FDR, Reagan and Our Current Predicament
CNBC had a segment last night in which Cato’s David Boaz and CAP’s Heather Boushey debated whether Ronald Reagan or FDR would make the best model for Barack Obama. It’s striking that the host starts out by saying that “FDR and Reagan both faced similar crises in their presidencies” even though they didn’t, in fact, face similar crises. Reagan faced a situation when the inflation rate was very high. This led the Fed to raise interest rates and strangle the economy in an effort to choke inflation. That worked, but it created a big recession. This is nothing like our current recession, where we’re trying to ward off the possibility of deflation:
Heather makes this point straight out of the gate. At this point, the anchor seems to agree that her intro was totally off-base, but it makes you wonder why she said it in the first place. Boaz, meanwhile, agrees that the situation doesn’t resemble the situation Reagan faced, but then just says we need Reaganite policies anyway! Which I suppose is a pretty good encapsulation of libertarianism’s one-note approach to public policy.
But the fact remains that these are different situations and the differences are important. We shouldn’t just emulate what FDR did. But that’s because some of the things FDR did were bad ideas. What we need is to do something similar to what we would advise FDR to do if we had a time machine. To model our approach on what worked in Depression-era policymaking (not just in the U.S., but abroad) and that avoids what didn’t work or what was counterproductive. The Reagan era is just irrelevant. Reagan did some good things, like remaining relatively steadfast in the face of the short-term pain caused by Volcker’s interest rate policies. And he did a lot of bad things. But you don’t want to emulate either of those things because the situation is different.
56 Responses to “FDR, Reagan and Our Current Predicament”
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February 23rd, 2009 at 6:32 pm
CNBC only has a pentabox? Truly the recession has hit new lows.
February 23rd, 2009 at 6:42 pm
Reagan’s situation was relevant only in this sense: The stagflation that greeted him when he came into office was the long-term result of policies initially enacted by FDR (and expanded by LBJ).
As for what we should do now, it’s clear that the situation calls for loose monetary policy and fiscal stimulus.
February 23rd, 2009 at 6:46 pm
“Reagan did some good things, like remaining relatively steadfast in the face of the short-term pain caused by Volcker’s interest rate quote.”
This assumes that high interest rates were the best solution to the problem. I would submit that wage and price controls would have been a better answer. We could have avoided the severe recession. Plus Reagan’s tax cuts were a stupid idea, as their partial repeal confirmed.
February 23rd, 2009 at 6:52 pm
“I would submit that wage and price controls would have been a better answer.”
Because that worked so well for Nixon? You sound like an economic illiterate.
“Plus Reagan’s tax cuts were a stupid idea, as their partial repeal confirmed.”
Reagan cut top income tax rates from 70% to 28%, and capital gains rates from 70% to 28%; Clinton raised income tax rates to 40% and lowered capital gains rates to 20%. If Reagan’s tax cuts were such a stupid idea there would be a lot of people advocating a return to 70% tax rates, but no one serious is advocating anything close to that. Absurdly high tax rates were a holdover from FDR’s attempt to control inflation during WWII (although they were ameliorated by JFK’s tax cuts in the 1960s).
February 23rd, 2009 at 6:58 pm
This assumes that high interest rates were the best solution to the problem. I would submit that wage and price controls would have been a better answer. We could have avoided the severe recession
============================================================
Right – they worked so well when Nixon used them:
http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/ess_nixongold.html
The Cost of Living Council took up the job of running the controls. After the initial ninety days, the controls were gradually relaxed and the system seemed to be working. But unemployment was not declining, and the administration launched a more expansionary policy. Nixon won reelection in 1972. In the months that followed, inflation began to pick up again in response to a variety of forces — domestic wage-and-price pressures, a synchronized international economic boom, crop failures in the Soviet Union, and increases in the price of oil, even prior to the Arab oil embargo. Nixon, under increasing political pressure from the investigations of the Watergate break-in, reluctantly reimposed a freeze in June 1973. Government officials were now in the business of setting prices and wages. This time, however, it was apparent that the control system was not working. Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets. Nixon took some comfort from a side benefit that George Shultz, at the time head of the Office of Management and Budget, identified. “At least,” Shultz told the president, “we have now convinced everyone else of the rightness of our original position that wage-price controls are not the answer.” Most of the system was finally abolished in April 1974, 17 months after Nixon’s triumphant reelection victory over George McGovern — and four months before Nixon resigned as president.
