argument.

By itself, I think this is correct. But one important response to that is that principal reduction can often pay for itself, especially in situations where a borrower is at risk. A lender will want a consistent, if lower, payment stream rather than to take ownership of an abandoned house in a depressed market. As Lew Ranieri said, "You are almost always better off restructuring a loan in a crisis with a borrower than going to a foreclosure." So it is good economics, especially in a distressed market. Another response is that few people propose just giving money away, but instead want to tie it to some sense of risk and reward, or reaccounting of the banks' balance sheets. So how does that play out?

3. Upsides and Downsides

One reason giving away money to pay off underwater debts is a bailout, and thus politically unpopular, is that there would be a disconnect between who absorbed the costs on the downside and who gains the potential value from the upside. If taxpayers just paid off mortgage debts, banks and homeowners would gain a windfall that isn't directly shared with taxpayers. One way to deal with this is either to force creditors to eat a cost upfront -- they absorb the downside and then can benefit from the upside. The other is for taxpayers to gain from the upside, usually through the mass purchase and/or refinancing of mortgages. Let's look at the first way.

Why aren't bank servicers doing writedowns? There's a mix of bad incentives and poor resources that result in bad practices. The administration hasn't been aggressive with using financial fraud, like the range of practices including robosigning and documentation fraud, to force reform here, instead focusing on removing legal liabilities from the banks. Maybe that task force will someday do something, but from my read even sympathetic observers think it was a wasted opportunity. 

But even if policy is centered on forcing servicers to clean up their fraud, there's a lot of creditor free-riding in ad hoc debt writedowns that becomes problematic. Is writing down first mortgages good policy even if junior mortgages, often held by the biggest banks, are untouched? If home equity lines of credit are acting as a last line of income maintenance and credit for households in this weak recovery, is it wise to push policy to extinguish them to adjust first mortgages? If you wipe out both, isn't that a giant transfer to other creditors like auto lenders, private student loans, and credit card companies? Should we be concerned about moral hazard from the debtor's side? You need some mechanism to coordinate and bind the collective behavior of creditors while preventing free riding and also bringing in impartial adjudication, which is a traditional function of bankruptcy. Bankruptcy reform was famously not pushed by the administration, and to me that was its biggest mistake.

The other approach to avoid a bailout is for the government to gain a share of the upside for taking on the downside. This is one reason writedowns for the GSEs make sense: we gain the upside, as we own the GSEs, and we're already on the hook for the downside, so the risk on the downside isn't a "bailout" but prudent policy.

When it comes to dealing with the broader housing market, a lot of the programs proposed, like revitalizing HOLC or Senator Merkley's plan on refinancing, would have taxpayers put up money but gain in the upside. Even the IMF is now encouraging the United States and other countries to investigate bringing back something like an HOLC. The two counter-arguments would be that HOLC still had a high redefault rate, a rate that would have a lot of people crying foul. The second is the problem of what to pay for the mortgages. Recent attempts to use eminent domain to purchase mortgages at below-market rate in order to compensate taxpayers for absorbing these risks in a terrible market also have a lot of people crying foul.

My general thought is that moral hazard can be a problem, but the misery and wasted lives of mass unemployment is a much bigger problem. That said, bankruptcy and these government programs eliminate most moral hazard concerns. Bankruptcy can be done in such a way to hit homeowners as well; for the government program you'd want people to be trying to take advantage of them. That's why so many people have been shocked that the administration hasn't pushed on either.

What I find interesting is that all these articles about what could have been done with housing take the way TARP played out as given. But starting a HOLC program, rebooting the broken servicing model, or otherwise writing down mortgage principal would have been significantly easier if the banks were put into a receivership in early 2009. TARP policy, which was to protect the banks' balance sheets at all costs, worked counter-productively, putting administration resistence to enacting even the lowest-hanging policy fruit. Receivership would have cost more upfront, but it would have been significantly easier to tackle these problems. There is a major debate to have on this topic.

 

Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

  

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Is the Drought a New Dust Bowl? No, Thanks to the New Deal

Jul 26, 2012David B. Woolner

When FDR tackled an environmental crisis, he didn't just put people to work to fix it in the short-term -- he solved it for the long-run.

When FDR tackled an environmental crisis, he didn't just put people to work to fix it in the short-term -- he solved it for the long-run.

The severe drought that has afflicted more than half of the country this summer has led some commentators to wonder whether the country might be headed for another Dust Bowl. The consensus among most experts is that the answer is no – and the reasons for this stem in part from the lessons learned and the actions taken by the Roosevelt administration in response to the unprecedented environmental crisis that the nation suffered in the early to mid-1930s.

