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The Great Depression, The New Deal, World War II And What They Mean To The Crash of '08

By       Message larry beinhart     Permalink

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Let's start with what everyone can agree on. There was a Great Depression, then the New Deal, then World War II.

Also, that America emerged from that war as the world's economic powerhouse and embarked on an astonishing period of growth, prosperity and power.
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What is controversial is how much good the New Deal did or did not do. The economy grew, about 57%, but there was a downward blip from 1936-38 when Roosevelt raised taxes and cut spending in an attempt to balance the budge. (for a chart, see http://en.wikipedia.org/wiki/File:Gdp20-40.jpg)Unemployment was at about 25% at the start of the Great Depression. In 1940 it was still at 15%.
 
The universal consensus used to be that the New Deal was effective, though not perfect. Moreover, it saved the United States from embracing the extremes of Fascism or Communism as so many other countries did.
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But the Right has invested huge sums of money and put a great deal of effort into manufacturing and then selling the claim that Roosevelt's policies were not effective.
 
"Before we go into a new New Deal, can we just acknowledge that the first New Deal didn't worl?"  George Will, ABC, The Roundtable
 
Even that the New Deal was counter-productive.
 
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UCLA Economists: Government Intervention Prolonged Great Depression
 
2004 study found FDR's 'misguided policies' delayed recovery.
By Paul Detrick
Business & Media Institute
 
What then - according to the Right - ended the Great Depression?
 
The "New Deal" Was an Utter Failure
 
It was, in fact, the Second World War that brought an end to the Great Depression.
Exposing Liberal Lies (Web Blog)
 
Actually, there's not much doubt that World War II finally fixed the unemployment problem and lifted the economy up to a significantly higher level.
            
Here, from a more reputable, fair and balanced source:
 
The war decisively ended the depression itself.
Christopher J. Tassava
EH (economic history) net
 
But what was World War II, for America, as an economic event?
 
The United States entered World War in December of 1941.
So '41 can be treated, in economic terms, as a pre-war year.
In 1941, tax revenues were 7.7% of GDP (Gross Domestic Product) and government spending was 12.1% of GDP
 
With the war, taxes went up. Deficits were disregarded. Government spending zoomed.
 
By 1944, tax revenues were 21.7% of GDP and government spending accounted for 45.3% of GDP.
 
It was the New Deal without restraint.
            It was Keynesian economics on steroids.
            It was Roosevelt unleashed.
           
If the New Deal did not end the Great Depression, but World War II did, what's the lesson?
 
By the numbers, it has to be that the New Deal was too half-hearted.
 
It was also that patriotism was able to overcome the backwardness of Republicans and the shortsightedness of the rich.
 
War is an expensive endeavor. It is also, in and of itself, not a very profitable one.
 
As we've seen with the Iraq, Afghanistan and War on Terror adventures, it can be not much different than simply throwing money into a pit and blowing it up.       
 
Why did WWII create such success for the United States?
 
Looked at strictly as an economic event, we made a vast investment in destroying that part of the world that had not been decimated by our enemies, and we emerged as the only modern industrial nation left intact.
 
It was not (as far as I know) a conscious goal, and it was a high risk way to get there, we came out of it with a dominant market share of all manufacturing and technology and even agricultural sectors.
 
What does this tell us about what the response to the crash of '08 should be?
            It should be whole-hearted. Not half-hearted.
            We should not fear high taxes, deficits, or government spending.
            Provided – provided – that we will be producing something of serious economic benefit.
 
This is not a war against a foreign power. It is an effort against the problems of our own economy.
            We have to determine what those problems are and what they are not.
            They are not the sub prime crises or the housing bubble. Those are symptoms.
            There are two real problems.
           

The first is faith in free markets as a form of magical thinking.

 Markets are never free (in that ideal, magical way). Left to themselves, they are never honest, they are never far-sighted, and they don't supply everything that either a strong economy or a healthy society needs.

