|November 24, 2008|
by Faiz Shakir, Amanda Terkel, Satyam Khanna, Matt Corley, Benjamin Armbruster, Ali Frick, and Ryan Powers
A New New Deal
When President-elect Barack Obama officially introduces his economic team today, he is also expected to lay out his vision for a "massive fiscal stimulus program." While estimates of its size vary -- from $300 billion to over $700 billion -- the expected stimulus package is now almost certain to eclipse the $175 billion package that Obama proposed during the election. The need for a stimulus increases with each passing day. Last week, new unemployment claims reached a 16-year high and are expected to increase again this week, while the total number of individuals seeking jobless benefits is now at a 25-year high. More worrisome for the nation's overall economic outlook is the very real threat of deflation. While the current crisis looks to be the greatest economic crisis since the Great Depression, economist Dean Baker explained recently this crisis needn't be as bad as the Great Depression. Baker wrote bluntly, "There is a simple way to get out of that sort of prolonged downturn: spend money." Despite such a simple prescription for our economic ills, conservatives who enthusiastically embraced President Bush's record deficit spending to fund the war in Iraq and tax cuts for the rich, are now recklessly opposing a stimulus package that would include necessary and significant spending to jump-start the economy and fund tax-cuts for the middle class.
NEW DEAL MYTH-BUSTING: In the past, rewriting the history of the Great Depression remained the favored pasttime of activists on the radical right: Grover Norquist, Jonah Goldberg, and the Heritage Foundation. In their erroneous view, FDR's New Deal was not only ineffective, but was responsible for "prolonging" the Great Depression. Increasingly, however, this view is breaking into the mainstream. Yesterday, for example, conservative columnist George Will said on ABC's This Week, "Before we go into a new New Deal, can we just acknowledge that the first New Deal didn't work?" But as Brad DeLong, Paul Krugman, and others explain, the New Deal did in fact work for Americans. Where the New Deal had shortcomings, they were the result of the initiative not being bold enough in the short-term. DeLong explained recently that after the New Deal policies went into effect, "[p]rivate investment recovered in a healthy fashion," but as the economic outlook began to brighten, Roosevelt chose to "adopt more 'orthodox' economic policies and try to move the budget toward balance." Roosevelt's attempt to return to "conservative budget principles" by cutting spending and raising taxes precipitated "an economic relapse that drove the unemployment rate back into double digits." "What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy's needs," Krugman wrote.
THE RETURN OF DEPRESSION ECONOMICS: Those on the right arguing against a sufficiently large economic stimulus and in favor of "belt tightening" at the federal level have been aptly labeled neo-Hooverists. Like President Hoover before them, such neo-Hooverists fail to grasp that admirable policy goals can become harmful in moments of economic crisis. As Krugman wrote recently, the U.S. economy is "well into the realm of what I call depression economics...a state of affairs like that of the 1930s in which the usual tools of economic policy -- above all, the Federal Reserve's ability to pump up the economy by cutting interest rates -- have lost all traction. When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly." Indeed, while conservatives argue for reduced spending and balanced budgets, New York University Economics Professor Nouriel Roubini testified before Congress's Joint Economic Committee that failure to enact a fiscal stimulus could actually result in wider deficits as the economy contracts. In his estimate, this would send the U.S. into a "very severe recession."
LARGE ENOUGH TO MATTER: Any fiscal stimulus should be bold. As Krugman wrote recently, "My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent." Vice President for Economic Policy at the Center for American Progress, Michael Ettlinger, explained why such a significant stimulus is needed: "The idea of a stimulus package is that it quickly puts money out into the economy to increase consumption, to increase spending, so that businesses can have confidence that if they make investments, if they hire people, there are consumers for their products which warrant those kinds of expenditures on their part." In order to have any effect at all, Ettlinger argued that such a package must be "large by historical standards": at least $300 billion in 2009. While it is unclear just how large Obama's stimulus plan will ultimately be, it appears that Obama's economic team is on the right track. Close advisers to Obama including Gov. Jon Corzine (D-NJ) and former Treasury Secretary Larry Summers both raised the possibility of a $700 billion dollar two-year stimulus plan last week. Failing to pass a plan "big enough to deal with the huge problem we face" risks repeating past errors. Indeed, "only those who learn from history can hope to avoid repeating it.