Economic stimulus package welcome, but will be little felt.
COLUMN: As I see it
One year ago today I predicated in the Telegram & Gazette the looming recession would not turn the fundamentals of the economy decisively negative. My logic was based on the miraculous willingness of an anti-intervention Bush administration to promote and implement Keynesian macroeconomic policy.
I claimed Bush's tax rebate stimulus package would fall short, but signaled Keynesianism or New Deal-style economics is "in" and Reaganomics "out." The fear now is too much New Deal-style economics. Conservatives point out the New Deal policies were riddled with problems and failures. They are correct.
The 1933 National Industrial Recovery Act, creating the National Recovery Administration, reduced competition in over 500 industries. Firms colluded to increase prices. Firms colluded with labor unions to increase union wages, at the expense of nonunion employment. While some firms and labor unions benefited, it increased consumer prices and unemployment; arguably making a bad depression "Great." These mistakes are not Keynesian.
Economists Harold L. Cole and Lee E. Ohanian argue Keynesian elements of the New Deal failed to stimulate growth, by failing to put Americans back to work. This conclusion is shocking when it is realized that the NIRA created millions of jobs to rebuild America's infrastructure, e.g. roadways, bridges and schools. Their data are unambiguous: total hours worked per adult fell 18 percent during Roosevelt's first three years and 23 percent from 1933-39, after the NIRA was passed. We could call this the New Deal paradox: an increase in federal public work projects led to a decrease in total hours worked.
Some economists defend the New Deal on grounds it was not given time to stimulate the economy because the Supreme Court declared it unconstitutional in 1935. Pointing to the lack of antitrust activity, Cole and Ohanian counter NIRA policy effectively remained in place even after 1935. New Deal policy failed.
The "New Deal fallacy" is the idea the NIRA reversed the Great Depression. Many economists instead point out the recovery only happened after the start of World War II. New Deal paradox or fallacy Keynesian intervention fails, whereby I would be wise to re-evaluate my 2008 (Keynesian) optimism.
In spite of the increasingly popular New Deal critiques my belief in Keynesianism is not shaken. The potential for an economic catastrophe indeed appears more likely, but this means the stimulation must be greater. Eight-hundred billion dollars is a good start.
The answer to the New Deal paradox seems to be provided by University of California-Berkeley economist Christina Romer, now the chair of the Council of Economic Advisers for President Obama.
Romer accepts federal work projects played a relatively small role in the recovery from the Great Depression. However, this was not because of a failure of Keynesianism - rather, federal spending was partially counteracted by Hoover's 1929 tax increases, which were mistakenly not repealed by Roosevelt. New Deal policy was significantly counteracted by decreased spending and increased taxes by states and cities. New Deal spending was not large enough, and New Deal policy neglected to adequately address the budget shortfalls and crises at the state and local level - lessons that are addressed in the current proposed legislation.
The New Deal fallacy that World War II, not New Deal policy, led to recovery does not condemn and rebuke, but vindicates Keynesianism. It is true New Deal policy was riddled with mistakes, counteracted by tax increases and local spending decreases. But military build-up is a massive increase in federal spending. To put it differently, Roosevelt failed to adequately implement Keynesian-style economics until entering the war. The massive 2009 stimulant package seems to understand the lesson.
With Christina Romer advising Obama and (the Bush-appointed) Ben Bernanke guiding the Federal Reserve, at the helm of U.S. macroeconomic policy are two of the country's foremost experts of depression economics. Thus, I remain confident the fundamentals of the economy will not turn decisively negative. I again applaud the return to Keynesianism; however, a massive Keynesian injection is not going to undo 30 years of economic illness.
The stimulus will be little felt by American households. We will continue to be squeezed by stagnant wages and salaries, massive personal debt, rising cost of food, child care, transportation, and tuition. The cost of health care will remain prohibitive and the ability to retire comfortably will be realized only by the wealthiest.
President Obama will return the economy to good health and the wealthiest 10 percent will again prosper.
The $800 billion stimulus package will stabilize the economy, but saddle all Americans with more debt, while failing to improve opportunity and socioeconomic conditions of the bottom 90 percent. Now that is un-change you can believe in.
Hans G. Despain is a professor in the department of economics at Nichols College in Dudley.
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|Publication:||Telegram & Gazette (Worcester, MA)|
|Date:||Feb 13, 2009|
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