As those who lived through it will attest, the Dust Bowl was unlike any previous environmental catastrophe the United States had ever experienced. The dust storms it generated buried homes and farm equipment, killed livestock, and on some occasions even darkened cities on the East Coast. The dust storms also represented a serious health risk to humans. At the height of the crisis, for example, physicians across the Midwest reported thousands of cases of what came to be known as “dust pneumonia,” which sometimes resulted in the death of the patient. The Dust Bowl laid bare millions of acres of farmland, left roughly half a million Americans homeless, and forced hundreds of thousands of people off the land. Indeed, between 1932 and 1940 it is estimated that 2.5 million people abandoned the plains for other regions of the country, with an estimated three to four hundred thousand heading to California alone.

In response to this unprecedented social and environmental catastrophe, the Roosevelt administration established a number of programs, such as the Resettlement Administration, that were designed to help those who had been driven off the land by the disaster. But it also recognized that the only way to deal with the crisis over the long term was to attack the root causes. In other words, it had to address the environmental degradation that led to the conditions that helped give rise to the Dust Bowl in the first place. Foremost among these was the state of the soil, which, thanks to over-plowing and grazing, the planting of inappropriate crops, and poor husbandry, was in abysmal shape.

Thanks in part to his experience as an amateur farmer and forester, FDR recognized that the key issue was soil conservation, and he established the Soil Erosion Service within his first six months in office. This initiative, which in 1935 became the Soil Conservation Service and later the Natural Resources Conservation Service, marked the first major federal commitment to the preservation of privately held natural resources. Under the auspices of this program, farmers learned new agricultural techniques, such as contour plowing, that helped preserve and protect the fertility of the soil. Equally significant was FDR’s initiation of the Prairie States Forestry Project in 1935. Here the goal was to create a “shelter belt” from the Texas Panhandle to the Canadian border. This program literally changed the face of the nation. Over the course of the next seven years, the U.S Forestry Service, working in conjunction with the Civilian Conservation Corps (CCC), the newly established Works Progress Administration (WPA), and local farmers, planted roughly 220 million trees, creating 18,000 miles of windbreaks on some 30,000 farms.

It is thanks to the New Deal’s establishment of the Soil Conservation Service and the planting of the Great Plains Shelter Belt that we have not experienced another Dust Bowl—even in the face of such severe conditions as this summer’s dry spell or the even more extensive drought the nation experienced in 1956. As was typical of most New Deal infrastructure projects, the programs the government designed to combat this unprecedented environmental disaster were not developed merely as a means to provide jobs and short-term work relief to those who were suffering unemployment. Rather, they were part of a large-scale effort to bring about a long-term solution to a very difficult environmental problem. This emphasis on long-term environmental planning, which recognizes the need create a balance between stewardship and managed exploitation and which sees the federal government as playing a crucial role in establishing the parameters of that balance, is now referred to as sustainable development.

In confronting the terrible conditions of the Dust Bowl, FDR once urged the American people to be ready “to fit and not fight the ways of nature.” Today, as we face the consequences of what the vast majority of scientific opinion recognizes as climate change—whatever its immediate causes—we would do well build on this lesson. If nothing else, this summer’s drought should remind us of our responsibility to ourselves and to our children to protect and preserve both our environment and our natural resources. With the right vision and political will, we too could turn the onset of the Great Drought of 2012 into an opportunity to provide millions of unemployed Americans work in developing green energy while at the same time building a cleaner, more secure future for our children. 

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

 

Drought land image via Shutterstock.com.

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Is Obama Using FDR's Playbook in Attacking Mitt Romney With Bain Capital?

Jul 16, 2012David B. Woolner

Obama's attacks on Bain follow in FDR's 1936 re-election footsteps except for one key aspect: a full-throated case for government.

Yes, there are still determined groups…[who would]…steal the livery of great national constitutional ideals to serve discredited special interests. As guardians and trustees for great groups of individual stockholders they wrongfully seek to carry the property and the interests entrusted to them into the arena of partisan politics…

Obama's attacks on Bain follow in FDR's 1936 re-election footsteps except for one key aspect: a full-throated case for government.

Yes, there are still determined groups…[who would]…steal the livery of great national constitutional ideals to serve discredited special interests. As guardians and trustees for great groups of individual stockholders they wrongfully seek to carry the property and the interests entrusted to them into the arena of partisan politics…

The principle that they would instill into government if they succeed in seizing power is well shown by the principles which many of them have instilled into their own affairs: autocracy toward labor, toward stockholders, toward consumers, toward public sentiment. Autocrats in smaller things, they seek autocracy in bigger things. “By their fruits ye shall know them.” - Franklin D. Roosevelt, 1936

In seeking to identify Republican presidential hopeful Mitt Romney as an unfeeling member of the nation’s wealthy elite, President Obama is using tactics reminiscent of those used by Franklin Roosevelt in his own bid for re-election in 1936. In that campaign, FDR sought to draw a clear distinction between what he and his Democratic colleagues represented—the interests of the average working American—versus what he saw as the Republican promotion of a return to the economic status quo. But unlike FDR, President Obama is shying away the argument that government must be the countervailing force against entrenched financial interests.

