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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The Insane Idea Hidden in the Debate Over Obama's Spending

May 24, 2012Mike Konczal

Instead of debating whether Obama is responsible for a spending surge, we should ask why anyone expects the ratio of spending to GDP to remain constant in a recession.

Instead of debating whether Obama is responsible for a spending surge, we should ask why anyone expects the ratio of spending to GDP to remain constant in a recession.

There's a recent debate about whether or not a federal government spending boom has happened on President Obama's watch. This was kicked off two days ago by Rex Nutting's post at MarketWatch, "Obama spending binge never happened." Nutting notes that "federal spending is rising at the slowest pace since Dwight Eisenhower brought the Korean War to an end in the 1950s." He argues that the 2009 fiscal year, outside the stimulus spending, belongs to President Bush, as it was four months into that budget when Obama entered the presidency. He draws on OMB's numbers, which you can access here.

As you can imagine, the right wing has gone into action. Here's "Actually, the Obama spending binge really did happen" by AEI's James Pethokoukis, which argues that you must look at the government spending as a percentage of GDP to see the increase. Now there's a technical debate about how to approach the numbers in the 2009 fiscal year, and there's a fair debate on how to understand the increase in automatic stabilizers, such as unemployment insurance. Do they "belong" to Obama, given that they were already starting up due to a recession that started in December 2007? And then there's the economic debate: shouldn't the proper response have been to run a much larger federal government spending program?

But underneath it is an insane debate about an insane idea -- that the government should keep a consistent ratio of government spending to GDP in a recession. The attack on Obama is focused on this number without acknowledging the crazy part of what this number actually does in a recession.

Let's run through a quick example to show why I think this is insane. Imagine a government spends 20 percent of GDP this year, there is no expected GDP growth in the next year, and the government will spend the same exact amount of money next year. And then imagine that GDP drops 2.7 percent for the year, as it did from 2008-2009, for this hypothetical economy.

Now even though there is no additional money spent, government spending as a share of GDP will go up. The number goes up if the numerator increases (governments spend more) or the denominator decreases (GDP falls in a recession). It goes up to 20.6 percent in this hypothetical example. If the government wanted to keep the 20 percent ratio consistent, it would have to cut spending. But in a weak economy, in the middle of a recession, the last thing you want to do is cut government spending -- that will make the recession worse, which will decrease GDP further. Then you have to cut government spending even further, which creates a nasty loop.

Federal government spending as a percentage of GDP went from 20.8 percent in 2008 to 25.2 percent in 2009. How much was GDP falling? If GDP had grown 3.4 percent as it had done the year before, instead of dropping 2.7 percent, spending as a percentage of GDP would have gone to 23.7 percent. That means a third of the rise in government spending as a percentage of GDP is a mechanical effect of GDP falling in the Great Recession. And if GDP didn't fall in the Great Recession, automatic stabilizers wouldn't have kicked in and there wouldn't have been the stimulus bill, meaning less spending.

It is worth noting that one reason why the Great Recession wasn't a Great Depression was likely because of the increased size of government spending in the economy compared to the 1920s.  Here's Josh Mason in a great post:

We always ask, why was the Great Recession so deep? But you could just as well turn the question around and ask why, despite initial appearances, did it turn out to be not nearly as deep as the Depression?
 
I can think of four families of answers....The second answer would be that the sheer size of government makes a Depression-scale collapse of demand impossible, regardless of policy. In 1929, with government final demand only a couple percent of GDP, autonomous spending basically was investment spending, especially if we think at the global level so exports wash out. Today, by contrast, G is significantly larger than I (about 20 vs 15 percent of GDP), so even if private investment had collapsed at the same scale as in 1929-1933, the percentage fall in autonomous demand would have been much less. (And of course that fact alone helped keep private investment from collapsing.) Interestingly, despite Hyman Minsky's association with stories about finance, this, and not anything to do with the financial system, was why his answer to the question Can "It" Happen Again was, No. Policy is secondary; big government itself is the ballast that stabilizes the economy.

And, for the record, it's a massive shame that government spending didn't go up more, reducing unemployment, getting the economy back on track, and ultimately really bringing down the debt-to-GDP ratio.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Curing the Causes, Not the Symptoms, of the Job and Debt Crises Facing Today’s Graduates

May 24, 2012David B. Woolner

The country is doing little to make college an affordable and realistic goal for American families.

We have believed wholeheartedly in investing the money of all the people on the education of the people. That conviction, backed up by taxes and dollars, is no accident, for it is the logical application of our faith in democracy.

