Economic Challenges: Comparing Obama to FDR

A lot of commentaries have compared Obama’s economic challenges to those facing Franklin Roosevelt when he took office in 1933. Clearly, President Obama faces some major hurdles. The probability of a major economic collapse has been estimated at around 20%, although in recent weeks at least, the future seems to have brightened a bit.

While Obama could see a major collapse, when Franklin Roosevelt took office the collapse had already occurred. In 1933, the American economy was in an absolutely disastrous condition. The New York Stock Exchange had suspended trading and the Chicago Board of Trade had closed. Banks were shut down in thirty-four states. The official unemployment rate among non-farm workers was 37 percent, although it was probably much higher. In cities such as Toledo unemployment was 80 percent. People who had put their savings in banks that closed were wiped out. Sixteen millions jobs had disappeared along with the entire savings of millions of Americans In 1933 journalist Earle Looker stated that “Capitalism itself was at the point of dissolution.”

Here is where we can make comparisons. Neither FDR nor his advisors had any real plan, or according to critics, any real grasp of what was going on. The phrase “New Deal” sounded great but there was no substance behind it. It did not represent any plan or specific programs. The term “new deal” had cropped up many times in the prior hundred years and a presidential speech writer Sam Rosenman simply plugged it into FDR’s nomination acceptance speech. Critics suggest Obama and his advisors also lack a substantive plan.

To save the economy, FDR had little choice but to experiment, and this is also the case with Obama. Many of FDR’s advisors were protégés of Harvard law professor Felix Frankfurter, and were thus named the “Happy Hot Dogs.” The “Hot Dogs” have been variously described as young, bright, Ivy League, talented, arrogant, creative, and very left-wing. In fact, some later became communists and a few ran into trouble with the law.

FDR’s New Deal and Obama’s plan were actually trial and error, although the common goal was the desire to expand the federal government and federal regulation. Roosevelt and his advisors simply experimented to see what would work. In other words, they winged it. However, some of FDR’s experiments did work. The WPA and CCC did provide jobs. There was help for the aged poor, and the physically handicapped. The minimum wage and the SEC were established. Social Security was initiated. And perhaps most importantly, FDR helped Americans regain confidence in their country’s future.

President Obama finds himself in a similar, although less drastic, situation than did FDR. To solve his daunting economic problems he has decided to spend his way to success. He and his staff seem to have held their breath and plunged into the new changes. As with FDR, Obama is inexperienced, but articulate, and exudes confidence. Increased regulation and government control is obviously a goal. Greater regulation is clearly needed, although one might argue about the details. Will President Obama’s advisors prove to be skilled and perceptive? Will they provide the right advice?

A reasonable prediction is that the economy will slowly turn around, based partly on its own momentum. President Obama will respond to his staffers’ happy hot dog advice and embrace a number of very interventionist policies as they move things to the left. The American economy will rise again but it will be very different from the one that has been sinking.

Disclosure: No investments were highlighted in this article.

Comments

[atlasman:]

and we will lose 1-2% off growth for the next 2 decades because of his fiscal policies.

Jun 12 07:41 AM

[TCK:]

Of course none of Roosevelt's policies helped turn the economy even after 10 years. And, ironically perhaps kept the economy in depression.

Jun 12 08:36 AM

[Ferdinand E...:]

A very reasonable analysis, however one things needs to be remembered. Go into a big library and ask for economics books written before e.g. l930. They didn't really have much to say when it came to dealing with the sort of situation that FDR faced. It's different now, and if President Obama is careful he can get the kind of advice he needs to giver the doubters a lesson. If he is careful that is!

And by the way, this thing about the US being different. You don't really mean that do you?

Jun 12 08:40 AM

[The Geoffster:]

Politicians surrounding themselves with young, leftist academics, eager to experiment with economic theories... I think we know where this is heading.

Jun 12 09:11 AM

[jpiretti:]

From 1929 to 1933 GNP(before GDP) contracted a total of 31%. From 1933-1937 GNP averaged over 9%/yr...the Dow 30 tripled and industrial production doubled. Unemployment went from 25% to 13%. Instead of reading political motivated drivel, go and look up the figures from the BLS and the census.


On Jun 12 08:36 AM TCK wrote:

> Of course none of Roosevelt's policies helped turn the economy even
> after 10 years. And, ironically perhaps kept the economy in depression.

