Now's not the time to choke off the economy's lifeline.

In April 1938, FDR addressed Congress on stimulating the economy. In his words:

"Let us unanimously recognize the fact that the Federal debt, whether it be twenty-five billions or forty billions, can only be paid if the Nation obtains a vastly increased citizen income. I repeat that if this citizen income can be raised to eighty billion dollars a year the national government and the overwhelming majority of state and local governments will be 'out of the red.' The higher the national income goes the faster shall we be able to reduce the total of Federal and state and local debts. Viewed from every angle, today's purchasing power -- the citizens' income of today -- is not sufficient to drive the economic system at higher speed. Responsibility of government requires us at this time to supplement the normal processes and in so supplementing them to make sure that the addition is adequate. We must start again on a long steady upward incline in national income."

"All the energies of Government and business must be directed to increasing the national income; to putting more people into private jobs; to giving security and the feeling of security to all people in all walks of life."

If I were the head of the US government, the first thing I would do would be to introduce a Job Guarantee program and set about restoring jobs and a living income to those who are without either. This would immediately boost aggregate demand and give business firms a reason to start investing and producing. You can't do this by "internally deflating" your economy a la Ireland or Estonia.

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Franklin Delano Roosevelt understood this better than any of our current leaders. He knew that workers' wages are not just a cost but a source of INCOME. The mainstream economics profession continues to ignore the income side of the wage deal. Supply and demand are not independent variables, just as fiscal policy cannot be viewed outside the broader construct of the economy as a whole. Mass unemployment occurs when there are not enough jobs and hours of work being generated by the economy to fully employ the willing labor force. This is because there is insufficient aggregate spending. Government spending is the one obvious remedy.

He might not have been an economist, but FDR intuitively understood the concept of the "fallacy of composition." One firm might be able to cut costs by lowering wages for their workforce, and because their demand will not be affected they might increase hiring. But if all firms do the same thing, total spending falls dramatically and employment drops.

Without the current level of fiscal support, the US economy would be in much worse shape. The obvious conclusion is that more is needed to reduce unemployment further. But our current crop of leaders continue to proclaim the need for the US to outline a "credible path" for deficit reduction in order to appease the bond gods, especially now that we're officially "out" of a recession. (Try to explain that to the millions who remain unemployed.)  It's a sad reflection of our priorities as a society.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

All the evidence points to one simple fact: the economy would have sunk without the New Deal.

In these troubled economic times, passionate discussions often center on the Great Depression, Franklin D. Roosevelt and his New Deal. Did FDR and his train of government agencies deal a good hand to millions of Americans?

They did. Roosevelt used the government to provide relief, recovery from the Depression and reform of the economic system. Americans' quality of life improved.

The New Deal brought relief to most Americans. Voters responded by electing FDR to an unprecedented four terms in good part because of his popular programs to help "the Forgotten Man." No amount of conservative spin or revisionist history can change this fact. In the 1936 election, FDR carried 46 of the 48 states. As conservatives cried "the economy will work itself out in the long run," Harry Hopkins, a Roosevelt adviser, famously replied: "People don't eat in the long run, they eat every day." Sound familiar today?

FDR called for "bold, persistent experimentation" to help Americans. The gold standard was abandoned to stop deflation and stabilize farm and manufacturing prices. The FDIC was created to restore public confidence in the financial system and to protect small depositors. The Glass-Steagall Act required banks to divest themselves of securities operations, separating investment and commercial banking operations. (This was enacted to reduce commercial bank involvement in stock market investment. This act was repealed in 1999, unfortunately.)

The WPA employed about 8.5 million Americans over its seven-year history, in projects that were not to compete with private business. The REA provided loans to local cooperatives that took electricity to 90 percent of rural homes by 1939, up from about 10 percent in 1930. This prompted private business to extend service into the countryside and to lower rates. The TVA brought jobs and electric power to seven states.