The country is doing little to make college an affordable and realistic goal for American families.

We have believed wholeheartedly in investing the money of all the people on the education of the people. That conviction, backed up by taxes and dollars, is no accident, for it is the logical application of our faith in democracy.

Man's present day control of the affairs of nature is the direct result of investment in education. And the democratization of education has made it possible for outstanding ability, which would otherwise be completely lost, to make its outstanding contribution to the commonweal. We cannot afford to overlook any source of human raw material. Genius flowers in most unexpected places; "it is the impetus of the undistinguished host that hurls forth a Diomed or a Hector." –Franklin D Roosevelt

As has been widely reported in the press of late, students graduating from college this spring are not just facing a jobs crisis; they are also facing a debt crisis. The New York Times recently reported, for example, that the average debt burden for graduating college seniors is now approaching $25,000, with ten percent of all graduates owing more than $50,000 and three percent owing more than $100,000. Taken together, total student loan debt in the United States now exceeds $1 trillion—more than all credit card debt in the country.

Equally daunting are the job prospects that current graduates face. It is estimated that more than half of all 2012 graduates will still be out of work a year from now, as was the case for the 2010 and 2011 graduating classes. What is more, even those graduates lucky enough to find a job will earn wages far below their counterparts who graduated in the years before the Great Recession, making it all the harder for them to keep up with—much less pay down—their student loans.

Facing high debt, bleak job prospects, and low wages, many students (and parents) are asking themselves if the high cost of education is really worth it. Current statistics suggest that pursuing a college degree is still a good investment. The unemployment rate among 21- to 24-year-olds with a college education is roughly half what it is for those with only a high school diploma, and the lifetime earnings of a college graduate still exceed the earnings of those without a four-year degree. But if—as some economists argue—our economic problems are more structural than cyclical and high unemployment and low wages will be with us for some time, then taking on a significant debt burden in the pursuit of higher education may in fact be a mistake.

In light of growing concerns about student debt, the Obama administration is pushing a proposal that would require schools to provide straightforward, standardized information on how much debt students should expect to incur over the course of their tenure in college. In addition, a bill has been put forward in the Senate that would require lenders and college financial aid officers to provide students with better information about their borrowing options, including the difference in cost between federal loans and private loans.

While these are welcome steps, they really boil down to treating the symptoms, not the disease. The real issue confronting students today is not the value of a higher education, but the cost. President Obama alluded to this in his 2012 State of the Union address, when he argued that our nation’s colleges and universities should do more to bring down the price of tuition. He also urged the states to make education a higher priority in their budgets. But the truth is that over the past ten years, state support for higher education has declined by about 25 percent, while the cost of tuition and fees at state schools has increased 72 percent.

Like the growing disparity in wealth and income that has emerged in this second Gilded Age, this combination of the decline in state support coupled with the rise in fees for both public and private colleges has rendered the dream of higher education less and less affordable for working families. And, as we have seen, those who do choose to pursue their educational ambitions do so at a huge cost, a cost that is becoming more suspect in a society where good jobs with decent wages are becoming a thing of the past.

In the middle of the 1930s, Franklin Roosevelt confronted a society that was equally burdened by the perils of structural inequality. But he was not content to merely provide relief to those suffering from the despair of unemployment or the scourge of poverty. Indeed, FDR often characterized the relief measures he initiated as temporary. What really concerned him was the far deeper question of structural reform: how to rid America of the one-third the nation that was “ill-clad, ill-housed, ill-nourished.”

It was this motivation that led to some of the most profound pieces of legislation that came out of the New Deal, including the Social Security Act, the National Labor Relations Act, the Fair Labor Standards Act, and the National Housing Act. It also gave us such critical financial reforms as the separation of commercial and investment banking and the creation of the Federal Deposit Insurance Corporation under Glass-Steagall, as well as the establishment of the Securities and Exchange Commission.

Roughly ten years later, as the Second World War was drawing to a close, FDR returned to this theme with his call for “a second bill of rights”—an “economic bill of rights”—that would include not only the right to “a useful and remunerative job” with an adequate income, but also the “right to a good education.”

To make good on the latter, the Roosevelt administration passed the “G.I Bill of Rights” later that year. The G.I. Bill represents one of the most significant government-led commitments to higher education and job training in our nation’s history. Under its terms, returning veterans received a host of benefits, including full tuition and book and living expense payments for those wishing to pursue a higher education. For those not wishing to go to college, the act also provided support for vocational training. The impact of the G.I Bill on postwar America was tremendous. In the next seven years, approximately 8 million veterans would take advantage of the education benefits. As a result, millions of Americans who might never have dreamed of going to college were able to do so, Millions more enhanced their earning power and job prospects through the vocational training and other educational benefits.