By 1936, conservative critics of the New Deal had launched a persistent and hard-hitting campaign against FDR's policies, labeling them un-American and contrary to the Constitution. At the forefront of this effort was the American Liberty League, a privately funded anti-government organization that ruthlessly attacked his economic policies as little more than a drive to usurp the constitution and take the United States down the path toward socialism. But thanks to the fact that the Liberty League was never a truly populist movement (although it tried to portray itself as such), as well as the fact that it was financed by some of the most powerful business interests in the county, including the leaders of the DuPont Company, Chase National Bank, Standard Oil, and a number of other wealthy individuals and corporations, FDR was able to discredit its efforts as little more than a poorly concealed attempt to restore the country to the laissez-faire economic policies of the past.

In doing so, FDR reminded the American people again and again that the rightwing drive to restore these policies was not based on the elite’s desire to protect and promote free enterprise, but rather based on their unabashed desire to protect and promote their own wealth and power. Under such an economic system, which had been in place during the 1920s, the “savings of the average family, the capital of the small-businessmen, the investments set aside for old age,” what FDR rightly called “other people’s money,” were the tools with which the economic elite dug itself in. Indeed, as he went on in perhaps his most famous 1936 campaign address, it was critical not to forget how:

Throughout the nation, opportunity was limited by monopoly. Individual initiative was crushed in the cogs of a great machine. The field open for free business was more and more restricted. Private enterprise, indeed, became too private. It became privileged enterprise, not free enterprise.

In our own era marked by declining wages, the outsourcing of jobs, and an ever-increasing share of the nation’s wealth residing in the hands of the financial barons of Wall Street—whose willingness to risk “other people’s money” has hardly diminished—FDR’s assault on what he identified as “the privileged princes of these new economic dynasties” rings as true today as it did in the mid 1930s.

It is for this reason that President Obama’s attacks on Mitt Romney’s record as the head of Bain Capital have proven so effective. Having been burned in the 2007-2008 financial collapse that led to the worst economic crisis since the Great Depression, the American people still harbor a good deal of hostility towards the bonus- and bailout-receiving bank executives whose reckless behavior brought the nation and the rest of the world to the brink of economic ruin. Based on the response to the president’s efforts to paint Romney as one of these elite, it also appears that they remain skeptical of the financial titans' ability to pull us out of the Great Recession. What is missing from the president's attacks, however, is the one key element that FDR used in convincing the American people that they should support his re-election in 1936: the clear and unequivocal case for government.

In the wake of the more than 30-year assault on government launched by Ronald Reagan in 1980, President Obama and the Democratic Party may be loath to use the case for government as part of their strategy to win the 2012 election. But as FDR pointed out in the mid 1930s, we have now reached a point like the 1920s where for too many of us “the political equality we once had won” has become “meaningless in the face of economic inequality.” Why? Because, as was the case in America’s gilded age, “a small group” has “concentrated into their own hands an almost complete control over other people's property, other people's money, other  people's labor—other people's lives.”  As a consequence, we also find, as FDR did, that “for too many of us life…[is] no longer free; liberty no longer real; men…[can] no longer follow the pursuit of happiness.”

To counter such entrenched economic interests, FDR insisted that “the American citizen could appeal only to the organized power of government,” and he urged his fellow citizens to vote for him and his party as the best means to ensure that government by, of, and for the people would continue to flourish. For, as he often noted, what was really at stake in this struggle between the average citizen and the interests of the wealthy was the state of democracy itself. In the same election speech, for example, he also observed:

Unhappy events abroad have re-taught us two simple truths about the liberty of a democratic people. The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic State itself.

The second truth is that the liberty of a democracy is not safe if its business system does not provide employment and produce and distribute goods in such a way as to sustain an acceptable standard of living.

FDR’s belief in the need for government to serve as an active instrument of social and economic justice won him the greatest electoral landslide in American history. It also helped preserve American democracy in an age when democratic government was under siege worldwide. Surely these are two lessons the Obama administration might turn to as it struggles to win the hearts and minds of the American people at this critical moment in our history.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

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President Obama and FDR: Rumors of Political Demise at the Hands of the Supreme Court Greatly Exaggerated

Jun 28, 2012David B. Woolner

Despite the handwringing, neither president suffered a huge political blow at the hands of the Supreme Court.

Despite the handwringing, neither president suffered a huge political blow at the hands of the Supreme Court.

There is no question that the Supreme Court’s decision to uphold the Patient Protection and Affordable Health Care Act represents a major victory for Barak Obama’s presidency. Struggling in the polls thanks to the continued sluggish performance of the economy, a defeat on the constitutionality of this signature piece of legislation had led many analysts to predict that, had the decision gone the other way, President Obama’s ability to effect further change would be finished. Others argued that a ruling striking down the health care law would have meant the end of President Obama’s political career. But if history is any guide, these dire predictions may have been too severe.