The very popular CCC addressed the problem of jobless young men between the ages of 18 and 25. Conservation projects changed the landscape of America over the nine years of the program. The Social Security Act of 1935 assured retirees a pension and benefits for the unemployed.

In 1933, the civilian unemployment rate was nearly 25 percent. If we count people in work-relief jobs as employed, the jobless range was about 10 percent by 1940. During FDR's first term, GDP grew at an annual rate of about 9 percent. The GDP grew about 11 percent annually after 1937-38.

The Great Depression did not end with conservative demands for cutting taxes and spending, or reducing government activity or decreasing the debt. The enormous fiscal stimulus -- yes, government borrowing, taxing and spending -- to finance World War II led the U.S. out of the Depression. The debt rose from $43 billion in 1940 to $258.7 billion in 1945. The unemployment rate fell to 1.2 percent in 1944. The national debt was fully 121 percent of GDP, compared with an estimated 95 percent today.

A cutback in New Deal spending in 1938 resulted in an economic contraction. The economy expanded again in 1939 as spending increased. Taxing, borrowing and spending -- government stimulus -- brought the United States out of the Great Depression.

After facing personal economic ruin and our capitalistic system gone awry, did millions of innocent, unfortunate victims appreciate the government help? Did the New Deal programs help get them back on track? You betcha!

E. Wayne Stewart is an adjunct professor of political science at Johnston Community College in Smithfield, NC. This article originally appeared in the News & Observer.

Roosevelt historian David Woolner shines a light on today’s issues with lessons from the past.

In a recent editorial in the New York Times, former Labor Secretary, Robert Reich, writes that this Labor Day promises to be one of the worst in decades. Organized labor, he notes, is down to a mere seven per cent of the private work force; unemployment remains high; and the prospects for a further recovery of the economy remain uncertain at best. Professor Reich goes on to argue that this dismal state of affairs is unlikely to improve until we address the deep structural flaws in our economy; flaws which have made it impossible for the American consumer -- i.e. the middle class American worker -- to sustain the level of spending needed to keep our economy going.

He rightly blames this state of affairs on the steady decline in working wages that has occurred in the past three decades as US companies brought in new labor-saving technologies or shipped jobs to non-unionized low wage areas overseas. He also correctly points out that much of the economic growth that the US has experienced since the early 1990s -- growth that occurred in spite of the fall in wages -- was fueled by three basic phenomenon: the vast increase of women in the work force; an increase in the number of hours people worked to make up for lower wages; and the massive use of consumer debt, fueled in part by the housing bubble.

In an eerie parallel to the 1920s, he observes that thanks to this real decline in income, even a return to near full employment will not be enough on its own to get us out of this mess. Why? Because as it stands today the "vast middle class still wouldn't have enough money to buy what the economy is capable of producing." Nor, he says, should we look to the rich to stimulate demand, since the rich -- who now take in nearly 25% of the nation's total income as opposed to 9% in the late 1970s -- spend a much smaller portion of their incomes than the rest of us.

In other words, what we are now facing is what may best be described as a mal-distribution of wealth. This is remarkably similar to the economic conditions that existed in the "roaring twenties" when the US economy, thanks to an increase in consumer spending and growing speculation in the stock market (fueled in large part by the expansion of credit), underwent a period of significant economic expansion. Unlike today, wages in this period also went up, but not enough to sustain the capacity of the US economy to produce goods. Most workers, in fact, earned wages that kept them and their families just above the poverty line. As a result, when the crash came and the bubble burst, the earning capacity of the average American was simply not strong enough to lift the country out of its economic malaise.