Of course, the G.I. Bill was not free; it required serious expenditures on the part of the federal government. But for FDR and his generation, this was an investment in America’s future well worth making. It was, as Roosevelt liked to say, an investment in our nation’s most precious resource, its “human capital.” To neglect America’s human capital, to cut back on our support for education, was simply not an option, for in FDR’s view if “we skimp on that capital, if we exhaust our natural resources and weaken the capacity of our human beings, then we shall go the way of all weak nations.”

If we are serious about the need to improve our economy, keep America competitive, and provide a hopeful and prosperous future for our children, then perhaps it is time we confronted the real issue that stands at the root of the student debt and jobs crisis: the woefully inadequate level of public support for higher education. No doubt the deficit soothsayers in Congress and elsewhere will tell us that we cannot afford such an investment. But the legacy of the 1930s and 40s suggests quite the opposite. Thanks to the G.I. Bill and the many other provisions of the New Deal, the better educated and better paid work force that emerged in the decades after World War II made the American economy—and the American worker—the envy of the world.

FDR warned us that “no country, however rich, can afford the waste of its human resources.” Yet the unfair burden we have placed on this generation of Americans—a generation that increasingly sees little reason to pursue post secondary education at such high costs and falling gains—suggests that we have chosen to abandon this lesson. In doing so, we have done much more than merely turn our backs on the millions of young people who dream of going to college. We have turned our backs on America.

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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FDR's New Deal Shattered the Austerity Myth

May 7, 2012David B. Woolner

FDR understood that prosperity would be created through growth, not austerity, and today's leaders may finally be learning the same lesson.

To balance our budget in 1933 or 1934 or 1935 would have been a crime against the American people. To do so we should either have had to make a capital levy that would have been confiscatory, or we should have had to set our face against human suffering with callous indifference. When Americans suffered, we refused to pass by on the other side. Humanity came first.

FDR understood that prosperity would be created through growth, not austerity, and today's leaders may finally be learning the same lesson.

To balance our budget in 1933 or 1934 or 1935 would have been a crime against the American people. To do so we should either have had to make a capital levy that would have been confiscatory, or we should have had to set our face against human suffering with callous indifference. When Americans suffered, we refused to pass by on the other side. Humanity came first.

…This debt is not going to be paid by oppressive taxation on future generations. It is not going to be paid by taking away the hard-won savings of the present generation. It is going to be paid out of an increased national income and increased individual incomes produced by increasing national prosperity. — Franklin Roosevelt, 1936

The recent news that the U.K. and other major European economies have officially entered a double dip recession has led many observers to argue, as the New York Times did last week, that the economic policies followed by the Obama administration have been better than the austerity measures pursued by his European counterparts. Indeed, most mainstream economists now agree with the voters in France, who, in electing François Hollande as their next president, have endorsed the idea that “austerity need not be Europe’s fate.”

There is a growing recognition on both sides of the Atlantic that President Obama's approach, which has combined stimulus spending, capital injections, and quantitative easing, is largely responsible for the fragile yet steady recovery the United States has been experiencing since 2010. Granted, the U.S. economy remains weak, and as such there is real concern that the downturn in Europe might drag the U.S. back into recession. But there is another, perhaps greater risk to the U.S. recovery that emanates from our own shores: the incessant demand for European-style federal budget cuts from American austerity hawks.

As evidenced by last summer’s debt ceiling debacle or the draconian budget proposed this spring by Rep. Paul Ryan, the right wing of the Republican party will seemingly stop at nothing to achieve its goal of cutting the size of government. Moreover, its unremitting sky-is-falling rhetoric—which is based largely on fear—has become so pervasive in our political discourse that the question of cutting the federal deficit receives nearly equal footing with the issue of job creation in the media and on the campaign trail. We are told again and again that the way to create jobs is to reduce spending and cut the size of government. Never mind that these policies have failed in Europe over the past two years, while President Obama’s rejection of austerity has resulted in sustained economic growth over exactly the same period.

Roughly three-quarters of a century ago, a similar argument raged between Franklin Roosevelt, who firmly believed that it was right and proper for the government to intervene in the economy during a time of crisis, and those on the extreme right who insisted the way to end the Great Depression was to reduce the federal deficit and balance the budget, no matter what the short-term costs.