February 23rd, 2009 at 7:18 pm
There are other models besides FDR and the radical evil one.
We need A Great Beginning
We can start by shutting down the reactionary media outlets.
February 23rd, 2009 at 7:27 pm
Price controls sucked under Nixon because Nixon was bad at them, and because it’s widely acknowledged that many of Nixon’s actions (imposing the wage freeze before the price freeze, not enforcing the price freeze and enforcing the wage freeze) were more directed at punishing the labor movement than actually dealing with inflation.
By contrast, price controls worked very well in WWII, both because the OPA really worked hard to enforce controls and because they weren’t interested in hurting people for political benefit.
February 23rd, 2009 at 7:28 pm
The stagflation of the 70’s was the result of the end of the Bretton Woods fixed monetary exchange rate mechanism. Which ended in turn as the US sent dollars around the world to buy stuff as the world economy expanded. So many dollars accumulated in foreign central banks that there was not enough gold to exchange for them, if one of them decided to ask. The system was untenable.
Currencies floated, the oil price spiked sending ever more dollars offshore along with our growing appetite for imports and he dollar fell. Inflation was the result.
FDR should be held responsible to the extent we won WWII and has strong economic growth for a 25 years after.
Inflation is a monetary phenomenon. Always was and always will be. As is deflation. Noting that money is debt. We now have deflation because we have debt deflation.
Carter recommended, indirectly, that we pare back our consumption, our hedonism, or decadence. Reagan rejected that. He proposed, indirectly, unlimited consumption paid for with unlimited debt. We have just concluded he biggest monetary experiment in world history. Morning is over.
February 23rd, 2009 at 7:28 pm
As for what we should do now, it’s clear that the situation calls for loose monetary policy and fiscal stimulus.
You sound like an economic illiterate.
February 23rd, 2009 at 7:44 pm
Current wage and price controls:
-minimum wage
-milk
-sugar
-rents in NYC
-money
February 23rd, 2009 at 7:52 pm
Second the comment on “one note” libertarianism.
It’s funny watching them flail about as they realize their ideology is not up to the task of explaining, much less offering useful advice, about what’s going on around them.
Reason magazine was running stories about “chicken littles” who were talking about a recession in the summer of 2008. The SUMMER. Of 2008.
Faced with the financial meltdown, they can do no better than the Freddie/Fannie/CRA nonsense from the racist right.
Global warming? There is no global warming, just a plot by the socialists. Just cut taxes, and we’ll be rich enough to solve it in 200 years, anyway.
Libertarians in 2009 remind me of Leninists in 1995.
February 23rd, 2009 at 7:54 pm
There’s a big difference between FDR’s fiscal stimulus and Obama’s: FDR was borrowing domestically to fund his stimulus while Obama is borrowing from China and the Petro-states. The US still doesn’t save enough and is borrowing money from abroad to fund our consumption. Consumption will have to fall further before we reach a sustainable situation. Hopefully the stimulus will keep us from over-shooting on the way down, but there’s no question that the belt-tightening needs to continue before we can get back onto a sustainable growth path.
February 23rd, 2009 at 7:59 pm
The “Volcker” recession of the early 1980s was the worst from the great depression to today.
And the interest rate is a price.
February 23rd, 2009 at 8:16 pm
“The stagflation of the 70’s was the result of the end of the Bretton Woods fixed monetary exchange rate mechanism.”
You’re conveniently leaving out the reason why we had to bail on Bretton Woods?
“FDR should be held responsible to the extent we won WWII and has strong economic growth for a 25 years after.”
The government spending unleashed by FDR — and stepped up a notch by LBJ with his guns & butter budgets — made our dollar peg unsustainable. That’s why Nixon had to bail on Bretton Woods.