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The New Deal changed this, not, as is commonly held, by merely providing relief to the unemployed through unemployment insurance or work in the vast infrastructure projects of the WPA and other agencies, but by engaging in long-term structural reform; by granting the American worker what he or she needed most: better wages, hours and working conditions. The Roosevelt administration accomplished this through the unprecedented pieces of labor legislation passed during the New Deal: The National Labor Relations Act (or Wagner Act), passed in 1935, which established the Fair Labor Relations Board and guaranteed workers the right to engage in collective bargaining; and the Fair Labor Standards Act, which established a minimum wage and the maximum hours an employee could work, after which they would be entitled to overtime pay at 1 ½ times their regularly hourly wage. Taken together, these two pieces of legislation vastly improved the lot of the American worker and thanks to the rights granted in the former led to an enormous expansion of union membership in the United States from a mere 3 million when FDR took office in 1933 to over 14 million in 1945 (or roughly 30 percent of non-agricultural work force) . When one adds the other significant pieces of New Deal reform legislation to this-banking and financial reform to make our financial sector more transparent and secure; Social Security to help the aged maintain a basic standard of living; the G.I. Bill, which significantly increased access to higher education -- what we end up with is a vastly expanded, better paid and much more secure middle class; a middle class which in the decades after World War Two had the earning capacity (not the borrowing capacity) to propel the US economy through the greatest period of economic expansion in history.

For FDR, then, the key to economic recovery lay not with providing the rich with ever-lower taxes, but in increasing the standard of living of the American worker through concrete measures that made it possible for him or her to earn decent wage and take part in the American dream.

Instead of harping on and on about tax cuts and deficits (especially at a time when the US income tax rates are among the lowest in the industrialized world), perhaps it is time for our well-paid leaders in Washington to take a hard look at the plight of the American worker; to recognize this Labor Day that better wages and job security-in short, a strong well paid middle class-is not some sort of 21st century luxury, but a necessity if we hope to earn our way out the Great Recession.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.

New Attacks on FDR's New Deal Fueled by Old - and Discredited - Ideology

If the US government had a dollar every time someone proclaimed to learn the lessons of the Great Depression, we probably wouldn't have a budget deficit. Usually, these debates turn on the question of fiscal policy and whether in fact, FDR's New Deal had a discernable role in generating recovery. "Fiscal austerians" have done much to dismiss the economic achievements of the New Deal, some even suggesting that FDR's fiscal policies worsened the crisis.

For a brief period during 2008, the views of neo-liberals like Alan Greenspan and Robert Rubin were shunted aside. But the FDR revisionists, who disapprove of fiscal policy measures of any kind, have come back. Now they're brandishing the old arguments that "excessive" government spending risks "crowding out" private spending, making it impossible for the US government to deal with the recession (because it has run out of money) and hindering the capacity of the private sector to recover because of too much government interference in the "free market". These complaints are usually accompanied by a wave of rhetoric condemning the "business un-friendly" policies of the current Administration, along with dire warnings of a "national solvency" crisis. After all, fiscal austerians are nothing, if not fully predictable.

Was the 1937 Relapse Caused by Increased Taxes and Unions?

In that context, we have to give some credit to Professors Thomas Cooley and Lee Ohanian, who have taken a more novel approach in their critique of the New Deal. In some respects, they actually validate the case for fiscal policy expansion (although the two authors might not see it that way). Cooley and Ohanian argue that:

"The economy did not tank in 1937 because government spending declined. Increases in tax rates, particularly capital income tax rates, and the expansion of unions, were most likely responsible. Unfortunately, these same factors pose a similar threat today."

The OMB numbers suggest that spending actually DID decline in 1937 and 1938 (see here) and, contrary to the assertions of Cooley and Ohanian, that decline had a very deleterious impact on economic activity and employment. I will address the tax issue presently, but let's first deal with the "excessive unionization" canard. An objective observer looking at the US in the 21st century would hardly conclude that unions have any real power in the American economy today, any more that we have a "socialist" government dedicated to the promotion of a vast left wing agenda which enhanced union power. Obama has not addressed Labor Law reform and wages haven't risen in a generation; in fact, last year they fell.