FDR had little time for such arguments, which he viewed as not only selfish, but un-American. In his view, most Americans, “if they know both sides of a question and are asked to support the public good, will step forward and lay aside selfishness.” But, he went on:

…we must admit that there are some people who honestly believe in a wholly different theory of government than the one our Constitution provides.

You know their reasoning. They say that in the competition of life for the good things of life “some people are successful because they have better brains or are more efficient; the wise, the swift and the strong are able to outstrip their fellowmen.” And they say that that is nature itself and you cannot do anything about it and it is just too bad if some, the minority of people, get left behind.

For Roosevelt, however—and the vast majority of Americans who voted for him over the course of four terms in office—such an attitude was unacceptable. They understood that there were times in the life of a nation when government had a duty to intervene in the economy, even if it meant going into debt. Thanks to their efforts, and to their faith in government, we continue to enjoy Social Security, unemployment insurance, Federal Deposit Insurance, and a host of other beneficial programs that came from the New Deal.

Conservative commentators today are fond of arguing that the New Deal did not work, that it was the war, rather than New Deal spending, which finally got the United States out of the Great Depression. What they fail to mention, of course, is that New Deal spending did work, just not enough to pull us out of the deep trough we were in. For that we needed much more spending, the kind of spending—and borrowing—that occurred in World War II. According to the logic of today’s budget hawks, such a massive level of deficit and debt should have brought the U.S. economy to a screeching halt once the war was over. But that did not happen. On the contrary, the period of economic growth that occurred in the United States after the war was the largest and longest the world had ever seen.

Much like the 1930s, our slow climb out of the Great Recession has been made all the more difficult and painful thanks in large part to the unwillingness of austerity hawks in Congress to pass the president’s ill-fated jobs bill and other pieces of stimulus legislation. Sadly, they seem far more interested in promoting the myth of austerity and the evils of short-term deficit spending than they do in confronting the overwhelming evidence from Europe and our own history that now is the time not to cut the federal budget, but to expand it.

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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How FDR Learned to Stop Worrying and Love Keynesian Economics

Apr 26, 2012Tim Price

FDR once thought austerity was the answer, but he quickly learned how wrong he was.

FDR once thought austerity was the answer, but he quickly learned how wrong he was.

As European leaders watch their austerity measures generate economic setbacks and pain at the polls, they're re-learning a lesson that FDR also learned the hard way: Balancing a budget during an economic crisis might sound like a nice idea in theory, but the real-life consequences are a killer. While FDR is today remembered as a president who embraced Keynesian economics with programs like the Works Progress Administration and the Civilian Conservation Corps that helped lead America out of the Great Depression, he started out as something of a deficit hawk. To explain this forgotten chapter in history, our partners at the FDR Library have put together this illuminating (and perhaps surprising) resource on Roosevelt's evolving fiscal policy, including copies of some original documents from the period.

They note that "FDR began his 1932 campaign for the presidency espousing orthodox fiscal beliefs" and "believed that a balanced budget was important to instill confidence in consumers, business, and the markets, which would thus encourage investment and economic expansion." But as the severity of the Great Depression became clear, he recognized that emergency relief programs were a necessity no matter the cost. Speaking at a campaign rally in 1936, he declared that "to balance our budget in 1933 or 1934 or 1935 would have been a crime against the American people... When Americans suffered, we refused to pass by on the other side. Humanity came first." As the economy began to improve, he eventually gave in to conventional wisdom and tried to cut back on spending, triggering the so-called Roosevelt Recession of 1937.

Duly chastened by the painful effects of his attempt at balancing the budget, FDR was persuaded to embrace the theories of John Maynard Keynes and called for more deficit spending beginning in 1938 and continuing throughout World War II. His change of heart culminated in his famous speech calling for an Economic Bill of Rights in 1944, in which he said, "We have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence. 'Necessitous men are not free men.' People who are hungry and out of a job are the stuff of which dictatorships are made."

As Roosevelt Institute Senior Fellow David Woolner has noted, what's important about this story is that FDR learned from his mistakes and changed course when he saw that orthodox economic theory wasn't working. The question is, will today's leaders show the same wisdom and courage?

Click here to read the FDR Library's full explainer, "FDR: From Budget Balancer to Keynesian."

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Franklin D. Roosevelt: Socialist or “Champion of Freedom”?

Apr 20, 2012David B. Woolner

President Obama is not the first president to be smeared by conservatives for suggesting that the country prospers when we all prosper.

