Was the New Deal too small?
A lesson from Great Depression, historians say, is that Roosevelt didn't spend enough to jolt economy into recovery.
| New York
In announcing the biggest public works spending in 50 years, President-elect Obama takes a page from the Great Depression that is both model and cautionary tale.
Model, because the programs put paychecks into workers' pockets and laid a concrete and electrical foundation for America's postwar boom. Cautionary tale, because the effort did not jolt the Depression economy back to health.
One big reason is that President Roosevelt didn't spend enough to really boost the economy, historians say. But US history offers no guide on how much stimulus is too much, especially since the timing of today's crisis and the Depression are so different.
The Great Depression had been in full swing for three years when Roosevelt came into office and proposed his massive work relief program. Obama will enter the White House as the economy is still unraveling, which may help him.
"This time we're trying to have the bailout and rescue as the crisis is unfolding before our eyes; there's a sense that 'Can we prevent this before it really gets rolling?' " says Jason Smith, author of "Building New Deal Liberalism." "The Roosevelt administration was experimenting – they were kind of operating blindfolded and in the dark – they didn't have the kind of economic expertise that's available to us today."
The infrastructure component of the still-evolving Obama economic-recovery plan would inject billions of dollars into repairing old roads and bridges and constructing new ones, upgrading the nation's schools with new technology, and making public buildings energy efficient.
When Obama announced those "few key parts" of his plan on Saturday, he called them "the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s." That's when the federal government invested $25 billion and built more than 41,000 miles of roads, highways and bridges over a 20-year period. In today's dollars, that would be the equivalent of $197 billion investment.
How much Obama will spend on infrastructure is unknown. His economic team is still "crunching the numbers," in his words, on the economic-recovery package, which would include far more than infrastructure and could end up costing $700 billion or more. Much will depend on Congress.
But US governors say they already have $136 billion dollars in projects that are "shovel ready," which means they could be under way within months of the new administration taking office. Each $1 billion of infrastructure is expected to create 25,000 to 40,000 jobs.
Still, some critics point to the Depression and note that infrastructure spending did not create enough of a stimulus to revitalize the economy. It took World War II to get it back on track. Depression historians contend that's because the Roosevelt administration didn't spend enough.
"There was a kind of crude sense that generating economic activity was what you needed to do to get the economy going," says Alan Brinkley, a professor of history at Columbia University. "But they didn't spend nearly enough. They were constrained by all kinds of traditional ideas about balanced budgets and austerity."
There is a consensus today among economists, even many conservative ones, that the government needs to inject some Keynesian stimulus to keep the economy from spiraling further downward. But some conservatives do disagree.
The consensus is "bad theory and bad evidence," says Robert Higgs, a senior fellow at the Independent Institute, a libertarian think tank in Oakland, Calif. Government spending in the 1930s crowded out potential private investment, he says.
Government infrastructure projects "are inherently wasteful because they are designed with political objectives in mind," he says "The [Works Progress Administration], which was probably the major New Deal infrastructure building program, was an enormous vote-buying scheme for Democrats."
Some conservative economists also argue that injecting massive government spending now will only make the deficit worse without providing the promised stimulus. But other economists point out that during the first three years of the Depression, when there were far fewer major spending programs, gross domestic product (GDP) continued to plummet.
Timing is key, because the scale of today's problem looks much smaller than the Depression. While today's 6.7 percent unemployment rate looks bad from a modern perspective, it's practically vibrant compared with the 24.9 percent in 1933, when the Roosevelt administration came into office. At last measure, today's GDP is down half of one percent after increasing during the first half of the year. In 1933, it had declined almost 30 percent from its 1929 peak.
That's why some analysts conclude that some infrastructure spending now may work as an effective stimulus. "The standard objection to public works spending – that it takes too long to get going and arrives after the economy has already begun recovering – really doesn't seem operative this time," says Mr. Smith.
Others disagree, and contend it could take many more months than predicted to get projects started because of the complications of contracting out the projects.
"There are some practical realities that don't support the expectation of 'Oh, just give us the money and we can go,' " says Richard Little, director of a public finance institute at the University of Southern California. "Over time we will start to see some projects rolling out and once that momentum builds up we'll see more of it. The only problem is that it's like mobilizing for war, once you get all geared up, don't cut the money off."
Today's crisis is also different because of the size of the federal deficit. Republicans in Congress are balking at increasing it even more. Here the New Deal does not offer much help.
"When Roosevelt came in there was some deficit spending in the 1930s, but he was committed to a balanced budget so the deficits were never extraordinary," says Margaret Rung, director of the Center for New Deal Studies at Roosevelt University in Chicago.
In the 1950s and 1960s, the last time there was a major investment in infrastructure, the US economy was thriving and deficit was negligible.
Obama acknowledges that a projected trillion-dollar deficit is problematic. But on NBC's "Meet the Press" over the weekend, he argued that the need to stimulate the economy outweighs immediate concerns about the deficit.
That has prompted many people to hope that today's stimulus package will work better than Roosevelt's did in the Depression.
"In the long run, you have to hope that the recovery is robust enough to deal with this enormous deficit which has been run up – which is scary and has repercussions beyond the immediate fiscal health of the country," says Professor Rung.