Roughly 75 years ago, when Franklin Roosevelt was engaged in his own struggle with the Supreme Court, it appeared for a time as if the fate of his presidency—and the New Deal—also hung in the balance. In May of 1935, for example, the Court struck down the National Industrial Recovery Act and the Agricultural Adjustment Act, two key provisions of the New Deal. FDR was livid and, fearing for the fate of such landmark pieces of legislation as the 1935 National Labor Relations Act and Social Security Act, he eventually decided to take on the Supreme Court by unleashing his famous “Court Packing Plan” in February 1937. The plan argued that the president should be allowed to add up to six new judges to the bench in cases where a sitting justice who had served at least ten years on the bench refused to retire after reaching his seventieth birthday.

The president was perfectly within his legal bounds to request a change in the make-up of the Court, and he certainly was not alone in his call for judicial reform. But given the widespread support for the make-up at the time and the means by which the president unveiled his proposal—it was launched without warning and without any effort to secure congressional support before it was put forward—the plan soon ran into fierce opposition, even from some members of Roosevelt’s own party. As time went on, what congressional support there was for the plan eroded, and after some months the bill was quietly allowed to die in the Senate before it ever came to a vote.

Most historians agree that the launch and demise of FDR’s court packing scheme was a major political blow which, when coupled with the Roosevelt recession of 1937, resulted in the strengthening of the anti-New Deal coalition in Congress in the midterm elections of 1938. This certainly made it harder for FDR to push further New Deal reforms in the coming years, but it did not bring about the judicial reversals that FDR feared. On the contrary, from that moment forward the Court upheld every New Deal statute that came before it, launching a new era of jurisprudence that fundamentally altered its character and the nature of its decisions.

The setbacks that President Roosevelt experienced at the hands of the Court in the mid 1930s, then, did not result in the undermining of the New Deal. Thanks to a shift in attitude in the Court about the role of government in the maintenance of the social and economic health of the nation, we still enjoy Social Security, unemployment insurance, a federal minimum wage, and a host of other New Deal provisions. Nor did the Court’s action’s result in the political demise of Franklin Roosevelt, who would go on to win reelection to an unprecedented third and fourth terms.

In the decades since Roosevelt’s showdown with the Supreme Court, a debate has raged about how much his decision to confront the Court may have led to the change in attitude among the justices regarding the constitutionality of the New Deal. A number of historians—and Roosevelt himself—have claimed that the president may have lost the battle but won the war. In other words, it was the pressure from the president that led to the shift in the Court’s outlook.

But more recent scholarship tends to support the idea that the Court’s about-face reflects the slow evolution of 20th century constitutional law that predates the New Deal. The court, in essence, was heading toward supporting greater federal intervention in the economy, but had not quite reached this point when FDR launched his flurry of programs and reforms. One strong argument in favor of this view stems from the fact that in early 1937—before FDR announced his court reform proposal—the court reversed itself and ruled in favor of two other New Deal provisions that had been brought before it. Ironically, one of the justices who changed his position was Owen Roberts, a conservative Hoover appointee who would continue to serve on the court until 1945. Given his change in attitude, it is Associate Justice Owen Roberts—a man whom the current chief Justice John G. Roberts (no relation) apparently admires—who is most often credited with saving the New Deal or, as was said at the time, carrying out “the switch in time that saved nine.” Today, it appears that it was Chief Justice Roberts, who cast the decisive vote in favor of the Patient Protection and Affordable Health Care Act, who will make it possible for millions of uninsured Americans to finally gain access to what many consider a fundamental human right: affordable health care. 

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

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Myths About Government

Jun 20, 2012Jeff Madrick

The Rediscovering Government roundtable discussion in DC tomorrow sets out to debunk misconceptions about government spending and the economy and reinvigorate a dialogue about the importance and positive potential of government. 

The Rediscovering Government roundtable discussion in DC tomorrow sets out to debunk misconceptions about government spending and the economy and reinvigorate a dialogue about the importance and positive potential of government. 

Perhaps it isn’t odd that the American people are so skeptical of the uses and purposes of government. As a nation built on a revolution against a monarchy, such skepticism is likely built into our national character.

But it doesn’t accord with our history, and that is why it remains surprising. Government was inseparable from American economic and social development. It did not reduce freedom, but protected it.

I am always disturbed when economists in particular talk about the “role of government.” It is like talking about the role of parents in their children’s lives, or the role of the basketball in a basketball game. There is no economy without government, even in America. The government does not merely correct market failures; its purpose is far more profound. It is about true freedom, true opportunity, and necessary change.

We have organized an important panel discussion on June 21st in Washington, D.C., to put to rest some of the prevailing myths about government. Peter Lindert of the University of California at Davis will tell us about his empirical work on whether large government impedes growth; his extensive research shows it has not. Jon Bakija of Williams College will similarly tell us about how little hard evidence there is that high taxes impede growth. Lane Kenworthy of the University of Arizona will show how much of the income of the lower half of the distribution depends on social policies. Nancy Altman of Social Security Works will put straight the true finances of Social Security. And finally Ruy Teixeira of the Center for American Progress will tell us how extensive the American antagonism towards government is despite these facts, and whether these views can be changed.  

