Comparing Obama policies with Roosevelt’s New Deal

Christina Romer compares the policies of two presidents in this useful speech.

We usually wonder how it was such a coincidence that Bernanke the great depression expert was in Fed chair to prevent the second one. Same is the case for Romer as well who is also a leading historian on great depression.

I often tell students the story of how I became an economist. I was all set to major in government and go to law school. But, as part of the government major, we were required to take a year of economics. After about two weeks — I was hooked. Because of that one requirement and a brilliant introductory economics professor, I found what would become my passion and my life’s work. Over my time here, I also got drawn into William and Mary’s wonderful history department. I ended up blending the two subjects in my academic research, becoming a specialist in the economic history of the Great Depression.

Whoever would have thought that this specialty would turn out to be so relevant to public policy?  But, in the fall of 2008 as our financial markets were rocked by a crisis reminiscent of the 1930s, that knowledge became frighteningly useful. My very first conversation with the President-Elect was about the role of monetary policy in the Great Depression.

Almost before I knew it, I moved from studying the Great Depression to helping to prevent a second one. Serving as one of President Obama’s economic advisers during this difficult time has been an honor and a challenge above any I could have imagined on the day of my William and Mary graduation.

In my remarks this afternoon, I thought I would return to my academic roots and take a stab at discussing the economic history of the first year of the Obama Administration through the lens of Roosevelt’s New Deal. This idea of comparing recent actions with those of the 1930s has been percolating in the back of my mind ever since I walked into the Oval Office one day and the President said, “Christy, you’re my Frances Perkins.”  (For those of you who are not up on your Depression history, Frances Perkins was Roosevelt’s secretary of labor and the first woman to serve in the cabinet.)

What are the similarities/differences in the policies in the two crisis? Clearly in this crisis, the policies were far more bolder

The signature action to fight the recession was the American Recovery and Reinvestment Act. This was simply the boldest countercyclical fiscal stimulus in American history. It was unquestionably bolder than the fiscal actions pursued in the New Deal. The Recovery Act included tax cuts and expenditures equal to more than 4 percent of GDP spread over two years. At its largest, the fiscal expansion under Roosevelt was just 1½ percent of GDP. And, that did not occur until the Depression had been going on for six years, and it was counteracted by an equally large fiscal contraction the very next year…..

A key difference between the financial crisis of the 1930s and the recent crisis was the response of the Federal Reserve. In the early 1930s, the Federal Reserve stood idly by and allowed banking panics to go unchecked. The result was widespread bank failures and devastating declines in the money supply. In the fall of 2008, the Federal Reserve and other financial policymakers responded aggressively to the financial crisis, taking crucial measures to provide liquidity, reassure depositors, and maintain key lending flows. Over those terrifying months following the collapse of Lehman Brothers, the Federal Reserve made the difference between hanging at the edge of a cliff and falling to the bottom of the ravine…..

The stress tests that were conducted in the spring of 2009 struck me as a modern version of Roosevelt’s bank holiday. To stop the banking panic underway at the time of his inauguration, Roosevelt shut every bank and conducted a thorough check of the books. Banks were only allowed to reopen after they were deemed safe. This time around, we did a comprehensive review of the nineteen largest financial institutions and pledged to fill any capital shortfalls with government money if needed. But, we were able to do this review without the enormous disruption of shutting down the financial system.

She adds what also matters is what policymakers did not do in this crisis:

So far, I have discussed how the response to the recent crisis shared some similarities but also had important differences from the New Deal. But perhaps the strongest differences were not in what we did, but in what we did not do. In 1930, Congress passed a large tariff to try to shift demand to American goods. The result was predictable — other countries retaliated, leading to a further decline in our exports. Trade spiraled down to a trickle. In 2009, President Obama led a worldwide effort to keep trade relations open. The result is that as the countries of Asia and elsewhere have recovered strongly, our exports have bounced back faster than any other part of the economy. In this way, international trade has helped to reopen factories and encourage job creation.

Likewise, this time we did not resort to anti-competitive practices. One of the New Deal’s wrong turns was the National Industrial Recovery Act, which suspended some of the antitrust laws and allowed firms to collude to raise prices. Most scholars believe this hampered the economy’s natural healing mechanisms and so held back the recovery. President Obama, in contrast, sought to maintain healthy competition.

Interesting stuff. But, economists will only give a rating to Obama after more research on the policy moves. After all, we still are debating Great Depression…..

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