Jun 12 09:22 AM

[jpiretti:]

My apologies...GNP contracted 29.3% from 1930-33...the rest is correct.


On Jun 12 09:22 AM jpiretti wrote:

> From 1929 to 1933 GNP(before GDP) contracted a total of 31%. From
> 1933-1937 GNP averaged over 9%/yr...the Dow 30 tripled and industrial
> production doubled. Unemployment went from 25% to 13%. Instead of
> reading political motivated drivel, go and look up the figures from
> the BLS and the census.

Jun 12 09:30 AM

[Richard J. ...:]

The characterization of FDR that he did not have a plan in creating the New Deal is a bit sophomoric and inaccurate. FDR's 2nd term as governor of New York put into place many of the pre-New Deal ideas. Top future New Deal advisors as Frances Perkins and Harry Hopkins were already working on relief in New York. His role in public power was well established before his inauguration, and the Brain Trust of Moley, Berle, and Tugwell certainly were able to create a path for the emerging New Deal to follow. Unfortunately the depth of the Great Depression was never fully understood then nor now. Hoover had an opportunity to "prime the pump," but his administration had only funded 3 out of 243 projects that were authorized by October of 1932. Right-wing revisionism is alive and well in the land, and the idea that the New Deal prolonged the Depression is absurd. Claims have been made that Europe climbed out of the Deprerssion more quickly. They did with dictatorships of the right and the left. England for sure never recovered until way after the war. But of course they were essentially bankrupt.

FDR made few mistakes in his first term. Growth exceeded 9% a year and unemployment which was over 25% with another 25% only working part time in 1933 was reduced to 14% by September of 1937. If one included WPA and PWA jobs, unemployment would be at about 8-9%. The Federal Reserve raised interest rates and the Dixiecrats and the GOP pressured FDR to cut spending. A sharp recession followed with the layoff of 3 million workers. FDR quickly primed the pump, increased spending and the Federal Reserve loosened credit and by April 1938 that short, but sharp recession was over. In truth there was not enough spending.

The business community was resistant to the Securities Acts of 1933 and 1934, and the Wagner Act of 1935 that allowed labor to collectively bargain. FDR saved capitalism, saved the farms, saved the banks and people’s savings and brought needed regulation to the markets. When one includes the programs of the New Deal, unemployment wasn’t much different then the Reagan Era, where it ranged from 7.5 to 9.5 % over seven of his eight years. In fact, government employment in 1928 was 4%, in this day and age it is 16% without including all the employment directly connected to defense spending. Cut that defense spending out and reduce government employment and there would have been 12-15% unemployment before the recent collapse.

The GOP and the right-wing fiction writers, inside and out of Congress, keep on denigrating the New Deal, but unemployment has gone down in every Democratic Administration and risen in 7 out of 9 GOP administrations since 1928. Get real you plutocrats, start paying your fair share of taxes, end the golden parachutes and corporate welfare for big business, and start competing. Too many tax loopholes, too many petro dollars to OPEC and too many dollars flowing from Walmart to China! The Bush Years are the worst since Hoover, and he maybe our worst president ever. As to the Depression, statistically it ended after 43 months and therefore four months after FDR's inauguration.

Basically recessions or depressions reflect quarterly shrinkage in the economy. As to Europe, the Depression never really ended, but for sure what little democracy and representative government there was, ended with the triumph of totalitarianism of the right and the left. The quote by former Secretary of Treasury Henry Morgenthau has been over-used and has been taken out of context for years. Obviously novitiates of history seem to have forgotten history they have not lived or really read about in depth. The right-wing doesn't seem to have any solutions except more blood in the water. How would the so-called "market" provide for the nine million Americans who lost their life-savings in 5000 so-called secure banks in the economic meltdown under Herbert Hoover? Today we face another market place plagued by phony derivatives and other idiotic investment devices created by our modern brand of Wall Street flim-flam artists. If anything we need more transparency, more watch dogs and more regulation over these wolves that have caused our recent meltdown. We will get through this mess, but it will cost more money, we will be poorer in the short run and maybe if we are smart we will be better off and have a more stable economic society in the long run.