Our goal is to present a counter-narrative to the prevailing anti-government ideology. We will not argue that government is all good, requires no radical reforms, or cannot be made to work better. After all, why should we expect politicians to act in the interests of others, rather than their own sometimes contradictory interests?  

But there is reason to expect this, because it has happened time and again in American history. Moreover, acting in the interests of others is often acting in one’s self interest. Thomas Jefferson championed regulations of land sales in early America to make sure many people got a chance at ownership. The result was a strengthened democracy of secure and satisfied citizens.

His party built the canals through public financing in the states, led by New York. Many, and probably most, prospered when New York City became the giant hub of trade and commerce with the opening of the Erie Canal. American government created free and mandatory schools, subsidized the railroads, started technical colleges, and sanitized the cities, which in turn became sources of growth. In the 1800s, these activities were typically led by the state and local governments.

Markets don’t work when monopolies gather power, and the federal government in the next century set out to limit that from happening. It protected workers in all kinds of ways. In the 1930s, it recognized that financial markets were different from others and required special regulations. It built highways, invested in medical and technical research, subsidized college, and established necessary product, safety, and environmental regulations.   

As Lane Kenworthy points out in his fine summary piece on our site, if big government were a problem, why did the U.S. economy keep growing fast even as government got bigger?  

And let me point out one other factor that is neglected. As I emphasized in my book, The Case for Big Government, government is the key agent of change. No one anticipated we’d need high schools and colleges when the Constitution was written, but government was the instrument to create these critical institutions. No one knew of germ theory, but government led the way in sanitizing water and making large cities habitable. Who knew about the computer chip?

Perhaps I am biased because I live in New York. The New York City government eventually took over and aggressively expanded the subways. It built the dramatic walls of Riverside Drive, so often neglected. Miracle of miracles, it collects the garbage in this densest of cities.

But consider the great water works of the west. This was the work of state and federal government. And the highways, of course.  And the university system of California, among others.

If one needs further historical examples, consider the first great European city, Rome. Its aqueducts and enormous road network were the work of the government. Its devotion to law is a model to this day. It was highly productive and conducive to commerce because of these advances.  

American attitudes towards government have always shifted; sometimes pro-government and public investment and social programs, sometimes against them. We were usually at our best when we favored government, but government was far from always efficient. America was not immune to substantial corruption. Government always needed a good wringing out. But when it was widely vilified and weakened, America often failed. Political instability, widespread sacrifice, and jeopardized democracy were results.  

As for contemporary times, the Great Depression was an important catalyst. It turned an already partly progressive nation (since Teddy Roosevelt and Woodrow Wilson) far more so. It gave us a minimum wage, unemployment insurance, Social Security, labor organizing protections, securities regulations, and great public works to create jobs. The New Deal was followed by Johnson’s remarkable Great Society in the 1960s -- Medicare, Medicaid, historic civil rights legislation, and on. The American social sphere was brought into modern time along with its economy, which required those social investments.

But these attitudes shifted strongly beginning in the 1970s. Attitudes towards government had already become somewhat more skeptical in the 1960s, with new poverty programs and racial demands. The Vietnam War was a further blow to confidence in government, as was the Watergate scandal.  

In my view, however, the economic devastation of the 1970s was the major blow. Inflation of 12 percent, unemployment soaring, mortgage rates at 18 percent. In 1972, Governor Ronald Reagan of California supported a referendum to demand a sharp and permanent cut in state income taxes. Californians voted against it; they said they would pay their state taxes. By 1978, only six years later, Proposition 13 passed overwhelmingly, sharply cutting property taxes and with it undermining the state’s great education system.  Nationally, the Kemp-Roth tax proposal to cut federal income taxes up to 30 percent was rapidly gaining support in Congress. Economic pain caused Americans to seek quick and sometimes vindictive solutions, even personally self-destructive ones.  

In my view, the lost faith in and mismanagement of government is the key cause of the crisis of the future the nation now faces. This lost faith resulted in deregulation, unaffordable tax cuts, and the failure of government to develop new programs and act as the agent of change it should be.  

We can argue about these issues philosophically. But Rediscovering Government will stay as close to the demonstrable facts as possible. We will present the evidence about government, the economy, and growth. Then we can discuss how to restore a true sense of our own history, rebalance our sense of the purpose of government, and move on constructively.  

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

 

Capitol image via Shutterstock.com.

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The Senate’s Dimon Hearing Was Sadly No Pecora Commission

Jun 14, 2012David B. Woolner

Rather than digging up the truth behind Wall Street's behavior, Congress seems content to let the possibility of another crash loom.

Rather than digging up the truth behind Wall Street's behavior, Congress seems content to let the possibility of another crash loom.

