S. HRG. 111–140 LESSONS FROM THE NEW DEAL HEARING BEFORE THE SUBCOMMITTEE ON ECONOMIC POLICY OF THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED ELEVENTH CONGRESS FIRST SESSION ON WHAT LESSONS CAN CONGRESS LEARN FROM THE NEW DEAL THAT CAN HELP DRIVE OUR ECONOMY TODAY MARCH 31, 2009 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html U.S. GOVERNMENT PRINTING OFFICE 53–161 PDF WASHINGTON : 2009 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS CHRISTOPHER J. DODD, Connecticut, Chairman TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama JACK REED, Rhode Island ROBERT F. BENNETT, Utah CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky EVAN BAYH, Indiana MIKE CRAPO, Idaho ROBERT MENENDEZ, New Jersey MEL MARTINEZ, Florida DANIEL K. AKAKA, Hawaii BOB CORKER, Tennessee SHERROD BROWN, Ohio JIM DEMINT, South Carolina JON TESTER, Montana DAVID VITTER, Louisiana HERB KOHL, Wisconsin MIKE JOHANNS, Nebraska MARK R. WARNER, Virginia KAY BAILEY HUTCHISON, Texas JEFF MERKLEY, Oregon MICHAEL F. BENNET, Colorado COLIN MCGINNIS, Acting Staff Director WILLIAM D. DUHNKE, Republican Staff Director DAWN RATLIFF, Chief Clerk DEVIN HARTLEY, Hearing Clerk SHELVIN SIMMONS, IT Director JIM CROWELL, Editor SUBCOMMITTEE ON ECONOMIC POLICY SHERROD BROWN, Ohio, Chairman JIM DEMINT, South Carolina, Ranking Republican Member JON TESTER, Montana JEFF MERKLEY, Oregon CHRISTOPHER J. DODD, Connecticut CHRIS SLEVIN, Staff Director (II) CONTENTS TUESDAY, MARCH 31, 2009 Page Opening statement of Senator Brown .................................................................... 1 WITNESSES Christina D. Romer, Chair, President’s Council of Economic Advisers ....... 3 Prepared statement ................................................................................... 33 Allan M. Winkler, Professor of History, Miami University, Oxford, Ohio ... 15 Prepared statement ................................................................................... 38 James K. Galbraith, Lloyd M. Bentsen, Jr., Chair in Business/Govern- ment Relations, Lyndon B. Johnson School of Public Affairs, University of Texas at Austin, and Senior Scholar, Levy Economics Institute .......... 17 Prepared statement ................................................................................... 41 Lee E. Ohanian, Professor of Economics, and Director, Ettinger Family Program in Macroeconomic Research .......................................................... 19 Prepared statement ................................................................................... 46 J. Bradford DeLong, Professor of Economics, University of California at Berkeley .................................................................................................... 21 Prepared statement ................................................................................... 53 (III) LESSONS FROM THE NEW DEAL TUESDAY, MARCH 31, 2009 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Subcommittee on Economic Policy, Washington, DC. The Subcommittee met at 2:44 p.m., in room SD–538, Dirksen Senate Office Building, Senator Sherrod Brown (Chairman of the Subcommittee) presiding. OPENING STATEMENT OF SENATOR SHERROD BROWN Senator BROWN. The Subcommittee on Economic Policy will come to order. This is the first meeting of our Subcommittee. Unfortunately, it is being delayed. I apologize for starting about 10 or 12 minutes late. Dr. Romer, thank you for joining us, and the other panel members, who I will introduce in a moment. There are three votes. I just cast a vote. Senator Merkley will wait until the second vote starts, will vote, and then come back, and then I will go back and cast another two votes, and then come back. So we will keep this Committee going as Dr. Romer and the second panel testify. We are facing an economic challenge few among us have wit- nessed. Unemployment in Ohio is 9.4 percent, the highest in 25 years. Several counties have rates in my State of more than 15 per- cent. My colleague Senator DeMint’s State—Senator DeMint is the Ranking Republican on this Subcommittee. In his State of South Carolina, the unemployment figure is 11 percent. With all respect to the economists in the room, these numbers do not tell the entire story. Millions of men and women, as we know, are struggling to make ends meet, trying to shield their families as best they can, wrestling with the emotional problems all too common to job loss. We are unfortunately becoming accustomed to the refrain ‘‘Worst since the Great Depression.’’ Unemployment reached one in every four workers 75 years ago, and economic output fell by a quarter from 1929 to 1933. While not so severe, the policy challenges faced by President Obama and the Congress parallel some of those that Franklin Roosevelt confronted when he took office in March 1933. Financial institutions are wounded and hesitant to lend. Demand has fallen as consumers lose jobs and see their savings diminish. Businesses are cutting workers while scrambling for credit. We are learning to fear fear itself. Fear of the unknown, whether it is job security or health security or asset-backed Securities, is pervasive. (1) 2 We cannot draw lessons from every aspect of the Great Depres- sion or from FDR’s response. The one lesson we should draw is the United States did indeed recover from the Great Depression, and we will indeed recover from today’s recession. What lessons can Congress learn from the New Deal that can help drive our economy today? That is the purpose of today’s hear- ing. The New Deal era remains historic for its ambition, for its aid to the neediest, and for its lasting policies that helped strengthen the economy and improve the lives of three generations of Ameri- cans. While not all perfect, the New Deal kept millions out of pov- erty. By 1940, unemployment was down to 12 percent, and real GDP by one estimate had grown 65 percent from 1933. Much of the New Deal’s legacy remains with us today. Invest- ments in infrastructure paved the way for the most dynamic econ- omy the world has ever seen. The Fair Labor Standards Act has guaranteed decent wages and working conditions for millions of Americans, and Social Security has provided a secure retirement for generations of our senior citizens. And think where we would be today without the Securities and Exchange Commission and the FDIC and the Banking Act. Ameri- cans know that despite the troubles on Wall Street, their savings at the bank on Main Street are secure. Until recently, there was not much debate on whether the New Deal helped or hurt efforts to recover. But recently, some of my col- leagues have suggested that the New Deal failed. They argue that it was World War II spending that pulled us out of the Great De- pression. But this is a false choice, in my opinion. Nothing I have seen or heard disputes the economic impact of our becoming the ar- senal of democracy. But this is not the same as saying that the New Deal was harmful or did no good. Discussion of the New Deal over the past several months has served as a proxy debate for cur- rent economic planning and recovery planning. It is a topic worthy of our examination today. Thomas Paine many years ago wrote, ‘‘By comparing what is past with what is present, we frequently hit on the true character of both, and we become wise with very little trouble.’’ Let us see if we should be so lucky today. We are honored to have a distinguished group of witnesses with us today. I look forward to their testimony. We will begin. When Senator DeMint comes and Senator Merkley comes and Senator Tester, if he can make it, they cer- tainly can feel free to make opening statements when that hap- pens. We will start with Christina Romer. She is Chair of the Council of Economic Advisers. She was a class of 1957 Wilson Professor of Economics at the University of California–Berkeley. Before teach- ing at Berkeley, she taught economics and public affairs at Prince- ton from 1985 to 1988. She went to high school in northeast Ohio, so she is a Buckeye at heart. Until her nomination, she was co-director of the Program on Monetary Economics at the National Bureau of Economic Research and served as Vice President of the American Economic Associa- tion, where she also was a member of the executive committee. She is a fellow of the American Academy of Arts and Sciences. Dr. 3 Romer is known for her research on the causes and recovery of the Great Depression and on the role that fiscal and monetary policy played in the country’s economic recovery. Her most recent work, authored with her husband, David Romer, also an economics pro- fessor, shows the impact of tax policy on government and on eco- nomic growth. Dr. Romer, thank you for joining us. STATEMENT OF CHRISTINA D. ROMER, CHAIR, PRESIDENT’S COUNCIL OF ECONOMIC ADVISERS Ms. ROMER. Well, thank you, Chairman Brown. Thank you for inviting me to join you today. As you noted, in my previous life as an economic historian at Berkeley, one of the things that I studied was the Great Depression. And in my current life, as Chair of the Council of Economic Advisers, I have been on the front lines of the administration’s efforts to end what is arguably the worst recession our country has experienced since the Great Depression. For this reason, I am delighted to be with you today to talk about the les- sons learned from the Great Depression and President Roosevelt’s New Deal and how they have helped to inform us—and I think will continue to help inform us—about the best way to approach dealing with today’s crisis. To start out, I think the first thing to say is that it is very impor- tant to point out that the current recession, while unquestionably severe, pales in comparison with what our parents and grand- parents experienced in the 1930s.