Old fashioned economic stimulus
has a new name for the twenty-first century. Concepts such as Keynesianism,
state intervention and pump priming have been replaced by quantitative easing.
According to
Bob McTeer, quantitative easing is “different from traditional monetary
policy only in its magnitude and pre-announcement of amount and timing.”
And if we accept quantitative
easing is not so very far removed from traditional monetary policy, it merely
becomes the latest in a long line of government economic intervention. Nick
Clegg told
the Liberal Democrat conference last week that Britain should invest its
way out of the downturn. Across the Atlantic, and there are growing demands for
the Obama administration to use the government’s economic heft to create jobs.
This is fuelling the loud
and increasingly antagonistic political debate over how successful fiscal
stimulus policies are, and both proponents and opponents are looking to the
past to reinforce their position.
Since the Second World War, the
US Congress has passed economic stimulus bills during five of the past seven
recessions — in 1964, 1971, 1975, 1981 and 2001. Jason Furman of the Brookings
Institution's Hamilton Project has noted
that measures taken in the 1960s and 1970s were relatively ineffective. This
changed with prompt intervention in 1981, and by 2001 tax cuts came as the US
slid in to recession, rather than following the start of economic recovery.
The Great Depression
and New Deal
The golden age of government intervention came amidst the
economic chaos and social despair of the Great Depression. In the period
starting with the crash of the US stock market on Black Tuesday (29 October
1929) and the inauguration of President Roosevelt (4 March 1933) the US economy
crumpled and confidence evaporated.
Industrial production almost
halved, unemployment sextupled and foreign trade collapsed by 70% as
America stumbled through the darkest days of the depression. Prices slumped by
a third as the US entered a devastating deflationary spiral, compounding the
economic and fiscal pressures. All this combined to give Roosevelt the worst
Presidential inheritance since Lincoln’s receipt of a fracturing union in 1860.
Roosevelt’s policy response was immediate, energetic and
arguably successful. In his election campaign he had
promised a new deal for the American people, and this was delivered in the
first hundred days of his frenetic administration. The closure and reform of the entire banking
system was followed by federal work programmes (FERA, WPA, CCC and the NRA) and
programmes to revitalise the agricultural sector and the poorest rural areas
(such as the iconic Tennessee Valley Authority). So many acronyms and initialisms
emanated from FDR’s White House that they became known as the ‘Alphabet
Agencies’.
So does the New Deal offer lessons to inform today’s debate
on stimulus? Unfortunately, it can be used as fuel for both sides of the
debate. Proponents argue that the New Deal pushed the US economy into recovery.
Keynesian economists suggest it helped, but did not go far enough (FDR was
still keen to balance the books and was forced into reverses from 1937 by a
resurgent Republican Party).
Opponents suggest the New Deal prolonged
the Depression with Cole and Ohanian stating that “New Deal policies are an important contributing factor to the
persistence of the Great Depression”. They have quantified their theory,
and extrapolated that New Deal policies prolonged the Depression
by seven years. Their findings are echoed by Gallaway and Vedder, who argue
that without the New Deal, the unemployment rate would have been 6.7% instead
of 17.2%. But this interpretation is not without critics, including DeLong, who states
that this work produces "flawed conclusions" based on
"flawed foundations", and the entire foundation "is made out of
mud".
Lincoln’s New Deal
The unprecedented economic hardship of the Great Depression
resulted in unprecedented levels of government intervention. But Roosevelt’s
New Deal was not the USA’s first government stimulus package. Abraham Lincoln
fostered an economic development programme that featured some of the most audacious displays
of governmental involvement.
His administration oversaw
the birth of the First Transcontinental Railroad, linking America from
coast to coast and stimulating the development of vast expanses of her lonely
interior. Under the Pacific Railroad
Act 1862 the Central Pacific and Union Pacific Railroads received generous federal
subsidies of both cash and land, encouraging them to forge ahead with ambitious
line building plans. Lincoln was, according
to Stephen Ambrose, "the best
and most powerful friend the transcontinental railroads ever had."
Grants of land were also the staple of his expansion of
higher education through the foundation of Land
Grant Colleges. This programme led to the establishment of colleges
throughout the US, including prestigious
establishments such as the University of California, MIT, the University of
Vermont, Texas A&M and Cornell University.
Other Lincoln policies included Federal agricultural
improvement programmes, protectionist tariffs which forged the development of
the US steel industry and national control over the banking industry to free
capital for investment. Some claim this set the scene for the rise of US
economic dominance. Others suggest
it precipitated the Panic of 1873.
The birth of
dirigisme and Colbert
Crossing back to the Old World, and it is obvious that state
intervention in the economy is as old as economic life. Whether it is the
ancient Egyptian state
grain stores or fixed price bread and
wheat distribution under the Roman Republic, states have always meddled in
the economy. One of the most concerted attempts to go a step further and direct
economic development was found in France under King Louis XIV.
Jean-Baptiste Colbert was the Minister of Finance of France
from 1665 to 1683 where hard work and thrift made him a respected advisor. He intervened
in industrial policy, establishing the Manufacture
royale de glaces de miroirs (the Royal Glass
Works) to replace dependence on imported Venetian glass. The company
continues to this day as one of France’s leading conglomerates under the name Saint-Gobain S.A.
Colbert established the
French merchant marine, protected the
fledgling Compagnie française des Indes orientales (French East India Company),
reformed medieval guilds and restrictive economic practises and oversaw construction
of the Canal du Midi. He eventually balanced France’s chaotic budgets, and
returned the monarchy to surplus. All of this would be undone in Louis XIV’s
numerous wars of expansion, wrecking Colbert’s carefully nurtured prudence.
Out of all of this the only clear lesson in the history of
economic stimulus is that there is no clear right or wrong. Policy makers are
damned if they do and certainly damned if they don’t.