Jamie Dimon’s testimony before the Senate Banking Committee yesterday has led some critics to charge that the Senators tasked with getting to the bottom of what led to JPMorgan Chase’s staggering $2-to-$5 billion dollar loss in the derivatives market have dropped the ball. In spite of Mr. Dimon’s frank admission that JPMorgan Chase, like the nation’s other big banks, was sometimes led astray by “greed, arrogance, hubris [and] lack of attention to detail,” and his additional observation that the instigation of the yet-to-be imposed Volcker Rule could have reduced the losses, Dimon faced few really tough questions. As a result, we learned little, if anything, from the hearings about the true nature of the decisions that led to the loss, or how Mr. Dimon and the CEOs of our nation’s other too big to fail banks might avoid such large losses in the future. This is particularly important if what he calls the “vague and unnecessary” Volcker Rule is ultimately watered down to the point of ineffectiveness.

Given the level of campaign contributions members of the Senate Banking Committee—on both sides of the aisle—have received from the banking industry, perhaps we should not be surprised by the coddling Mr. Dimon received in the Senate hearing room. But things were not always so cordial. Roughly 80 years ago, in the wake of the 1929 financial sector crash, the very same Senate Banking Committee, under the leadership of the committee’s indomitable chief counsel Ferdinand Pecora, excoriated members of Wall Street’s financial elite. The result was a series of revelations about the behavior—what Mr. Dimon accurately calls the “greed, arrogance [and] hubris”—of Wall Street that outraged the nation and shocked Congress into action.

In the spring of 1933, for example, under the grilling many top executives received at the hands of Pecora, who cut his teeth as a prosecutor as the Assistant Attorney General for the State of New York, the Senate Banking Committee learned that top executives at National City Bank (now Citibank) had bundled a series of bad loans to Latin American countries into securities and sold them to unsuspecting investors. The Committee also learned that these same executives had received large interest-free loans from National City’s coffers and that, as J.P. Morgan, Jr. admitted, it was fairly common practice among the members of Wall Street’s banking and financial elite to keep a list of influential “friends” who were given the opportunity to purchase stocks at drastically reduced prices. Most shocking, however, was the revelation that Mr. Morgan, who as head of the nation’s largest bank was the Warren Buffet of his day, had paid no income taxes between 1930 and 1933. Nor was he alone, for the committee soon learned that many of the nation’s other top bankers had also paid little or no income tax in the years since the 1929 crash.

These disclosures, coupled with additional revelations about excessive salaries and bonuses, outraged the public and helped inspire the incoming Roosevelt administration and Congress to push through some of the most important banking and financial reforms in American history. It is thanks in part to the work of the Senate Banking Committee, then, that the nation benefitted from such reforms as the Glass-Steagall Act, which separated commercial from investment banking and gave us the Federal Deposit Insurance Corporation; the 1933 Truth in Securities Act, which required the securities industry to provide potential investors with complete and accurate financial information about any financial product individuals or firms might wish to purchase; and the 1934 Securities and Exchange Act, which created the Securities and Exchange Commission.

Of course, the vast majority of the financial sector in 1933 and '34 vehemently opposed these reforms. But thanks to the willingness of the Senate Banking Committee to root out and expose many of the unethical practices that contributed to the collapse of the American economy, all Americans, from Wall Street to Main Street, were able to reap the benefits of a properly regulated financial sector for decades to come.

Today, most mainstream economists agree that it has been our return to the reckless and largely unregulated financial practices we saw in the 1920s, coupled with the dismantling of such key New Deal reforms as the Glass-Stegall Act, that led to the 2007-08 collapse of the world’s economy and the onset of the Great Recession. Yet the gentle treatment Mr. Dimon received at the hands of the current Senate Banking Committee pales in comparison to the penetrating line of inquiry pursued by its predecessors. This is unfortunate, for it represents yet another lost opportunity at the hands of our dysfunctional government to provide the kind of leadership required to bring about meaningful financial reform. Sadly, it seems that we would rather run the risk of another financial collapse than confront the truth about the unsustainable nature of an industry driven solely by the desire to accumulate vast quantities of wealth by whatever means necessary, no matter what the cost to the millions of Americans who still believe in an honest day’s pay for an honest day’s work.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

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Austerity Replaces Economics With Disciplinarian Ideology

Jun 6, 2012Jeff Madrick

Ludger Schuknecht's insistance on continued austerity is merely a discipinarian's argument, which has already been proven wrong time and again. 

Ludger Schuknecht's insistance on continued austerity is merely a discipinarian's argument, which has already been proven wrong time and again. 

The letter in today’s Financial Times, "Jointly Agreed Strategy is Good for Germany and Europe," from Ludger Schuknecht, the Director General of the German Ministry of Finance, will likely live in infamy. In any case, frame it for your children as a symbol of the folly of mankind. In the sternest terms, Mr. Schuknecht chastises Martin Wolf for demanding a reversal of fiscal austerity. Why? “The public and markets have been led to believe in short-term measures for far too long.” Goodbye to Keynes, and even Friedman.

Moreover, he argues, “it is expansionary policies and weak fiscal positions that created the current problems of high debt and low competitiveness.” Of course, the Eurozone deficit was only 0.5 percent of GDP before the crisis. In Spain, fiscal policy was clearly restrained before the crisis. Few could argue the European Central Bank practiced loose monetary policy over these years.  