In recommending this program I am thinking not only of the immediate economic needs of the people of the Nation, but also of their personal liberties—the most precious possession of all Americans. I am thinking of our democracy. I am thinking of the recent trend in other parts of the world away from the democratic ideal.

President Obama is not the first president to be smeared by conservatives for suggesting that the country prospers when we all prosper.

In recommending this program I am thinking not only of the immediate economic needs of the people of the Nation, but also of their personal liberties—the most precious possession of all Americans. I am thinking of our democracy. I am thinking of the recent trend in other parts of the world away from the democratic ideal.

Democracy has disappeared in several other great nations—disappeared not because the people of those nations disliked democracy, but because they had grown tired of unemployment and insecurity, of seeing their children hungry while they sat helpless in the face of government confusion, government weakness,—weakness through lack of leadership in government. Finally, in desperation, they chose to sacrifice liberty in the hope of getting something to eat. We in America know that our own democratic institutions can be preserved and made to work. But in order to preserve them we need to act together, to meet the problems of the Nation boldly, and to prove that the practical operation of democratic government is equal to the task of protecting the security of the people. —Franklin D. Roosevelt, April 1938

One of the consistent arguments that conservative Republicans are hurling against President Obama and the Democrats this election season is that President Obama’s support for federal intervention in the economy, through such programs as his ill-fated jobs bill or the Patient Protection and Affordable Health Care Act, represents an attack on individual liberty. They claim the promotion of government intervention in the economy is somehow “un-American” and that what the president really wants is to turn the United States toward socialism. We have even heard the charge, uttered by one right-wing conservative Congressman, that a significant number of liberal members of the House of Representatives are in fact “members of the Communist Party.”

The use of such tactics to discredit those who believe in government intervention in the economy is not new, of course. Franklin Roosevelt faced similar charges when he ran for re-election in 1936. Like President Obama and those in Congress who favor government programs to put people to work and ensure that all Americans can enjoy a healthy and productive life, FDR’s New Deal—including his passage of unemployment insurance and Social Security—was attacked as “undisguised state socialism” by one senator. Others went so far as to insist that FDR was a communist, including FDR’s erstwhile colleague Al Smith, who, as one of the founders of the right-wing American Liberty League, warned in the 1936 election that “the people could either breathe the clear fresh air of America, or the foul breath of Soviet Russia.”

FDR brushed aside these attacks in part by insisting that we were a rich nation that could “afford to pay for security and prosperity without having to sacrifice our liberties into the bargain.” He also turned to our nation’s history, reminding the American people that in the first century of our republic, when “we were short of capital, short of workers, and short of industrial production, but…were rich…in free land, and free timber and free mineral wealth,” the federal government “rightly assumed the duty of promoting business and relieving depression by giving subsidies of land and other resources.” Thus, he said, “from our earliest days we have had a tradition of substantial government help to our system of private enterprise.”

FDR then acknowledged that economic conditions were very different in the mid 1930s from what they were in the 19th century, but not because the nation was poorer than it had once been. On the contrary, in many ways the nation was richer, “because now we have plenty of capital, banks and insurance companies loaded with idle money; plenty of industrial productive capacity and many millions of workers looking for jobs.” In light of this, he insisted that he was “following tradition as well as necessity” by striving to use government “to put idle money and idle men to work, to increase our public wealth and to build up the health and strength of the people—to help our system of private enterprise to function again.”

This last point is critical, for as FDR well understood, it was the failure of the free market to provide the average American with basic economic security—in other words, a decent job at a decent wage—that got us into the crisis in the first place. Prosperity, in short, was not dependent on the concentration of wealth in the hands of a few, but rather on the economic strength of the millions of men and women who make up America’s vast working and middle class. For without their purchasing power—or what he called the “fair distribution of buying power”—a strong, vibrant economy was not possible.

Moreover, the same principle held true for the health and maintenance of America’s democratic system of governance. Indeed, as FDR saw it, the events of the 1920s and 30s made it obvious that “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.” Viewed from this perspective, the real threat to our individual liberties came not from government, but from the “heedless self interest” of those in positions of vast wealth and power, whose greed crushed individual initiative and so restricted “the field open for free business” that private enterprise “became too private….it became privileged enterprise, not free enterprise.” In such a system, the political equality the American people once enjoyed became “meaningless in the face of economic inequality,” and as such “life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness.”

For Roosevelt, then, government intervention in the economy was not about destroying individual liberty; it was about restoring individual liberty. It was about making capitalism work in such a way as to ensure equal economic opportunity for all Americans, not just the privileged few at the top. Above all else, it was about preserving our democratic way of life at a time when anti-democratic forces were on the rise the world over.