If there is an advantage, a greater profit, to be had through fraud, deception, excessive risk taking, collusion and monopoly, diversion of funds, failure to live up to contracts, bribing, buying or influencing governments (which are the only, and necessary, check on fraud, deception and all the rest), some members of the business community will engage in them. They will, at least in the short run, and often in the long run, out perform their more honest competitors.
 
There are things we need for economic health that established business have battled tooth and nail against, and they will continue to do so.
 
The second is that over the last seven years we have come to the crisis point of a long term trend. We crossed the line from being a producing economy to being a credit economy.
 
This is an unsustainable condition. The next time you hear someone say "We have to get consumers spending again," run for cover. We need to get people producing, so that they earn, and then they will automatically spend.
 
It is also a consequence of the underlying philosophical proposition that free markets create the best of all possible worlds.
           
 
The goal must be to transform America into an economy that produces more than it consumes.
 
The question is how to do that?
 
Oddly enough, the solutions that have been proposed are on the right track.
 
1. Invest in infrastructure.
 
Expenditures on infrastructure become an invisible subsidy for all other business. They make all other business cheaper, faster, easier and more efficient.
 
Expenditures on infrastructure, for the most part, cannot be outsourced.
 
2. Energy independence.
 
Imported oil normally accounts for about a third of the US trade deficit. That's been true for decades.
 
The way to change that is to consume less energy and to produce our own energy.
 
Energy consumption can be cut in a host of ways. Some require new technology, others require investment in the application of existing technology. The most obvious are more efficient cars and mass transit.
 
How do we produce our own energy?
 
The stupid answer is "Drill, baby, drill." There's not enough domestic oil to do the job and it detracts from the real, long solutions.
 
The green answers are wind, solar, tidal energy, possibly geo-thermal.
 
These are infrastructure intensive. The primary cost is building machinery, setting it up, and then building efficient transmission lines. Money spent on infrastructure stays in town and gets spread widely. Money spent on oil zips into a pipeline owned by the Exxon-Mobils of this world and gushes out overseas.
 
Then there's "clean" coal and nuclear. A lot of literature says that both are feasible. I don't know who paid for it. The problem is to include all the costs – the environmental destruction – and actual, effective regulation. Theoretically, both are easily solved. In the real world, it has proved to be unlikely.
 
3. National health.
 
The system we have now is bureaucratic, wasteful, rations care, and does not allow your own choice of doctors. All the faults that conservatives rant about when they attack "socialized medicine," but more so. It's also expensive, less effective by almost any measure, and makes America non-competitive.
 
4. Government goal setting for business and technology.
 
The glory of free market capitalism is that it is innovative. Thousands, even hundreds of thousands, of different people come up with new ideas and try them out. Most fail, a few are wild successes. That won't go away. Imagination, ambition, greed, innovation, will remain.
 
There are lots of things wrong with central planning.
 
One is that it "distorts" the economy. Compared to imaginary free markets? Absolutely. Compared to real world markets?  The market forces we have now produce their own distortions. We know what many of them are. They have not been self-correcting. Unless we want to accept a complete economic collapse and dream that a more perfect world will arise from the ashes.
 
The second is that it stifles innovation.
 
Compared to what? Innovation in financial instruments? Clearly, the market, left to itself, did not produce alternative energy, popular, efficient American cars, pleasurable mass transit, a new electrical grid, a solution to the obesity epidemic, a reduction in the prison population, a sane health care system, and a host of other things.
           
We have a choice. Go to war for our economic future and well being.
 
Or muddle along with half measures, lost in a fog of pseudo-free market theology, and let ourselves be drained by our own parasites and plundered by the more driven, forward thinking, and committed economies.

 

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http://www.larrybeinhart.com
LARRY BEINHART is the author of SALVATION BOULEVARD, soon to be released as a major motion picture with Pierce Brosnan, Greg Kinnear, Jennifer Connelly, Marissa Tomei, Ed Harris, and Jim Gaffigan, WAG THE DOG, The Librarian, Fog Facts: Searching for Truth in the Land of Spin and HOW TO (more...)
 

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