February 23rd, 2009 at 8:19 pm
Reagan faced a situation when the inflation rate was very high. This led the Fed to raise interest rates
The interest rates initially went up under Carter, well before Reagan took office. Because Carter had recession at the end of his term and Reagan at the beginning, Carter politically “owned” the recession while Reagan was lauded as having brought “Morning in America.” In reality both presidents allowed the Fed chairman to apply the monetary discipline that tamed 70’s double-digit inflation.
Right now we face a set of economic problems much more similar to FDR’s than Reagan’s. Which isn’t to say that in a few years we won’t be facing another bout of hyperinflation (not a prediction, just a warning).
February 23rd, 2009 at 8:33 pm
“Because Carter had recession at the end of his term and Reagan at the beginning, Carter politically “owned” the recession while Reagan was lauded as having brought “Morning in America.””
That’s not totally accurate. The worst of the recession happened on Reagan’s watch, and he took a lot of heat for it. “Morning in America” was his reelection campaign. Also, Reagan presented strength, confidence and optimism in America, that it’s best days could be in front of it. Carter presented malaise, weakness and despair. Right now Obama seems to be leaning closer to the Carter rhetoric.
February 23rd, 2009 at 8:37 pm
Reagan presented strength, confidence and optimism in America, that it’s best days could be in front of it.
i.e. the kind of sex that Fred has to pay heroin-addled Thai teenagers for.
February 23rd, 2009 at 8:42 pm
You should change your handle to This Machine Isn’t Funny.
February 23rd, 2009 at 8:48 pm
bob mcmanus,
I enjoyed your link to Lenin’s call for communists to work on Saturdays the better to fight the landlords and capitalists. However, I’m not sure if this idea translates travels very well from Russia 1918 to America 2009. Is your point that the far left is just as irrelevant and out of touch as the libertarians?
February 23rd, 2009 at 8:49 pm
You’re conveniently leaving out the reason why we had to bail on Bretton Woods?
You conveniently forgot that Breton Woods was crafted by under FDR by our political and financial elites. It worked. It worked to our advantage, till it didn’t. We didn’t bail it out, we bailed, abandoned it.
Fiscal policy had very very little to do with it. Inflation is a monetary phenomenon. In addition inflation is an absolute necessity with a debt based monetary system. (I intend nothing pejorative in that statement) Fiscal policy is often used, wisely or not, to augment monetary growth. It works at the margin. The stimulus will work only at the margin.
One wonders what the monetary system dictated by a victorious Germany would have looked like? Especially after it had nuclear weapons and missiles. I’m sure conservative Americans would have accommodated Germany, and perhaps emulated it. Once the excesses of Nazism had cooled. Or not.
The overwhelming majority of voters embraced FDR’s Democratic coalition. Deal with it. It’s history. Admittedly conservatives stand at the edge of a chance again establish an American form of National Socialism. Righting all the wrongs of the post 1932 period which have motivated them ever since. This is your big chance. Don’t blow it.
February 23rd, 2009 at 8:52 pm
Why do we watch CNBC anyway? It’s an odd compulsion, to be sure. I guess it’s for the same reason I watch evangelical Protestant programming: fundamentalism is fascinating to me. CNBC snippet from this morning: “markets got us into this mess, so markets should get us out.” This kind of political-economy homeopathy is oddly compelling to me, though rather than homeopathy I suppose it’s more like a hangover cure, fur of the cat that bit you etc.
February 23rd, 2009 at 8:55 pm
Rapier,
You started rambling there toward the end with the alternate history stuff. Let’s deal with facts instead. By the early 1970s, the American economy was in the tank, taxes were already as high as they could feasibly be raised, and our government had been spending like a drunken sailor for years (that this had been a popular policy I don’t dispute). That led foreigners who could connect the dots to start cashing in their dollars for gold. We didn’t have enough gold to cash them all out, which is why we bailed on Bretton Woods. What would have been the alternative, to shrink our money supply to match our supply of gold? The last time that was tried, we got the Great Depression.
February 23rd, 2009 at 8:58 pm
“Is your point that the far left is just as irrelevant and out of touch as the libertarians?”
