Stimulus, FDR, Myths

Every time stimulus spending is advocated or the name of Maynard Keynes is mentioned, free market ideologues roll out what has become a firmly-rooted myth. It is that Franklin Delano Roosevelt’s stimulus spending had had no effect—and that real recovery required World War II—or some say the post-war period. Here is such a statement, plucked at Google-random from the American Thinker (link):

Exhibit A: The massive deficit spending of Franklin Roosevelt in the 1930s didn’t stop the Great Depression. In fact, despite FDR spending more money in his first five years in office than all 31 prior presidents combined, his Secretary of the Treasury Henry Morgenthau stated in 1939 that “[w]e are spending more than we have ever spent before and it does not work. ... I say after eight [sic] years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!”

Let’s take a look at this statement, so oft repeated. First of all, technically, anyway, the Great Depression had actually ended in the very month when FDR took office. The dates of that depression are August 1929 through March 1933. Let’s next deal with Morgenthau’s statement quoted by our source. When FDR took office, unemployment stood at 25.2 percent of the civilian workforce. In 1939, when Morgenthau spoke, unemployment stood at 17.2 percent. Ouch, you might say. But it was 8 points lower. Morgenthau’s frustration is understandable, but his statement isn’t accurate.

Herewith a graphic showing both GDP in constant dollars and the civilian unemployment rate in percent for the 1929 through 1950 period, with FDR’s time in office shaded in.

If our free market priesthood would bother to put up charts like these, clearly showing that stimulus did work—both in dollars and in lowering unemployment—their readers would start making faces. The numbers don’t support the statements. The priesthood doesn’t show such graphs for a really good reason. They can’t get away with what they’re saying.

Will a repeat of that past performance produce the same commendable results—sure as the sun shall rise? That may not necessarily follow. But that there is precedent for the anguished demands of Paul Krugman and company, that is certainly true. What lingers in the back of my mind is that fundamentals may have changed since FDR’s time. One of those is globalization. Another is the point I made a while earlier on this blog. Namely that a perpetual motion, as in an economy that forever grows at a greater rate than population, may not be possible forever to maintain. But the stimulus hawks are backed by history. It may turn out that God does exist but that the Hidden Hand does not.

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My GDP data come from this BEA table. The earliest unemployment data come from this BLS source, the later numbers from this one.

Stimulus v. Confidence

Under the Tax Relief Act of 2010, individuals get a 2 percent reduction in their Social Security contribution to payroll taxes. That contribution is 6. 2 percent of gross earnings. In 2011, the deduction is 4.2 percent. This applies to earnings up to and including $106,800. Thus a person earning $45,000 would have paid $2,790—but in 2011 pays only $1,890. This amounts to $900 or, taken at a monthly rate, $75 a month.

I bring this up because the administration is pushing for an extension of this tax cut to 2012—in the name of stimulus. The presumption is that people will rush out and spend that $75 a month, lift consumption, and therefore create jobs.

Now in my mind Stimulus does not stand alone, as it were. It is intimately associated with Confidence. Pushing for a stimulus measure without improving public confidence—indeed by eroding it in wave after wave of public events that signal doom ahead—has only one absolutely predictable consequence. In this case it means that the Social Security Trust Fund (so-called) is forgoing revenues. In today’s environment, the public is at least as likely (1) to pay down still staggering credit card debt or (2) put that $75 in savings against the possibility of losing the job, or the necessary second job.

The minor stimulus the administration is advocating is, it seems to me, way more than matched by the defunding of government that it cannot stem. Meanwhile confidence is low—and zigzagging like employment gains. Here the temporally near-term and the longer-range view of confidence:

The first shows the Consumer Confidence Index from mid-1997 to January 2011. This index is produced by the University of Michigan and published by the Conference Board. The straight line is the trend of confidence over a 14-year period. Notice, please, that the "leveling-off" after each drop has taken place at a lower level—which is that supports the downward trend.

The second, which I have from an April 2003 paper from the Regional Economist, a publication of the St. Louis Federal Reserve Bank (link), shows us much more history of confidence using the same series, going back to the 1960s and ending in 2003. What that chart shows is that we’ve had periods of very low confidence twice before, once in 1973-1974 and again in 1993 or thereabouts. Current levels, not shown on that chart, are matching those.

You can measure confidence in surveys, but the feel is the thing. The current level of confidence, it seems to me, is lower than any earlier periods’. That measly stimulus of $75 a month, or much less for many, does not automatically cause the kind of spending-frenzy the administration really wishes to achieve. What we’re thinking, here in the boonies, is that a trillion in cuts is bound to cause massive layoffs somewhere. And that we have unpaid FAA employees inspecting things for safety because Congress has denied them the dough.