According to Mr. Schuknecht, we need “a combination of fiscal consolidation and structural reforms.” And all of this with the goal of rebuilding confidence. How can we be hearing this again, after the failure of austerity in country after country?  Now even the conservative Spanish government is admitting failure.

Evidence is not the issue here. Surely the impressive IMF research on the failure of austerity time and again cannot be simply dismissed. But dismiss it Mr. Schuknecht clearly does. Heaven forbid we introduce Eurobonds, which will undermine the confidence being built.

Clearly the German government sees confidence somewhere, but it is surely not in the financial markets.

I long to ask Mr. Schuknecht what he believes caused the Great Depression. He may have written about this somewhere; I assume he thinks uncertainty and government spending were the causes. I wonder if he can point to one credible case where austerity worked without a concurrent devaluation of the currency.

But such arguments do not seem to turn on evidence or theory.  They come from the stern gut of a schoolmaster, and they come from a nation that has yet to suffer the consequences of the current crisis. The inability or refusal to see ahead is the sure sign of an ideologue. But I think this is not even ideology; it is the instinct of the disciplinarian. And it is mixed with a desire to diminish government. Another rap on the knuckles with the ruler will bring confidence, confidence will bring investment, and investment, prosperity. We were told the same in the 1930s, but never mind all that.  

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

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Mike Konczal on “Fireside Chats”: Tough Times make Liberal Reform Tougher

Jun 5, 2012Danielle Bella Ellison

In the latest episode of “Fireside Chats,” Roosevelt Institute Fellow Mike Konczal talks with David Frum, Daily Beast writer and author of the new novel Patriots. In the clip below, they take on why Democrats have had trouble gathering support for stimulus programs during the current recession. “We’ve gone from Speaker Pelosi and the new Obama presidency and the idea of this wave of progressive energy to really trying to fight between the center and the center right,” Konczal notes.

In the latest episode of “Fireside Chats,” Roosevelt Institute Fellow Mike Konczal talks with David Frum, Daily Beast writer and author of the new novel Patriots. In the clip below, they take on why Democrats have had trouble gathering support for stimulus programs during the current recession. “We’ve gone from Speaker Pelosi and the new Obama presidency and the idea of this wave of progressive energy to really trying to fight between the center and the center right,” Konczal notes.

As Konczal explains, “The real New Deal that we think of – the core economic security and managing the business cycle and so on – occurred in ’35,” when the economy was expanding. Meanwhile, “the conservative agenda to roll back the Great Society and the New Deal” unfortunately becomes more feasible in tough economic times like ours. The public becomes more risk averse and prefers austerity policies to big and potentially risky spending programs. Major liberal reforms, however necessary and beneficial they may be, are just very hard to pass during bad economic times.

The current grim economic condition, as well as the increase in media culture and accelerating ethnic change, have caused a transformation of American politics. Watch the full conversation below in which Konczal and Frum discuss this transition, what a Romney budget would look like, and the future of Obamacare.

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Bloomberg's Soda Ban Recalls New Deal-era Nutrition Programs

Jun 1, 2012David B. Woolner

Despite conservatives' recoiling at food and nutrition standards set by the government, they have a long and important history.

Despite conservatives' recoiling at food and nutrition standards set by the government, they have a long and important history.

New York Mayor Michael Bloomberg’s recent announcement that his administration plans to ban the sale of large size sugary drinks to combat the growing problem of obesity has once again brought the question of the government’s role in nutrition and public health to the forefront of the nation’s discourse. In a similar move earlier this year, the Obama administration announced that it was issuing new rules for the nation’s subsidized school meal program, which would add more fruit and green vegetables to school breakfasts and lunches, also as a means of combatting the growing problem of obesity among our nation’s youth.

Most Americans are highly supportive of these moves and regard the school meal program—formally the National School Lunch Program—with favor. But like so many of the social programs that we now take for granted, few Americans probably realize that its history and its relationship to concerns over the nourishment of the nation’s children is rooted in the New Deal.

Prior to the New Deal, at the beginning of the 20th century, it had become more and more obvious that millions of Americans were suffering from malnutrition. This fact was confirmed by the initiation of the military draft in World War I, where it was determined that a shocking number of young men across the country were ineligible for military service due to their poor physical condition. Equally important was the simultaneous realization that widespread malnutrition among the nation’s school children was having an enormous negative effect on the ability of millions of young people to achieve basic academic standards. Armed with this alarming information, an emerging class of experts trained in the science of nutrition began to argue that it was time to instigate programs aimed at alleviating this critical problem.

One of the suggested reforms was the initiation of a national school lunch program designed to help lessen the problem of hunger among the nation’s youth. The idea of serving hot lunches to hungry students in the nation’s public schools was in fact not new, as many progressive-minded reformers had been advocating for it for some time. One result of these early efforts was the establishment of privately funded school lunch programs in a number of American cities, including New York and Chicago, which by the early 1920s had been partially embraced by their local school boards. However, it would not be until the onset of the Great Depression and the subsequent arrival of the New Deal that we would see direct federal involvement in the issue.