You assume he was making a subtle point. He was not: he is a Marxist.
“CNBC snippet from this morning: “markets got us into this mess, so markets should get us out.”
That’s as ignorant as Chris Dodd’s (or was it Barney Frank’s?) statement that “the private sector got us into this mess, so government needs to get us out”, as if the worst excesses didn’t occur at the intersection of the private and public sectors (e.g., the mortgage business).
February 23rd, 2009 at 9:02 pm
“I suppose is a pretty good encapsulation of libertarianism’s one-note approach to public policy.”
Exactly! What we need is a multi-faceted, empirical response to events on the ground. Like, when the economy is booming, call for massive infrastructure spending, particularly on high-speed rail. Later, when the econommy tanks and the situation changes dramatically, call for something dramatically different. Like massive infrastructure spending, particularly on high-speed rail.
See? So many notes, it’s like a symphony! Of high-speed rail!
February 23rd, 2009 at 9:45 pm
What is it with the recent backlash against FDR. I really don’t understand this silliness. Reagen boomed the debt far more than any other president ever.
February 23rd, 2009 at 9:54 pm
THe situation is most like the 1996 recession, just prior to the deregulation of telecom. What we await is another deregulation bill that, like the 1997 deregulation solved the most specific and important constraint. The things we do now have nothing to do with the Mini Depression, but is more associated, as Arnold Kling points out, with reparations, payback.
February 23rd, 2009 at 9:57 pm
Is your point that the far left is just as irrelevant and out of touch as the libertarians?
It is the liberals and social democrats that are irrelevant and out if touch. It’s like they live in some world that does not have the new leader of the Imperialist Power increasing a trillion dollar defense budget to fight wats against third world guerillas forty years after the last insane brutality.
It is like the social democrats aren’t desperately begging for health care for children in a society where 1% of the population has most of the wealth. They can’t seem to see Obama gicing trillions to investment bankers.
This will get much worse, with bad luck 30s fascist worse followed by World War. It should have been impossible to repeat the 30s. I don’t blame the Right. The Right should have long since been put away.
The mistake was trying to save capitalism in the 30s. In fact most of what has been done in the West since 1917 is a tragedy.
What, maybe after the 3rd or 4th cycle of crash-depression-fascism-World War liberals will go further than begging for Obama to not cut Social Security and pleading for a little better health care?
Bosses, can we haz some mass transit, please. Fucking contemptible.
February 23rd, 2009 at 10:14 pm
I’ll second the tax-cut-as-panacea argument MY makes here. What makes it even more maddening is the assumption that because conservatives want to cut taxes and liberals don’t like that, liberals must want to take everyone’s money away. It’s silly and absurd, and the Right gets away with it every time, for everything.
Abortion? Liberals want to force women to get abortions.
Gay marriage? Everyone must get gay-married!
Terrorism? Surrender to Iran!!1!
Also, FDR was way better than Reagan. What did Reagan ever do besides illegally ransom hostages and fund death squads in Latin America?
I’m rather sick of this and would like to see some pushback.
February 23rd, 2009 at 11:14 pm
I think Republicans should keep focusing on the amazing accomplishments of that God striding across all History, otherwise known as Ronald Reagan. If only their political candidates had invoked His Holy Name more, they would surely have won the election. It is the true path to victory, that and the 1994 Gingrich revolution. Sure way.
February 23rd, 2009 at 11:24 pm
Inflation is a monetary phenomenon. In addition inflation is an absolute necessity with a debt based monetary system. (I intend nothing pejorative in that statement)
True. Of course, I think that this is a pejorative statement, and I support a gold standard.
Second the comment on “one note” libertarianism.
It’s funny watching them flail about as they realize their ideology is not up to the task of explaining, much less offering useful advice, about what’s going on around them.
Actually, the real libertarians (see Ron Paul and the Mises Institute) explained this situation long before it happened. Loose Federal Reserve monetary policy funded both the bubble and all of the derivatives trading/etc. that led to the crisis.
And I wouldn’t be so hasty to dismiss the theory that the push to lower lending standards to get more non-Asian minorities into homes played a role in the housing bubble.