This is a good reminder for President Obama and others who understand that it is quite natural for our government to take steps to restore the balance of economic opportunity in our free market economy in times of high unemployment and economic distress. They might also do well to remind themselves and the American people this election season of FDR’s maxim that “[t]he true conservative seeks to protect the system of private property and free enterprise by correcting such injustices and inequalities as arise from it. That the most serious threat to our institutions comes from those who refuse to face the need for change.”

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.

In his April 1945 eulogy of President Roosevelt, British Prime Minister Winston Churchill characterized FDR as a "Champion of Freedom."

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Representative Bachus, FDIC and Voting Down Dodd-Frank's Resolution Authority

Apr 20, 2012Mike Konczal

So the House Republicans on the Financial Services Committee just voted to repeal "resolution authority."  What does this mean, and how can we compare it to previous actions by House Republicans?

So the House Republicans on the Financial Services Committee just voted to repeal "resolution authority."  What does this mean, and how can we compare it to previous actions by House Republicans?

A useful way of understanding both the financial crisis of 2008 and Dodd-Frank's response to it is through the idea of a "shadow banking system."  We have a set of regulatory rules, laws, practices and institutions from the New Deal that does well with the regular banking sector.  Over the past thirty years, a set of institutions started acting like banks without calling themselves banks, and thus did not have the same set of rules, laws and practices in place to regulate them as such.  Dodd-Frank's goal was to extend this regulatory framework to all "systemically risky financial institutions," or shadow banking institutions.

One of the main pillars of this is "resolution authority," which allows FDIC to takeover and wind-down a failing shadow bank.  Since the New Deal the FDIC can wind down a failing commercial bank without the system collapsing.  We found that putting commercial banks through bankruptcy was a disaster, so we created FDIC to allow a firm to fail and allocate losses in a way that mitigated panics and contagion.  Now the FDIC can use those powers on firms acting like banks but that are not hanging a "bank" sign on their window.  These powers include the ability to force big financial firms to write "living wills" to help with taking them down.

The FDIC has been making progress in formulating these powers.  They released a major report, The Orderly Liquidation of Lehman Brothers Holdings under the Dodd-Frank Act, which walks through how they would have handled 2008.  They've also answered conservative think tank critiques of resolution authority in what I think are correct and persuasive.

So when you hear people, especially on the right, criticizing Dodd-Frank's resolution authority your first step should be to analyze what they think of the FDIC more broadly.  Do they view it as a statist boot stamping on a human face forever?  Here's a Cato Handbook for Congress from 1997 arguing for the privatization of FDIC and mandating banks purchase private deposit insurance (perhaps from an exchange?).  Cato's 2001 call for privatizing FDIC is amazing for how disastrous every one of their assumptions and calls turned out to be in light of the financial crisis.  But, as they say, at least it's an ethos.

Representative Spencer Bachus (R - AL) is the current Chairman of the House Financial Services Committee, and just lead the Committee in a vote that, among many other things, repealed this resolution authority powers.  Bachus has argued "This authority is not a death panel for failed institutions...It is taxpayer-funded support for their creditors and counterparties.”

So where does Bachus stand on FDIC more broadly?  Here's the fascinating part: he lead a major 2002 move that expanded deposit insurance.  Bachus was the chief sponsor of the Federal Deposit Insurance Reform Act of 2002 which increased "the standard maximum amount of deposit insurance coverage from $100,000 to $130,000" and also adjusted it for inflation.

It's not clear why he supports FDIC when it comes to commercial banks but not shadow banks.  It's also not clear why, if he is so concerned about even the potential for moral hazard and taxpayer-funding being at risk (remember: FDIC recoups any expenses from fees on shadow banks, so taxpayers are always paid back), he took the bizarre step of expanding the amount of coverage FDIC gives to depositors (or the "creditors and counterparties" he rails about).  Did he feel creditors in the form of depositors weren't protected enough?

I've been reading about this 2002 bill, and if Bachus showed any concern about FDIC as an institution and a preference for putting commercial banks through bankruptcy instead of an orderly winddown I can't find it.  I'm trying to get a comment from the House Financial Services Committee on this but it certainly seems like a complete about face.  So one has to ask - if FDIC is a useful and appropriate way of allowing firms that hang a "bank" sign on the window to fail, why isn't it appropriate when a firm functions exactly like a bank?

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Stiglitz: The Invisible Hand is Invisible Because It Isn't There

Apr 2, 2012Elena Callahan

Americans have had it drilled into them that government is bad, but a new narrative is surfacing.