True, the President occasionally does display a social democratic rhetoric, but so far, redistributive policies have primarily benefited financial institutions. Social security benefits are under threat via a new "bipartisan commission" on long term deficits, public health care insurance proposals were eviscerated in the "health care reform" bill, and trade unions outside the public sector have withered over the past 30 years. Cost of living adjustment clauses have largely disappeared since the early ‘80s (although some government benefits like social security retain them), average hourly earnings are virtually flat, and I would not be surprised to see wage deflation before the unemployment rate peaks this time around. US households are paying down debt on a net basis -- even credit card debt -- and creditors remain reluctant to make new loans. So the odds of a wage/price spiral taking root as a consequence of excessive union power look decidedly low - in fact, close to zero.

On the other question of taxes, I actually have some degree of sympathy with the arguments of Cooley and Ohanian, but largely because functionally, a tax increase works as a countercyclical policy which mitigates the impact of fiscal policy expansion.

Let's go back to basics. Under a fiat currency regime, such as we have in the US, when the Federal government spends, it electronically credits banks accounts. Taxation works exactly in reverse. Private bank accounts are debited (and private reserves fall) and the government accounts are credited and their reserves rise. All this is accomplished by accounting entries only, but the main point is that spending creates new net financial assets and taxation drains them.

So in one sense, Cooley and Ohanian are right. Tax hikes do cut aggregate demand, much as government spending cuts do. In economic terms, both serve to depress economic activity. We agree with the authors: tax rises at this juncture are a dumb idea. They won't serve to "reduce" the deficit, because the resultant impact on private sector activity is likely to diminish it and thereby increase the gap between government expenditures and revenues as the economy slows down.

The broader issue of government spending versus tax cuts is a political/distributional argument, and economists (and others) can legitimately argue about the respective multiplier effects of one versus the other. But at least this kind of discussion shifts the debate in the right direction --toward increasing economic activity and, hence, job growth and away from wrong-headed discussions of fiscal austerity and deficit reduction as a primary policy goal of government. FDR ran into trouble only when he moved away from fiscal expansion toward austerity in 1937.

At the outset of the Great Depression, economic output collapsed, and unemployment rose to 25 per cent. Influenced by his "liquidationist" Treasury Secretary, Andrew Mellon, then President Hoover made comparatively minimal attempts to deploy government fiscal policy to stimulate aggregate demand. Further, the Federal Reserve actually sold bonds to push up interest rates in a mindless effort to stem the gold outflows that we occurring as the rest of the world lost confidence in the US economy. So much for the halcyon days of the gold standard!

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FDR's Employment and Wage Strategy Worked

This all changed under FDR. The key to evaluating Roosevelt's performance in combating the Depression is the statistical treatment of many millions of unemployed engaged in his massive workfare programs. The government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York's Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown.

It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country's entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock. So much for the notion that government jobs are not "real jobs", as we hear persistently from critics of the New Deal!

The reasons for the discrepancies in the unemployment data that have historically arisen out of the New Deal are that the current sampling method of estimation for unemployment by the BLS was not developed until 1940 (for more detail see here). If these workfare Americans are considered to be unemployed, the Roosevelt administration reduced unemployment from 25 per cent in 1933 to 9.6% per cent in 1936, up to 13 per cent in 1938 (due largely to a reversal of the fiscal activism which had characterized FDR's first term in office), back to less than 1 per cent by the time the U.S. was plunged into the Second World War at the end of 1941.

In fact, once the Great Depression hit bottom in early 1933, the US economy embarked on four years of expansion that constituted the biggest cyclical boom in U.S. economic history. For four years, real GDP grew at a 12% rate and nominal GDP grew at a 14% rate. There was another shorter and shallower depression in 1937 largely caused by renewed fiscal tightening (and higher Federal Reserve margin requirements).

