Why Obama Was Never Going to Be the Next FDR

Megan McArdle, The Atlantic | Sep. 14, 2011

Each party has their sweeping historic narrative leading to eventual triumph, and this slotted neatly into what you I'd call the Ur-Myth, the Creation Story, of the modern Democratic Party.

In that heroic tale, before 1932, the earth was ruled by evil, Laissez-Faire Republicans who ruined the economy with their speculative excesses.

The result was the Great Depression.

Thankfully, the people saw that Republicans had made the earth a terrible place, and they annointed elected FDR to make things right.

With a combination of massive government spending and tight regulation, FDR was able to put things right, to restore balance in the world.

Thus was the Great Depression ended, and in grateful recognition, the American public made Democrats king-for-life for another generation.

Every time you see Rachel Maddow make an MSNBC commercial standing in front of the Hoover Dam, or something similar, you are seeing a reference to that still-powerful foundation story.

So it's not surprising that many Democrats assumed that financial crises and recessions are, well, good for Democrats and/or progressive policy advocates.

I always thought this was nonsense: financial crises and recessions aren't good for Democrats; they're bad for whoever happens to be in charge, which merely means they're good for whoever isn't in charge by default.  Hoover was indicted by history not because he'd done nothing--he had actually done quite a bit--but because the Depression had continued to worsen despite the things he did do.

I see that there are now liberals coming to the same conclusion.  Robert S. McElvaine, a history professor at Millsaps, seems bewildered and almost hurt:

"Under Roosevelt, national policies eased the harsh impact of the Great Depression and turned public opinion strongly in favor of a more active government. Obama's 2008 election appeared to pave the way for a similar turn against the economic approach that had produced the collapse -- as well as a renewal of popular support for government action in the public interest.

Instead, public opinion has turned against government, and many middle-class people support a movement that favors the low-tax, anti-regulation, concentrate-the-income-at-the-top policies that led to economic catastrophe in both 1929 and 2008.

. . . Rather than precipitating a New Deal, as had similar circumstances before FDR won the presidency, the economic disaster under President George W. Bush has produced calls for a return to the tried-and-failed very Old Deal of Calvin Coolidge and even William McKinley.

Why?

A significant part of the answer, as I argued here, is that Obama took office only four months after the collapse of 2008, while Roosevelt did not take office until 3½ years after that of 1929. By 1933, there could be no question in the minds of most people that the Depression was the fault of the Republican leadership of the 1920s and its economic philosophy, with its absolute faith in an unregulated market."

Yet even recognizing that FDR got tremendously lucky in his choice of election years does not cause McElvaine to question the Ur-Myth; instead, he segues into a complaint that Obama needs to be feistier, like FDR was.

Smart progressive Ezra Klein, however, offers what I think is the correct take:

"The pat story behind FDR's victory and the ensuing decades of mostly Democratic dominance is that the president got the policy right and the politics followed. Whatever you believe about FDR's policies, a more international perspective will disabuse you of the notion that the golden age for the Democratic Party was an ideological triumph rather than an accident of history. As Larry Bartels, a political scientist at Vanderbilt University, has written, globally, the pattern is clear: Whichever party was in power when the Great Depression hit was booted out of office, and whichever party was in power when the global recovery took hold reaped huge political benefits.

"In the U.S.," wrote Bartels, "voters replaced Republicans with Democrats and the economy improved. In Britain and Australia, voters replaced Labor governments with conservatives and the economy improved. In Sweden, voters replaced Conservatives with Liberals, then with Social Democrats, and the economy improved."

But this shouldn't have come as a surprise.  It was, I think, predictable in 2008, if you had read much history of the Great Depression.   How do I know?
Er, ahem . . .

"Is it 1932?
I heard that a fair amount last night, and over the past few days. This is faulty economic history. It is not 1932. It is 1929.

Outside of the economics profession, the FDR mythos is strong among Democrats: Hoover did nothing, and then FDR came in with his magic Keynesianism, and through the mighty power of massive government spending and a huge increase in the social safety net, got America moving again.

Economic historians know better. You can argue whether FDR, on net, helped a lot, helped a little, or mildly hindered recovery. But you cannot argue that if FDR had gotten into office on January 20th, 1930, America would have avoided most of the pain of the next three years. The progression of the bank panics and industrial slowdown throughout the next two years is well described, but not well understood. But the problem was clearly not merely a lack of government activity, or fiscal stimulus. Hoover was, contra popular myth, fairly active. It's just nothing he did worked. Neither did most of the things FDR tried.

FDR did some things right, don't get me wrong--and I think some of those really made a difference, notably bank audits and the creation of the FDIC. But he also benefitted tremendously from stepping in just as the banking system, and hence the economy, were bottoming out. By the time of the second banking panic, the system really didn't have much of anywhere to go but up.

