Though Ben Bernanke, the head of the Federal Reserve, prides himself on his extensive research and expertise on the Great Depression, he is strangely quiet on the glaring parallels between this moment and a similar moment four years into the New Deal “recovery” from that earlier economic catastrophe. I wrote in February, 2008:
The [Roosevelt] Administration lost further steam by aggressively attempting to balance the budget in 1937. With the economy sharply rebounding, administration officials began to sound the fear of inflation, urging budgetary restraint. Federal spending was cut drastically, with the WPA nearly shut down. Consequently, the economy quickly sank into decline. Industrial production fell drastically (35% in 9 months), prices fell and unemployment jumped dramatically.
Through the first months of 1938, Roosevelt stayed firmly with the policy of fiscal restraint urged by capital. This appeasement of business only deepened the crisis. In April, Roosevelt reversed his policies, reviving WPA with $1.25 billion for employment and further funding other programs to the tune of $3 billion. The Congress overwhelming approved these moves.
The turnabout of policy led to a turnabout in economic activity. Almost immediately, industrial production, employment, prices, and payrolls begin to climb. Nonetheless, the US economy never reached pre-Depression levels of employment and industrial production until 1939, seven years after their lows. By then, the mandate of 1936 was gone, eroded and crippled by the retreat of 1937 and the fresh economic slump of 1937-1938. The momentum of New Deal progressive legislation was lost without achieving the goals of full recovery or social justice.
Balancing the budget in 1937 is exactly the same thinking as the beliefs behind the debt hysteria rampant with the media and the legislators of both parties today. And in both cases, it is the interests of capital that stand to benefit from the policies. As recent economic reports prove, we are in danger of driving off the same cliff that the New Deal economy encountered in 1937. Radical budget constraints and the consequent austerity will, if history means anything, quickly find that cliff.
Oddly, few commentators reference this historical lesson – or few other historical lessons, for that matter – except notably Paul Krugman, columnist for The New York Times, who has warned of a repeat of 1937.
Another, far more curious, reference to the parallel comes from the extreme right, the pen of the best-selling author, Amity Shlaes. Shlaes is celebrated for the publication of a bizarre historical narrative of the Great Depression that crudely recasts the period as confirmation of the economic philosophy of Milton Friedman.
As an unvarnished apologist for unfettered capitalism, Shlaes recognizes the power of the historical precedent in potentially crafting a counter-argument to the shrill, ubiquitous argument for government austerity. Even though liberals are unwilling to challenge or even tepidly object to debt-fright, she hopes to head them off at the pass should they find some spine. In a Pittsburgh Tribune-Review commentary, Is ’11 the New ’37?, Shlaes argues that the wrong lessons are conventionally drawn from the 1937 economic relapse. The Yale University English major, elevated by the media into a serious economic historian, argues that rising taxes, Social Security payments, bank regulation, and, most importantly, the cost of labor, caused the relapse of 1937. Ominously, she contends, these same moves threaten the economy in 2011.
This is utterly ridiculous, yet Shlaes passes as a serious voice in public discussion of economic policy. More and more, that discussion is conducted in the realm of fantasy.
Consider the data: Federal tax receipts did grow between 1936 and 1937, but only by an absolute amount less than the growth of tax receipts between 1933 and 1934. Moreover, during the war years, a time of great expansion, tax revenues nearly doubled every year between 1941 and 1944. Clearly, there is no defensible simple relationship between rising taxes and economic decline – a fact that even a celebrity English major should acknowledge. High taxes or Social Security payments did not cause the 1937 collapse.
As for banks, credit grew between 1936 and 1937, as it did every year going forward from 1933. While its expansion slowed in 1937, it was not enough to account for the deep decline of 1937 that began in the summer. Indeed, the Board of Governors of the Federal Reserve tightened the reserve requirements for banks concurrent with this slackening, which only made matters worse. At the end of the summer, the economy collapsed.
To cite the rise in the cost of labor as a cause of the 1937 collapse purposely violates the truth. While the powerful unionization drive in manufacturing brought many into the protective umbrella of the CIO, earnings in manufacturing, mining, construction, transportation, communications, and public utilities grew at roughly the same pace as the prior two years going into 1937. The exception was a notable increase in earnings in the agriculture, forestry and fisheries sector, which was notoriously underpaid and of little impact upon the overall economy.
But what does stand out in the data is the pronounced decline in federal government expenditure which dropped in 1937 and even more rapidly in 1938.
By April of 1938, the Roosevelt Administration realized that its balanced budget “olive branch” to big business had failed and returned to New Deal pump priming:
Therefore, on April 14, the President sent a special message to Congress and addressed the nation in a fireside chat which announced the revival of the policies which had brought recovery in 1935, and had been reversed just prior to the recession [of 1937]. A new appropriation of $1,250,000,000 for the expansion of WPA employment was proposed… Additional appropriations for the PWA, PSA, CCC, NYA, USHA… brought the total recommendations… to slightly more than $3,000,000,000… (The History of the New Deal, Basil Rauch, p. 300).