February 23rd, 2009 at 11:29 pm
You should change your handle to This Machine Isn’t Funny.
Then why did I laugh my ass off at what he said? Explain it if you’re so smart.
February 23rd, 2009 at 11:40 pm
“Then why did I laugh my ass off at what he said?”
Because “he” is you. Your new handle should be This Machine is Lame.
February 23rd, 2009 at 11:41 pm
Reagan pulled the ultimate reverse Robin Hood by increasing wage earners’ Social Security taxes, and appropriating the revenue to offset the deficits he caused by cutting marginal income tax rates.
This is what makes him a conservative’s hero.
February 23rd, 2009 at 11:45 pm
There’s been quite an infestation of rightard trolls around here lately. Anybody got a can of Raid?
February 23rd, 2009 at 11:47 pm
MY will stop asking for infrastructure when the situation changes – when we get more infrastructure.
Meanwhile taxes are lower then they’ve been since, what, the 1920s?, and Republicans want more tax cuts.
The housing bubble is a multiple failsafe situation. First, people mispriced homes. Second, the regulation of lending standards was screwed up. Third, people mispriced mortgage-backed securities. Fourth, people leveraged so much that this loss really hurt them. Everyone is at fault.
February 23rd, 2009 at 11:51 pm
Speaking of Paul Volcker, this revelation is from a speech he gave recently in Canada:
February 24th, 2009 at 12:05 am
“Then why did I laugh my ass off at what he said?”
Because “he” is you. Your new handle should be This Machine is Lame.
I am he as you are me as you are…whatever, I’ve been posting under my own handle for a long time, I’m nobody’s sockpuppet.
February 24th, 2009 at 12:17 am
That’s an awesome quote. I had a podcast of Volcker speaking from National University of Singapore recently. The man can tell a good anecdote, and listening to his answers during Q&A was interesting.
February 24th, 2009 at 12:29 am
FDR is the foremost example we should be looking at. FDR did something right to address the economic problems, he built 40,000 miles of road, so desperately expected.
Should we do the same? No, but we should be working a similar problem.
February 24th, 2009 at 1:44 am
Oh, it wasn’t meant to be funny. Reagan spun Americans a whore’s line, and America’s finally come down with the clap.
Funny how Fred celebrates how Reagan told Americans they could have whatever they wanted, then objects when those of a huskier hue took him up on it. But no john ever wants to think that some other sweaty old man has been in his place.
February 24th, 2009 at 1:50 am
“One wonders what the monetary system dictated by a victorious Germany would have looked like?”
[Brown]: Well, if you look at Germany, it went absolutely bankrupt and then the way Hitler turned it around was he issued his own money. And I think that’s the only solution – is to give the money issuing power back to the government.
http://www.thomhartmann.com/index.php?option=com_content&task=view&id=1127&Itemid=119
February 24th, 2009 at 2:29 am
MattYoung: I appreciate the sentiment, but your numbers are off. The WPA alone built 500,000 miles of roads.
February 24th, 2009 at 7:14 am
Half a million miles of road built by WPA StevenAttewell?
You need to get off the crack baby.
MattYoung is much closer to correct.
You are perhaps thinking of the “improvements to rural roads” claimed by the WPA. This category claimed 500,000 miles but then their “improvements” included kicking stones off an unpaved and ungraded mule track by barefoot children walking to their swimming hole..
Sorta like our current metric free ObaStimulator.
And do Lefties really want us to follow the FDR model?
After all, whatever one wants to say about the efficacy of any particular “New Deal” program in ameliorating the pain, I think everyone agrees that it was the transformation of the American economy for war (Federal spending up to 45% of GDP) and of course the massive employment the war effort demanded (on top of the death of half a million working age citizens) which actually nailed the coffin of the depression/recession.
Whom shall we invade?
February 24th, 2009 at 7:25 am
Americans were furious at FDR’s New Deal waste and inefficiencies, and they showed their ire at the ballot box.
February 24th, 2009 at 8:00 am
By the early 1970s, the American economy was in the tank,
If that was torture, nail me to the wall.