Obama has the benefit of better economic theory--but not nearly as much better as we thought six months ago. There is no economic consensus--or even a revolutionary school like the Keynesians--with a coherent program for getting us out of the crisis. The happy, utterly wrong narrative of Democrats striding in and boldly reversing Republican errors with stiff regulation, an expanded safety net, and massive fiscal stimulus, is wrong when applied to FDR. It won't save Obama either.

If the crisis is as bad as some people fear, Obama will have no magic bullet to fire at it. The very best he can hope for is a fairly successful process of trial and error. To the electorate, that will look like bumbling as Rome burns."

I just came across that today.  It reads a little eerie, even to me.  But this wasn't genius speaking; it's just long seemed obvious to me that some presidents get lucky economic breaks, and some . . . don't.

Subsequent events have only made the parallel stronger.  It turned out that we didn't have any economic magic tricks up our sleeve; economic policy is not even as advanced as we thought in 2008.  Stimulus may somewhat ease the pain of a recession, but it is at best an expensive palliative, not a way to shorten the illness.  And Reinhart and Rogoff seem to be right that financial crises are long, painful, and accompanied by persistently high unemployment.  FDR's biggest policy contribution to GDP growth in the early years was going off the gold standard, followed by shoring up the banking system, and the FDIC; these are not remedies that are open to Obama, since we already did them eighty years ago.

As Ezra goes on to discuss, this suggests that there's a decent possibility Obama may end up a one-term president, with stimulus and other signature achievements discredited in the way that Hoover's term was supposed to have discredited Laissez-Faire.  He was never likely to be the second coming of FDR . . . but he could well end up as the reincarnation of Herbert Hoover.

I doubt the reaction will be as strong--the Great Depression was really a whole lot worse than our current problems in almost every way you can think of.  Still, it would be a savage blow for what was supposed to be the progressive moment, and it won't be any fairer than it was to Hoover.

But if you want to make history, you take the risk that you'll get panned by the critics.

Obama Worse Than Herbert Hoover?

Obama's Wrecking Crew
By MARSHALL AUERBACK

It’s actually a bit over the top and unfair to compare Barack Obama with Herbert Hoover – unfair that is, to the memory of Herbert Hoover. The received image of the latter is the dour, technocrat who looked on with indifference while the country went to pieces. This is actually an exaggeration. As Kevin Baker convincingly argued in his Harper’s Magazine piece, “Barack Hoover Obama”, President Hoover did try to organize national, voluntary efforts to hire the unemployed, provide charity, and sought to create a private banking pool. When these efforts collapsed or fell short, he started a dozen Home Loan Discount Banks to help individuals refinance their mortgages and save their homes. Indeed, the Reconstruction Finance Corporation, which became famous for its exploits under FDR and Jesse Jones, was actually created by Hoover. Often tarred with the liquidationist philosophy of his Treasury Secretary, the establishment of the RFC was, as Baker suggested, “a direct rebuttal to Andrew Mellon’s prescription of creative destruction. Rather than liquidating banks, railroads, and agricultural cooperatives, the RFC would lend them money to stay afloat.”

Hoover’s tragedy lay in the fact that whilst he recognized the deficiencies of the prevailing neo-classical laissez-faire nostrums of his day, he could not ultimately break with them and accept that the economic tenets which he had grown up with were deficient in terms of dealing with the huge unemployment challenges posed by the Great Depression. By contrast, Roosevelt was himself instinctively a fiscal conservative throughout much of the early stages of his political career (and campaigned as a gold standard man during the election of 1932), but ultimately had the vision (or, at least, excellent political instincts) to recognize the need to cut himself off from the dogma of the past and try something new in a persistent spirit of experimentation. Not everything FDR did worked, but his lack of rigid ideology and his bold spirit of economic experimentation ultimately did much to reduce the scourge of unemployment, though of course such policies brought him into significant conflict with the economic royalists of his day.

Barack Obama’s style of governing largely reflects an acceptance of the status quo. His “economic experts” also reflects this preference. As Baker argued, “it’s as if, after winning election in 1932, FDR had brought Andrew Mellon back to the Treasury.”

To the extent that he displays any kind of radicalism, it is to roll back the frontiers of the New Deal and Great Society, in effect gutting the Democratic Party of its core social legacy. This assertion will no doubt inflame the dwindling band of Obama supporters, who insist the president would never cut Social Security or Medicare, that he's merely been exploring every possible route to a deal with the GOP. But the evidence increasingly suggests otherwise.
Perhaps the president sincerely believes that the intense polarization of American politics isn't merely a symptom of our problems but a problem in itself – “and thus compromise is not just a means to an end but an end in itself, to try to create a safe harbor for people to reach some new common ground”. One finds further support for this view within Barack Obama’s own writings. A major theme of his 2006 book The Audacity of Hope is impatience with “the smallness of our politics” and its “partisanship and acrimony.” He expresses frustration at how “the tumult of the sixties and the subsequent backlash continues to drive our political discourse,”

There appears little question, then, that the President values compromise, indeed appears to enshrine it as the apex of all great Presidencies (ironically citing Lincoln’s compromise on slavery as a perfect illustration of this ideal). But the problem is that the President’s accommodation with his political enemies, his apparent infatuation with a “third way”, suggests that he is being forced to compromise on a particular set of ideals and principles which he has hitherto embraced dearly.