With this return to stimulative programs, the economy began to recover again in 1939. A similar fireside chat from President Obama would be welcome now.
Shlaes blatantly distorts this history with a zeal driven only by ideological dogma and fealty to the celebrity easily won from our modern-day philistines.
But on one point, Shlaes approaches the truth. She correctly notes that military spending overwhelmed the tepid stimulus for popular programs offered by the Roosevelt Administration and invigorated the US economy going forward. After 1939, the major stimulus for growth came from rapidly expanding war-driven public expenditures. Only when the economy was established on a war-time footing -- in 1941 -- did GDP and per capita GDP surpass the level of 1929. For liberals like Paul Krugman, this glaring fact challenges the mythology of the New Deal. Can capitalism survive without massive military spending? With the US committed to a perpetual war economy since World War II, is it possible for capitalism to offer economic growth and peace with the rest of the world? History suggests that it cannot.
Today, we get war without economic growth or social justice.
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Disintegration of the Old Order
I wrote in November of 2008:
The economic crisis has reversed the post-Soviet process of international integration -- so-called "globalization." As with the Great Depression, the economic crisis strikes different economies in different ways. Despite efforts to integrate the world economies, the international division of labor and the differing levels of development foreclose a unified solution to economic distress. The weak efforts at joint action, the conferences, the summits, etc., cannot succeed---for the simple reason that every nation has different interests and problems, a condition that will only become more acute as the crisis mounts. In the past, the most economically powerful country, the US, could impose a solution to regional problems as it had before in Asia and South America. With the US economy the most seriously wounded, this is now highly unlikely.
We see great stress on the European Union. Germany's export-driven economy is collapsing. France, on the other hand, has yet to feel the full force of the crisis. Italy maintains staggering debt and an already stagnant economy. Spain's real estate and building boom is rapidly contracting. In the face of these disparate, but debilitating expressions of the world economic crisis, it is highly unlikely that the Union will come up with common solutions. Indeed, the unraveling of the EU is a possibility.
I returned to this theme on several occasions in subsequent posts. Today, the European Union is indeed unraveling. While Germany’s export economy has recovered, the stark difference between Germany’s momentary prosperity and the fate of much of the rest of the EU has only exacerbated the tensions wracking Europe. Nor did I anticipate that Greece, Portugal, and Ireland would prove to be the focal point of EU dissolution. Nonetheless, the projection stands up. The EU faces numerous contradictory policy choices, all of which threaten to unwind the Union.
But the larger point should not be lost. Those who foolishly saw a new era of the decline of the nation-state, the global dominance of transnational corporations, and the emerging rule of international organizations in the wake of the collapse of the Soviet Union profoundly misread the logic of capitalism and the resiliency of nation-state imperialism. This view proved quite popular with neo-Marxists, especially in the nineties. In its essence, it was a rejection of Lenin’s theory of imperialism.
Today, events have demolished this view, with its adherents retreating into the academy or moving on to a new “re-thinking” of Marxism or Leninism, the game that sustains the intellectual left.
Instead, we are left with the crumbling of the institutions thought to be cornerstones of international integration and globalization.
Consider some of the elements that were thought to be the secure foundation and cement of a new transnational, global world order: the International Monetary Fund, free-trade agreements, NATO, the Organization of Petroleum Exporting Countries, bi- and multi-lateral coalitions, etc.
In the case of the IMF, contradictions abound between the advanced capitalist countries and the formerly compliant or subservient emerging economies. Intense frictions arose around IMF policy allowing unrestricted capital flows, with the entrenched representatives from developed economies reluctantly conceding some control to the emerging economies like Brazil. The recent jockeying over a new IMF Director only underscores these differences and tensions.
US free-trade agreements between Colombia, Panama and the Republic of Korea languish without ratification. Formerly, these agreements were rammed through in the face of any and all opposition. However, confidence in the virtues of free-market dogma is now lessened and ruling class unity is impaired over the “advantages” of these agreements.
NATO is experiencing deep divisions. In an unprecedented public admission, outgoing US Secretary of Defense, Robert Gates, expressed severe criticism of the US’s NATO allies, questioning their commitment to provide resources and manpower in support of NATO’s objectives. Most often, these objectives are dictated by the US and coincide with US interests. Members are less than happy with this arrangement, affording the US with less cover for its imperial designs.
The imperialist venture in Libya currently demonstrates the contradictions in NATO. Enthusiastic supporters of aggression have their eye on their own interests in and dependency on Libyan energy resources while other members have their eye on the impact of the aggression on the outcome of the so-called “Arab Spring.” The escalation of this naked aggression, with no success in sight, has only brought these contradictions to the fore.