Like many of the locally based public or private relief programs that were in place by the early 1930s, most establshed local and state school lunch programs found it impossible to continue in the face of the crisis that now confronted the nation. The devastating drop in local revenue due to the drastic downturn in the economy was one reason; a second was the inability of the millions of impoverished students to pay even the meager “at cost” fees that many districts charged in exchange for school lunches.

The economic collapse also meant that a good share of the nation’s farm production went begging for a market. Moreover, as surpluses of farm products continued to mount, their prices declined to a point where farm income provided only a meager subsistence. It soon became apparent that one way to tackle the growing problem of malnutrition among Depression-era young people was to link it to agricultural aid through the school lunch program. In 1935, therefore, under the auspices of an Amendment to Agricultural Adjustment Act, Congress passed Public Law 320, which created the Commodity Donation Program. Under its terms, the Secretary of Agriculture was provided the funds and charged with the responsibility for removing “price-depressing surplus foods from the market through government purchase” and disposing of this surplus “through exports and domestic donations to consumers in such a way as not to interfere with normal sales."

Needy families and school lunch programs became constructive outlets for the commodities purchased by the Department of Agriculture under the terms of this legislation. And as the food used for school lunches would not otherwise be purchased in the marketplace, farmers benefitted by obtaining an outlet for their products at a reasonable price. The purchase and distribution of the food was assigned to the Federal Surplus Commodities Corporation, which had been established in 1933 as the Federal Surplus Relief Corporation to distribute surplus dairy products, pork, and wheat to the needy. By March 1937, nearly 4,000 schools were receiving food and serving 342,031 children daily. Two years later, the number of schools participating had grown to just over 14,000 and the number of children being served had climbed to 892,259.

As was the case with many New Deal programs, the Federal Surplus Commodities Corporation employed special representatives in each state to work with state and local school authorities, parent teacher associations, and similar organizations in an effort to expand the school lunch program. These efforts were enormously successful, and by 1942 the number of schools participating increased by over 75,000 and the number of pupils participating exceeded 6 million.

As a further benefit to the economy, many of the individuals involved in preparing and distributing the school lunches were employed by the Works Progress Administration (WPA). The Community Service Division of the WPA employed thousands of needy women in nearly every city, town, and rural community of the country. The supervisory staff chosen to spearhead the effort to prepare and distribute the lunches was most often chosen from people who had special knowledge in the preparation of food. In addition, manuals were developed at the state and district supervisory levels, which did much to improve the quality of the meals served as well as to set standards for equipment, sanitation, and safety in the lunch program. A further benefit of the WPA’s involvement in the program was that much of the labor was provided without cost to a school district. As such, lunch prices were held to a minimum and more children were able to participate, with the result that the program expanded rapidly throughout the nation.

Not surprisingly, the onset of World War II had a significant effect on the school lunch program. The rise of defense industries, for example, resulted in a sharp drop in the number of people employed by the WPA, and in early 1943 the agency's activities came to a close. In the meantime, the enormous amount of food required to support the U.S. Armed Forces and the Allied war effort soon depleted farm surpluses, and the quantities of food available for the school lunch programs declined sharply. But by this point federal government support for the school lunch program had gained enormous popularity, both among the public and in Congress, and in 1943 the latter voted to authorize the funding needed to continue the program for another year. Similar laws were enacted in 1944 and 1945, so that the school lunch program continued in spite of the demands of the war.

Congress finally decided to make the program permanent with the passage of the National School Lunch Act of 1946, which among other things declared that “as a measure of national security, to safeguard the health and well-being of the Nation's children and to encourage the domestic consumption of nutritious agricultural commodities” the federal government would provide assistance to the States to provide “an adequate supply of food and other facilities for the establishment, maintenance, operation and expansion of nonprofit school lunch programs.”

The national school lunch program that emerged from the New Deal is just one more example of how the sensible use of nation’s national resources—including government revenue—may be used to improve our nation’s economic and physical well-being. In the years since the New Deal, however, the school lunch program has often come under assault from conservatives as too expensive. One result was an effort to privatize much of the program in the 1970s and '80s. As a result, many districts adopted “kid friendly” fast foods menus of pizza and fries while allowing vending machines – which dispensed the very sugary drinks Mayor Bloomberg is now limiting – to be placed within school buildings. Most experts now agree that this was a mistake and that, as was the case in the 1930s, it is critical for those in a position of responsibility to ensure that the food served to our young people meets basic nutritional standards.

Given all of this, it would appear that attacks on government nutrition programs follow the same pattern of our abandonment of the Glass-Steagall Act, our move away from proper regulation of the banking and financial sector, and our refusal to recognize the short- and long-term benefits of a massive infrastructure building program. We turn away from the common-sense ideas of the New Deal at our peril.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

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