But what is this President's ideal? The only time in our national discussions where Obama has evinced any kind of passion has been during the debt ceiling negotiations. He has, since the inception of his presidency, elevated budget deficit reductions and the "reform" of entitlements as major transformational goals of his Presidency (rather than seeing deficit reduction as a by-product of economic growth). As early as January 2009, before his inauguration (but after the election, of course), then President-elect Obama pledged to shape a new Social Security and Medicare "bargain" with the American people, saying that the nation's long-term economic recovery could not be attained unless the government finally got control over its most costly entitlement programs.

In other words, Obama has been on about this since the inception of his Presidency. Recall that it was Barack Obama, NOT the GOP, who first raised the issue of cutting entitlements via the Simpson-Bowles Commission. The President has also parroted the line of most Wall Street economists as he has persistently characterized our budget deficits and government spending as “fiscally unsustainable” without ever seeking to define what that meant. One of his earliest pledges was to cut the deficit in half by the end of his first term, in effect paying no heed to the economic context when he made that ridiculous assertion.

In essence, the debt ceiling dispute is not forcing a compromise on this President, but is instead is viewed by him as a golden opportunity to do what he's always wanted to do. That also explains why he won't ask for a clean vote on the debt ceiling, why he has ignored the coin seignorage option, and why he has persistently avoided the gambit of challenging its constitutionality via the 14th amendment, even though his Democrat predecessor has already suggested that this is precisely what he would do: Bill Clinton asserted last week that he would use the constitutional option to raise the debt ceiling and dare Congress to stop him.

It also explains why President Obama remains infatuated by bigger and bigger "grand bargains", which seem to take us further away from averting the immediate economic catastrophe potentially at hand, which is to say national default. The Administration, then, is not going for a bipartisan compromise, but going for broke on something which the President apparent holds sacrosanct. In reality, true compromise would start with the notion of a clean vote on the debt ceiling or, at the very least, a minimal series of spending cuts that would avert the immediate risk of a default, whilst creating less deflationary pressures.

Have you actually seen the President ever get angrier than he was at his press conference announcing the collapse of the negotiations on the debt ceiling extension? Not even on health care "reform" can we ever recall seeing Obama this engaged, and manifesting something close to real emotion as he has here. That does suggest something beyond mere political calculation; it hints at core beliefs.

And to what end? Neither he, nor the Congress appear to recognize the downward acceleration in GDP triggered when the spending limits are reached if the automatic stabilizers are disabled because they are no longer funded as a consequence of the debt ceiling limitations (again, a legal, rather than operational constraint – the debt ceiling reflects an unwillingness to pay, rather than an inability to pay).

So spending will be further cut, debt deflation dynamics will intensify, sales will go down more, more jobs will be lost, and tax revenues will collapse even further. Which will set the whole process off again: more spending is cut, sales go down more, more jobs are lost, and tax revenues fall more, etc. etc. etc. until no one is left working. All are radically underestimating the speed and extent of the subsequent damage.

Unlike President Hoover, who inherited the foundations of a huge credit bubble from the 1920s and found himself overwhelmed by it, this President is worse. He is, through his actions, creating the conditions for a second Great Depression because of his misconceived belief that too much government spending “crowds out” private investment, and takes dollars out of the economy when it borrows. And therefore, goes the perverse logic, when the government stops borrowing to spend, the economy will have those dollars to replace the lost federal spending.

And so after the initial fall, Obama believes, it all come back that much stronger.

Except, that as my friend Warren Mosler insists , he is dead wrong, and therefore we are all dead ducks.

As Warren notes, have you ever heard anybody say 'I wish they'd pay off those Tsy bonds so I could get my money back and go buy something.'?

Of course not! Warren:

“Treasury borrowing gives dollars people have already decided to save a place to go. Dollars that came from deficit spending- dollars spent but not taxed. If they were spent and taxed, they'd be gone, not saved.

“Treasury bonds provide a resting place for voluntary savings. They are bought voluntarily. They don't 'take' anything away from anyone.

“For example, imagine two people, each with $1 million. One pays a $1 million tax. The other doesn't get taxed and decides to buy $1 million in Treasury bonds. Pretty obvious who's better off, and who's still solvent and consuming.”

Someone please explain this basic economic tenet to the President so that he can effect a genuine compromise, not a destructive “grand bargain” which will suck trillions of demand out of a still fragile economy. The predictable result is of his current stance is that, even as he claims to recognize the interlocking nature of the problems facing us and vows to “solve the problem” once and for all via a “grand bargain”, Obama is in fact tearing apart most of the foundations which were tentatively initiated under Hoover, but which came to full fruition under FDR. If he continues down this ruinous path, $150 billion/month in spending will be cut. Such economic thinking isn’t worthy of Mellon, let alone Herbert Hoover.