Similarly, the uprisings in several North African and Middle Eastern states has shaken the alliances between conservative governments and their international sponsors, the US and Israel. Imperialists are scrambling to contain the damage through contradictory policies: propping up some conservative governments with aid and even military intervention, while reluctantly discarding others with the hope that money and covert operations will cobble together a friendly alternative. The recent decision by the G-8 pledging $40 billion towards the “Arab Spring” is the bank roll for both projects. In these impoverished countries, $40 billion will go a long way toward buying public opinion, feeding corruption, and directing policy, just as it did in Eastern Europe after the fall of the Soviet Union. Nonetheless, forces are unleashed that promise to disrupt the balance of power in the regions.
OPEC, long led by close US ally, Saudi Arabia, has recently concluded an acrimonious meeting with members agreeing not to agree on a policy going forward. Where OPEC formerly linked its policies to the needs and wishes of the most advanced capitalist countries, the relationship has soured with many member states.
Further east, the long-standing alliance between the US and Pakistan is under great stress, with hostility growing daily.
Relations between the US and China are similarly frayed.
Other examples of divisions and tensions wracking global cooperation and integration abound. The global economic crisis has exposed inter-imperialist rivalries and differing national interests long simmering during the decade of “globalization” and capitalist triumphalism. As these rivalries intensify, it will be increasingly difficult for policy makers to contain the damage inflicted by a sinking global economy.
The collapse of the old order offers left forces, progressives, and especially advocates of socialism, an opportunity to plant the seeds of a new order based on social justice and equality. While the road is difficult, the opportunity should not be lost.
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The Joke’s on Us!
If nothing else sours the last remaining liberal, it should be President Obama’s Jobs Council. Faced with massive and sustained levels of unemployment (with signs that more is coming), the “hopey, changey” President created a council to address the most serious threat facing his country.
Presidents create councils when they have no policy ideas of their own and they hope that the public will be fooled into thinking that they intend to seriously address an issue.
In Obama’s case, he doomed the project to failure and contempt from the beginning by appointing Jeffrey Immelt as chairman of the Council. Immelt is CEO of GE, notorious for its anti-labor policies, off-shoring, and plant closing – actions that destroyed tens of thousands of jobs. Appointing Immelt to the key position is like asking a convicted rapist to lead the discussion on sexual harassment.
In addition, Obama loaded the Council with CEOs, none of whom has a distinguished record on hiring in the face of the crisis. Consider, for example, council member Jim McNerney of Boeing. His company is currently charged by the National Labor Relations Board with moving a plant to the non-union South to punish union workers who exercised their right to strike, a unique qualification for improving the lot of working people.
The biographies of this bizarre collection of tycoons on the President’s Job Council website tout their many awards and success in generating a return on investment. In other words, they are proven masters of lowering costs – including labor costs – for the sake of corporate profits.
To add credibility to this collection of wolves guarding the hen house, Obama appointed Richard Trumka, head of the AFL-CIO. With all his bluster about corporate greed and Democratic Party betrayal, he will have to live with his conscience over breaking bread with these corporate predators.
Last week, this august group offered the President and the public its initial proposals. Even the business community recoiled against its timid initiatives: The Wall Street Journal headlined: Surprise! Interim Jobs Advice From Panel Lands With Thud. They went on: “The yawn-o-meter spiked into the red zone in part because these ideas aren’t that new.”
They were not only old ideas, but ineffective and irrelevant to job creation; they were a joke.
Leading the way was the tired old bromide of job training, matching skills to available jobs. Apparently, no one bothered to notice that the private sector has not created sufficient jobs to offer to trained employees. Hopefully, the President knows better. Certainly Trumka does.
In addition, they implore the government to make it easier for firms to get construction permits, as though the permits – and not the availability of projects – stand in the way of job creation. Charged with finding jobs, the CEOs divert their attention to greasing the skids for contractors.
They see expediting foreign visas as a route to boosting travel and tourism. It’s hard to imagine anything further down a list of initiatives for effectively stimulating new jobs. Are there potential foreign visitors clamoring to have their visas approved to flood the US with euros or yen? If there were, would it put a dent in unemployment?
Extending credit to small businesses through the Small Business Administration is offered by the Council as a job-generator. Overlooked, of course, is the massive bail-out the public has made to banks so that they could continue to extend credit to worthy small businesses. Are they not fulfilling this function? Should they not bear this responsibility? And where are the businesses confident enough of the recovery that would use the loans to take on new employees?
Finally, the Council invokes the obvious by calling for an effort to employ construction workers, particularly in reconstructing public and private structures more energy efficiently. No doubt this is particularly appealing to the CEO of General Electric, whose firm, no doubt, has a hand in offering products and services in this sector. But invocation, like prayer, will not create jobs.
Like an obedient lap dog and vulgar careerist, the great labor traitor, Andy Stern, hailed the proposals, saying that the Administration has “the validation of the business community to get this done.”
When has there been as much insincerity and hypocrisy collected in one meeting place? When has a President offered a more absurd approach to the most pressing problem facing the economy and feared by the public?
Everything stinks about this sham “initiative.” There isn’t enough shame to lay before the initiators and participants in this tasteless joke on the US people. Obviously, no solution to unemployment is forthcoming from this Administration.
Zoltan Zigedy
zoltanzigedy@gmail.com
