The Great Recession?

The philosopher, George Santayana, in his work The Life of Reason said that 'Those who cannot remember the past are condemned to repeat it.' It is an argument that I regularly hear recycled to justify the teaching of history. It has even been cited by visitors to this blog. As the recent Auschwitz debate showed - it is a powerful mantra. Unfortunately, it seems to have passed George Osborne by. With every step that the Coalition takes towards rectifying the budget deficit, I can't help but wonder whether our Government wouldn't benefit from a history lesson:

At the beginning of 1937, the US President Franklin D Roosevelt, could feel proud. His 'New Deal' reforms had pulled his country from the brink of utter despair caused by the Great Depression. His administration had created a framework of welfare and union rights that ushered in a new relationship between business and the 'common man.' In 1936 he had won a second term by a larger margin than any President in over a century. In his second inaugural address he felt able to boast that, "we have come far from the days of stagnation and despair. Vitality has been preserved. Courage and confidence have been restored. Mental and moral horizons have been extended."

Yet in little over a year the economic recovery and the New Deal coalition of the liberal North and conservative South were in tatters. Four million people lost their jobs and unemployment, which had dropped from 25% to 14%, rose back to 19%. Industrial production fell by 33 percent, national income dropped by 12 percent, and industrial stock prices plummeted by 50 percent. In Congress the conservative 'Southern Democrats' deserted Roosevelt and no more 'progressive' New Deal legislation was passed after June 1937. In the rest of the country Republicans were gaining ground.

Franklin D Roosevelt

Having been happy for the government to step in to save capitalism most of American big business were looking to see Roosevelt step aside and let them again take control once again. For the first time since 1929 the conservative forces in the US were able to combine behind a coherent programme of opposition. The 'Conservative Manifesto' denounced strikes, demanded lower taxes, a balanced budget, defended the rights of private enterprise against government reform and warned of the dangers of creating a permanently dependent welfare class. Sound familiar? The New Deal came under a concerted attack from inside and out.

The cause of the "Roosevelt recession" occurred largely because the President, along with some of his advisers - led by Secretary of the Treasury Henry Morgenthau - were determined to balance the federal budget and control imaginary inflationary pressures. The result was a decision to reduce government spending. In 1936, the government contributed $4.1 billion to consumer purchasing power, versus less than $1 billion in 1937. Furthermore, regressive taxes were eating into the national income and reducing consumption from the poorest part of society.

The economy seemed ready to plunge into an even deeper recession than in 1930. This and the potential loss of seats in Congress, forced FDR to change course. Influenced by the British economist, John Maynard Keynes, The General Theory of Employment, Roosevelt came to believe that government spending on relief and public works would revive the economy—even if such spending produced ever larger deficits. Their rationale for this approach was that the depression was the product of under-consumption and that putting money in the hands of consumers—"priming the pump"—would stimulate consumer spending and perk up the economy. Accordingly, FDR asked Congress for a $5 billion relief program, which passed in the spring and summer of 1938.

The sums involved were not large enough to completely solve the consumption problems but they did stave off a deeper recession. In the end it was not the moderate 'priming' of the New Deal but the huge government spending that the Second World War required that finally pulled America out of the depression. However, many broad lessons had been learnt and the extensive financial regulatory framework introduced by Roosevelt was not repealed until 1999. The repeal of the Glass–Steagall Act of 1933 effectively removed the separation that previously existed between Wall Street investment banks and depository banks. I think we now understand why that legislation was necessary.

But the big lesson is: 'Don't cut public spending or raise regressive taxes (like VAT) in a recession!'