Americans have had it drilled into them that government is bad, but a new narrative is surfacing. Last Thursday, Roosevelt Institute Senior Fellow Jeff Madrick kicked off the Roosevelt Institute's new flagship initiative, Rediscovering Government, at an event in New York City, declaring, "There is no economy without government. There is no America without government. Government doesn't have a role; it is integral." In a keynote address, Roosevelt Institute Senior Fellow Joseph Stiglitz also argued that healthy societies have strong governments and that his research has shown that "the reason the invisible hand often was invisible was that it wasn’t there." Watch the full video of the opening remarks and keynote below:

 

Stiglitz says that "most Americans don’t realize that we are no longer the country of opportunity that we think of ourselves, that America today has less equality of opportunity than any of the other advanced industrial countries." He points out how many like to say that our economy is doing well because GDP is growing, but that "if you’re going to be judging how well an economy is doing, clearly I think the key metric that one wants to focus on is what is happening to the living standards of most citizens.” He says that most Americans don't realize how bad we're doing, including the fact that "the median income of a full-time male worker today is the same as it was in 1968," and "if you look at median household income it is the same today as it was a decade and a half ago."

Join the conversation about the Roosevelt Institute’s new initiative, Rediscovering Government, led by Senior Fellow Jeff Madrick.

How did our society get to a place where government has taken a back seat and where people are wary of government control? Stiglitz thanks the conservatives who have successfully touted false ideology about markets over the past 40 years. While they like to blame the government for inequality, Stiglitz notes that not even Adam Smith thought markets were anything beyond efficient. "Nobody ever said that they were fair, that they would lead to a distribution of income that was socially acceptable." Furthermore, he says, "many of the aspects of our inequality are a result of market failure. People who don’t have health insurance when they get sick wind up in extreme poverty and they can’t get health insurance because of a whole set of market failures." He says it's "striking that in spite of the fact that there is no intellectual basis for what you might call a 'Smithian' view that unfettered markets lead to efficiency," conservatives have marched ahead with this idea.

So why was there so much economic growth after World War II? Stiglitz says one reason is "the legacy of the Roosevelts, the legacy that government made a difference.” In making the case for government he also points out that "government has played an important catalytic role in a whole variety of other areas. If you think about our modern economy, you think about Internet, you think about biotech, you think about telecommunications and all of these things rest on government-funded basic research." He recalls a conversation with a Scandinavian finance minister who, when asked how his economy was so successful, answered "high taxes." Stiglitz took away that "if you’re going to have a well-functioning economy... you have to pay for what you get. You need to have a well-functioning government that provides education, infrastructure, research, technology, all these things, and we have to pay for it." Given that markets are not predictable nor interested in social problems, our government should stop bailing the financial institutions out and start investing in its people and the institutions that benefit them.

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Progress on Trial: How FDR Fought to Make SCOTUS Serve the Greater Good

Mar 30, 2012David B. Woolner

FDR struggled to make a reactionary Court recognize that the government served a greater purpose than defending property. Today President Obama faces a similar battle over health care reform.

FDR struggled to make a reactionary Court recognize that the government served a greater purpose than defending property. Today President Obama faces a similar battle over health care reform.

In our generation, a new idea has come to dominate thought about government, the idea that the resources of the nation can be made to produce a far higher standard of living for the masses of the people if only government is intelligent and energetic in giving the right direction to economic life. - Franklin D. Roosevelt

The hearings of the Supreme Court this week over the Patient Protection and Affordable Health Care Act have led some commentators to compare President Obama's potential difficulties with the Supreme Court to the troubles FDR had with the Court in the mid 1930s, when some of the key provisions of the New Deal were struck down as unconstitutional. In response to the Court challenge, Roosevelt ultimately decided to pursue a court reform effort -- his famous "court-packing" scheme -- that aroused widespread opposition from both the public and those holding public office, even among members of his own party.

Most historians agree that Roosevelt's attempt to alter the Court in 1937 was both ill-conceived and badly handled. But the debate over the legal dimensions of FDR's attempt to alter the make-up of the Court -- like today's debate over the legality of Obama administration's Affordable Health Care Act -- has to a certain extent obscured the real issue that stood at the heart of the New Deal reforms: how the nation might, as FDR said, "use the agencies of government to assist in the establishment of means to provide sound and adequate protection against the vicissitudes of modern life."