This economic relapse has led to the misconception that the central bank was pushing on a string throughout all of the 1930s, until the giant fiscal stimulus of the wartime effort finally brought the economy out of depression. That's factually incorrect. Most accounts of the Great Depression understate the effect of the New Deal job creation measures, because they don't show how much of the decline in official employment was attributable to the multiplier effect of spending on direct job creation. Also, the "work relief" category does not include employment on public works funded by the Public Works Administration (PWA) nor the multiplier effect of PWA spending. The figures tell the story indirectly, however, in the path official unemployment followed -- steeply declining in periods when work relief spending was high and either declining more slowly or increasing in periods when work relief spending was cut back. In fact, by the end of 1934, more than 20 million Americans (one out of six!) were receiving jobs or public assistance of one form or another from the "Welfare State".

Yes, 9.6% unemployment at the end of 1936 was still a big number. But it's hard to imagine the Democrats being in political peril for the midterms, or witnessing the current abysmal state of Obama's popularity ratings, if today's Administration could reduce unemployment by two-thirds in one term in office, as FDR did under any honest measure of unemployment. Suffice to say, unemployment reduction was the singular focus of the Roosevelt Administration; by contrast, today we have "the new normal", in effect, a faux intellectual argument to justify why we can't generate higher job growth. It's a testament to political failure.

In reference to the criticism of FDR's "high wage" policy by Cooley and Ohanian, it is worth noting that the wage "inflation" which they decry was in reality a product of a deflationary environment in which the general price level fell faster than the money wage level. During the outset of the Great Depression, output generation collapsed in the face of the US federal government's fiscal inaction and central bank interest rate hikes. This had the strange result of generating a counter-cyclical real wage increase, which in fact was nothing more than a product of depressed nature of the economy, in which overall prices were deflating prices faster than wages (for more information see here).

Overlaying the wage data with the true reduction in unemployment between 1933 to the end of 1936, makes it difficult to mount an empirical case that FDR wage improvements during the Great Depression were damaging to overall economic growth and increasing employment. Even if some sectors were disadvantaged (and that isn't proven by Cooley and Ohanian) the evidence actually suggests that the rises in real wages were associated with rising overall employment.

Relapse Caused by Austerity Measures

What about the relapse in 1937/38? By 1936 many economists and financial experts (notably FDR's Treasury Secretary, Henry Morgenthau) feared the country would go bankrupt if the government kept deficit-spending (sound familiar?). And after all, they argued, the government deficits had "pump-primed" the economy. The private sector could now take off on its own and get back to close to the full employment level of 1928-early 1929.

Consequently, Roosevelt ran (in 1936) on a platform that he would try to reduce, if not eliminate, the deficit. He won the election by a landslide -- understandably, as the U.S. was out of depression by 1937. True to his campaign promise, government spending was cut significantly in 1937 and 1938, and taxes were raised to "fund" the new Social Security program. By 1938 Roosevelt submitted a budget in which the deficit was virtually eliminated (0.1% of GDP). The resultant economic relapse, based on efforts to balance the budget, exacerbated by a nonsensically tight monetary policy brought on by the Fed, duly followed.

This is unsurprising. Any type of fiscal austerity during a period of economic slowdown, whether via government spending cuts or higher taxes, will indeed depress economic activity.

But the other lesson of the Great Depression is that properly targeted fiscal policy which focuses on job creation can work. The Great Depression was indeed a disastrous human calamity but FDR's New Deal (including the high wage policies) attenuated the disaster. There is nothing to the claims that the interventions made things worse, other than when Roosevelt himself capitulated to the tired old forces of financial conservatism and fiscal austerianism, and the economy paid the price. Thankfully, FDR was not ideologically wed to the ideas of fiscal austerity and quickly reversed course. It helped, of course, that his Cabinet was well represented by progressive figures such as Frances Perkins, Henry Wallace, Harold Ickes and Harry Hopkins, who overcame the forces of economic conservatism embodied by FDR's Treasury Secretary, Henry Morgenthau. We need these kinds of progressive forces in current Administration, especially given the recent resignation of CEA head, Christina Romer. It's time to let go of the old ideology, which created today's crisis. Here's hoping that President Obama, like FDR before him, changes course quickly. America is ready for a new New Deal.

Marshall Auerback is Senior Fellow at the Roosevelt Institute.