Richard J. Garfunkel
Host of The Advocates- WVOX Radio
www.wvox.com

Jun 12 10:16 AM

[1RuleNoRules:]

Milton Friedman stated that the Great Depression was caused by the Feds failure to maintain the money supply. There was a sharp decline in the money supply as the 2 main branches of the Fed argued over who was calling the shots. According to Milton Friedman, the recovery came as money supply was corrected. This would make FDR irrelevant. For that matter, Obama will also be irrelevant if the current crisis has been created by a steadily growing government drawing wealth and resources from the private sector.
So, You all don't know what you are talking about : )

Jun 12 12:29 PM

[fireball:]

hopefully it won't be the post war economy of the "winner" of ww3 that leads out of global rec/dep . it would be preferable to avoid the path of ww2.
there were some interesting statements of bb&ts ceo, allison on being forced to take high interest tarp funds that were not needed in order to help the unsound banks. he also said they were willing to make sound loans but the regulaters were making it very difficult. he seemed to think this was one cause to the "freeze-up". this was released on this mornings market wire.
to err is human. to really screw it up takes government.

Jun 12 12:40 PM

[rosey99:]

Comparing FDR to Obama is as pointless as it is ridiculous. These days people have no idea what a liberal or conservative really is, both species are extinct in American politics. For thirty years we have had more government, more expensive government, generally declining taxes, and a requisite increase in federal borrowing. Add to that so called "free trade," and deregulation, and all of this no matter which party has been in power. It started with Reagan, that great "conservative."

The policies of the last 30 years are neither liberal nor conservative. They are the worst of both, and the best description is probably "reckless and irresponsible." A simple case of inter-generational theft, boomernomics, entitlement. . .Whatever.

Obama is following the same policies of every president since 1980 (with the exception of Bush Sr. - a one-termer). He is the perfect cross between Bill Clinton and G.W. Bush.

For thirty years the lessons of American politics have been more than clear: We are a nation of children who do not understand that nothing is free. Any talk of responsibility that is actually backed up by policy will get you fired.

FDR brought real change, and brought many new people to DC. Obama is recycling various Washington fixtures, and various past policies in his efforts to preserve the status quo. There is no comparison to be made. And so we will see the same criminal behavior that we have seen from both parties for nigh on three decades: Make our kids pay for it!

Ain't change grand?

Jun 12 02:04 PM

[Nightcrawler:]

Frankly, I am amazed we are still taking about FDR's policies nearly 40 years after his death. FDR's era was the stone ages compared to now. It is a completely different situation. FDR would have curled up into a fetal position and cried if faced with the situation that Obama has to deal with. FDR might be on Mount Rushmore, but I don't think he would have been able to climb the mountain that lies in front of Obama.

Jun 12 04:17 PM

[user396040:]

An interesting comparison. I believe that the New Deal did suceed
in its initial phase but then around 1937, they got worried about inflation prematurely and tried to balance the budget and tighten the money supply and we had a second drop. Ultimately, it was WW2 that really got the economy going again. In comparison with the 1930s we now have a much more aggressive monetary policy, a higher percentage of economic activity that does not decline because it is government related(defense spending, social security, medicare, etc.) and (after the increased FDIC insurance protections implemented last Fall) a more stable financial system. I think it will not be as bad this time but I also think it is waaaay too early to be worried about inflation rather than deflation.

Jun 12 04:20 PM

[jpiretti:]

Government Spending Chart
Fiscal Years 1930 to 1940 Year GDP-US
$ billion Total Spending-total
$ billion
1930 91.2 12.06
1931 76.5 12.19
1932 58.7 12.44
1933 56.4 12.62
1934 66 12.81
1935 73.3 14.78
1936 83.8 16.76
1937 91.9 17.22
1938 86.1 17.68
1939 92.2 19.05
1940 101.4 20.42



On Jun 12 04:20 PM user396040 wrote:

> An interesting comparison. I believe that the New Deal did suceed
>
> in its initial phase but then around 1937, they got worried about
> inflation prematurely and tried to balance the budget and tighten
> the money supply and we had a second drop. Ultimately, it was WW2
> that really got the economy going again. In comparison with the 1930s
> we now have a much more aggressive monetary policy, a higher percentage
> of economic activity that does not decline because it is government
> related(defense spending, social security, medicare, etc.) and (after
> the increased FDIC insurance protections implemented last Fall) a
> more stable financial system. I think it will not be as bad this
> time but I also think it is waaaay too early to be worried about
> inflation rather than deflation.

Jun 13 01:06 PM

[User 440392:]

Patterson for next Pres!

Jul 03 05:44 PM