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A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Kregel, Jan A. Research Report What we could have learned from the New Deal in confronting the recent global recession Public Policy Brief, No. 141 Provided in Cooperation with: Levy Economics Institute of Bard College Suggested Citation: Kregel, Jan A. (2016) : What we could have learned from the New Deal in confronting the recent global recession, Public Policy Brief, No. 141, ISBN 978-1-936192-49-6, Levy Economics Institute of Bard College, Annandale-on-Hudson, NY This Version is available at: http://hdl.handle.net/10419/168419 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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It is nonpartisan, open to the examination of diverse points of view, and dedicated to public service. The Institute is publishing this research with the conviction that it is a constructive and positive contribution to discussions and debates on relevant policy issues. Neither the Institute’s Board of Governors nor its advisers necessarily endorse any proposal made by the author. The Institute believes in the potential for the study of economics to improve the human condition. Through scholarship and research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad. The present research agenda includes such issues as financial instability, poverty, employment, gender, problems associated with the distribution of income and wealth, and international trade and competitiveness. In all its endeavors, the Institute places heavy emphasis on the values of personal freedom and justice. Editor: Michael Stephens Text Editor: Barbara Ross The Public Policy Brief Series is a publication of the Levy Economics Institute of Bard College, Blithewood, PO Box 5000, Annandale-on- Hudson, NY 12504-5000. For information about the Levy Institute, call 845-758-7700 or 202-887-8464 (in Washington, D.C.), e-mail [email protected], or visit www.levyinstitute.org. The Public Policy Brief Series is produced by the Bard Publications Office. Copyright © 2016 by the Levy Economics Institute. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information-retrieval system, without permission in writing from the publisher. ISSN 1063-5297 ISBN 978-1-936192-49-6 Preface To the extent that policymakers have learned anything at all from The contrast with the more recent crisis period and its after - the Great Depression and the policy responses of the 1930s, the math is that no such conflict arose, in the United States or lessons appear to have been the wrong ones. In this public pol - Europe, since the reduction of unemployment and poverty was icy brief, Director of Research Jan Kregel explains why there is never adopted as a direct policy target. Instead, Kregel observes, still a great deal we have to learn from the New Deal. He illumi - rescuing the financial system seems to have been regarded as nec - nates one of the New Deal’s principal objectives—quelling the essary and sufficient for recovery of the real economy. In the fear and uncertainty of mass unemployment—and the prag - eurozone, the commitment to austerity and its dire consequences matic, experimental process through which the tool for achiev - are on full display. But even in the United States, after a brief but ing this objective—directed government expenditure—came to inadequate federal fiscal stimulus measure was passed in 2009— be embraced. roughly cancelled out by austerity at the state and local level— In the search for a blueprint from the 1930s, Kregel suggests the government settled into a fiscally conservative policy stance, that too much attention has been paid to the measures deployed with a degree of fiscal consolidation unprecedented among post - to shore up the banking system, and that the approaches under - war US economic recoveries. lying the emergency financial policy measures of the recent period The Roosevelt administration experienced its own return to and those of the 1930s were actually quite similar. The more fiscal conservatism and balanced budget policies in 1937, and as meaningful divergence between the 1930s and the post-2008 pol - Kregel recounts, Roosevelt himself was prone to comparing the icy response, he argues, can be uncovered by comparing the federal budget to a constrained household budget. But the differ - actions that were taken (or not taken, as the case may be) to ence, Kregel emphasizes, is that this turn to austerity was recog - address the real sector of the economy following the resolution nized as a mistake and ultimately abandoned. Fiscal conservatism of the respective financial crises. came to be regarded as incompatible with recovery of the real In the context of outlining the evolution of the New Deal, sector of the economy, and New Dealers set about trying to per - Kregel focuses on a critical obstacle that had to be overcome for suade Congress and the public of the need for an expansive role its eventual success: the fetishism of balanced budgets. He notes for fiscal policy. that the New Deal’s public works policies and direct provision In the aftermath of the 2008 crisis, not only have the forces of paid employment, rather than being informed by a formal of fiscal conservatism prevailed, the battle, as Kregel describes it, Keynesian theory of macroeconomic stabilization, were designed was never joined. It is a fight we still need to win in order to begin to support morale, provide relief from the suffering and uncer - meaningfully addressing outright depression in the eurozone tainty of unemployment, and serve as a bulwark against more periphery and “secular stagnation” elsewhere. Whether the next interventionist alternatives. But the attempt to secure these major crisis is just over the horizon or further off, the question objectives—to address the deep uncertainty in the domain of the of how it will be handled should leave us deeply concerned. We real sector of the economy—collided with an orthodox com - can hope that policymakers look to the New Deal, and to the les - mitment to rein in what were regarded as excessive fiscal deficits; sons highlighted here, for the way out. a commitment, Kregel points out, that was just as much a part of As always, I welcome your comments. the early New Deal. The resolution of this internal conflict, in his view, provides the essential, largely ignored lesson of the 1930s. Dimitri B. Papadimitriou, President March 2016 Levy Economics Institute of Bard College 3 Introduction admit it frankly and try another. But above all, try It has become common to refer to the policies introduced after something. The millions who are in want will not stand the Great Depression of the 1930s as providing a template for by silently forever while the things to satisfy their needs what should have been done after the recent financial crisis. After are within easy reach. We need enthusiasm, imagina - all, the series of regulatory and policy decisions taken at that time tion and the ability to face facts, even unpleasant ones, in the areas of banking and finance laid the groundwork for a bravely. We need to correct by drastic means, if neces - 20-year postwar expansion with stable prices and stable financial sary, the faults in our economic system from which we markets, while since the recent crisis financial markets have now suffer. (Roosevelt 1932, 12) remained highly volatile, with recovery in real activity extremely slow and feeble. However, this view of the lessons of the 1930s It was this pragmatic approach that eventually led him to focuses excessively on the success of the reform and regulation of abandon the precepts of conservative fiscal policy, independently the financial system and tends to overlook the most important of Keynes’s General Theory , and to the eventual recognition that lesson to be learned from the experience of the New Deal. the government’s budget policy could be used to achieve the Roosevelt faced the same conundrum that is present in cur - main New Deal objectives of providing relief and employment. rent policymaking. He espoused direct action by the government This is the path that was not followed in the recent crisis and to alleviate the poverty and suffering caused by the Depression, its aftermath.

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