February 24th, 2009 at 8:01 am
THe situation is most like the 1996 recession
I missed that one. 1996 BCE?
February 24th, 2009 at 8:05 am
as if the worst excesses didn’t occur at the intersection of the private and public sectors (e.g., the mortgage business).
If we’d had the mortgage excesses — doubled — but didn’t have the derivatives/debt swap shenanigans, we’d have had an economic sneeze instead of the TB we’re having now. The “worst excesses” were the leveraging, the secrecy, and the greed of the derivatives/debt swap market. (You’re in the that market, aren’t you, Fred?)
February 24th, 2009 at 10:20 am
Re: The government spending unleashed by FDR — and stepped up a notch by LBJ with his guns & butter budgets — made our dollar peg unsustainable.
By the 1970s we had paid off the WWII denbt (which was by the far the largest component of FDR’s spending). You can legitimately blame LBJ’s “Guns and Butter” policies for some of the 70s inflation, but not FDR, except maybe in a purely contigent sense as FDR (like Lincoln, Washington, and, fro that matter, Julius Caesar) was in the chain of events that got where we are.
And if we are talking about FDR’s spending, shall we assume you agree with Pat Buchanan that we should have simply let the Nazis have Europe and Japan have Asia and the Pacific?
February 24th, 2009 at 11:13 am
Actually, the real libertarians (see Ron Paul and the Mises Institute) explained this situation long before it happened. Loose Federal Reserve monetary policy funded both the bubble and all of the derivatives trading/etc. that led to the crisis.
They made the same prediction every year since the 1930s, and were wrong for 70 years. Then, when an unregulated financial sector engaged in shenanigans that caused the frequent, non-depression-causing event of a real estate downturn to set off a cascade of failures that sent the entire economy into a depressionary cycle, they were utterly incapable of explaining what made this different from every other real estate run-up and downturn, and were left offering the same explanation that has been wrong for seven decades.
And I wouldn’t be so hasty to dismiss the theory that the push to lower lending standards to get more non-Asian minorities into homes played a role in the housing bubble. I’m sure you wouldn’t. Nevemind that over half of the subprime loans made in the past decade were cash-out refinances in the suburbs – CitiGroup and Countrywide would have models of prudent rectitude if it weren’t for those darn low income families and minorities.
February 24th, 2009 at 12:53 pm
“You’re in the that market, aren’t you, Fred?”
No.
JonF,
I find it amazing that I make a fairly non-controversial point (among the economically literate), that big government spending eventually led to the stagflation of the 1970s, and commenters like you assume that makes me a Nazi sympathizer. A little less hysteria, please.
FDR created the precedent for expansive social spending; see for example, Medicare grew out of amendments to FDR’s Social Security Act. By the early 1970s, it got to the point where the government was writing checks dollar holders didn’t think it could cash — that’s why they started cashing in their dollars for gold. The alternatives were to shrink the dollar supply to match the gold supply (which would have led to the sort of deflationary recession of the 1930s) or to take the dollar off the gold standard (which led to stagflation).
February 24th, 2009 at 8:02 pm
I’m sure you wouldn’t. Nevemind that over half of the subprime loans made in the past decade were cash-out refinances in the suburbs – CitiGroup and Countrywide would have models of prudent rectitude if it weren’t for those darn low income families and minorities.
It’s not the percentage of subprime loans – it’s the percentage of defaults.
If that two to one minority to white foreclosure ratio seen in Massachusetts holds true nationally, where minorities took out half the subprime dollars, then minorities would account for two-thirds of all defaulted subprime dollars.
However, Asians probably have a lower default rate. On the other hand, they largely stayed away from subprime mortgages, so it’s not a big issue. So, it’s likely that minorities accounted for at least 60% of the subprime dollars defaulted.
From a Steve Sailer post.
February 26th, 2009 at 4:49 pm
JT:
According to the “Final Report of the WPA,” (Washington D.C, U.S Government Printing Office, 1947) the WPA built:
572,000 miles of rural roads
67,000 miles of city streets
I think that more than qualifies.
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