Using government to pursue this goal was somewhat of a novel idea in early 20th century America. But it was not something that FDR came up with on his own. As the nation made the 19th-to-20th century transition from an agrarian to a modern industrial economy, questions about the health, safety, and living conditions of the working class -- more appropriately called the working poor -- gave rise to ever-increasing calls for social legislation to protect working Americans, including women and children, from dangerous employment practices like starvation wages and other forms of economic exploitation. The same sentiments also gave rise to a series of laws, such as the 1906 Pure Food and Drug Act, to protect American consumers from tainted foods and poisonous and/or useless "medicines," as well as anti-trust legislation to prevent the establishment of anti-free market monopolies that would lead to exploitative prices of key commodities and other goods and services.

Not surprisingly, all of these efforts aroused considerable opposition from conservative business interests, who frequently argued that such legislation was an infringement on their liberties. This was especially true in FDR's day, when, in the wake of the 1929-1932 financial crisis and the failure of the free market to provide adequate levels of employment to roughly 25 percent of the American workforce, the Roosevelt administration launched a series of efforts to reform the financial sector, offer employment to the jobless, and provide a basic measure of economic security to the average American through Social Security, unemployment insurance, and the right to collective bargaining.

Even before many of these measures were fully put in place, FDR anticipated what the wealthy conservative opposition would say about them. In a June, 1934 Fireside Chat on the subject, for example, FDR noted that a "few timid people, who fear progress," would try to give "strange names" to these efforts.

Join the conversation about the Roosevelt Institute’s new initiative, Rediscovering Government, led by Senior Fellow Jeff Madrick.

Sometimes they will call it 'Fascism,' sometimes 'Communism,' sometimes 'Regimentation,' sometimes 'Socialism.'

But, in so doing, they are trying to make very complex and theoretical something that is really very simple and very practical.

I believe in practical explanations and in practical policies. I believe that what we are doing today is a necessary fulfillment of what Americans have always been doing -- a fulfillment of old and tested American ideals...

All that we do seeks to fulfill the historic traditions of the American people...We are restoring confidence and well-being under the rule of the people themselves. We remain, as John Marshall said a century ago, 'emphatically and truly, a government of the people.' Our Government 'in form and in substance . . . emanates from them. Its powers are granted by them, and are to be exercised directly on them, and for their benefits.'

What emerged from the New Deal, then, was an attempt to use government as an instrument to provide basic economic safeguards within the free enterprise system, to mitigate the worst excesses of capitalism, so that all Americans could enjoy its benefits.

As was the case in previous governmental efforts to provide a measure of social and economic protection for the average American citizen, these measures were challenged in the Supreme Court as an infringement of contract and property rights, and up until 1937 -- the year that FDR's struggle with the Court came to its head -- the Court tended to rule in favor of property. For progressives like Theodore Roosevelt, this tendency on the part of the Court was unacceptable. Indeed, roughly two decades before his cousin Franklin was sworn in as President, TR articulated his firm belief that government had a responsibility to serve as "the steward of the public welfare." As such, he insisted that the judiciary should "be interested primarily in human welfare rather than in property... just as... the representative body shall represent all the people rather than any one class or section of the people."

It was this basic idea that government had a responsibility to serve the "public welfare" that animated both the social justice legislation of the progressive era and the social and economic reform legislation of the New Deal. Hence, FDR's frustration with the inability of the Court to embrace this fundamental  -- or what he would term modern --concept was not unique and in fact had led many other public figures before him to call for some type of judicial reform.

This is not to say that FDR was correct in pursuing his so-called Court packing scheme; he was most surely wrong to do so. But we should not allow this misguided attempt to bring the Supreme Court into the modern world to mask the reasons why he -- and others -- felt such drastic measures might be necessary. In the end, of course, the Court would reverse itself and from 1937 forward would uphold every New Deal provision that came before it, including two prior pieces of legislation -- the Agricultural Adjustment Act and a minimum wage law -- that the Court had previously struck down.

In the decades that followed the New Deal, Americans came to accept and understand the idea of government as the keeper of the public welfare. But in the past two decades, this basic concept of governance has come under a sustained assault from the same special interests that fought this idea in FDR's day. As a result, President Obama's attempt to provide equal access to health care for the nearly 50 million Americans who remain uninsured through the so-called individual mandate has been attacked as an infringement on our liberties. But in embracing this point of view, the Court (should it decide to strike down the law) will have failed to take in the larger argument that the purpose of the law is to provide a means to secure a greater good for all. Viewed from this perspective, requiring all Americans to purchase health care is perhaps the most important step we can take "to provide sound and adequate protection against the vicissitudes of modern life."

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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