Friday, June 17, 2011

Great Recession, Great Depression:  a sign of things to come

Is Barack Obama being haunted by the ghost of Great Depression past?

Is the economic malaise currently plaguing the United States taking on an uncanny resemblance to the lost decade of the 1930s?

In May 1939, president Franklin Delano Roosevelt's senior economic advisor made a pilgrimage to Capitol Hill where he raised the white flag of surrender.  Secretary of the treasury Henry Morgenthau appeared before the Ways and Means Committee of the US Congress to confess defeat:

We are spending more money than we have ever spent before and it does not work.  I want to see this country prosperous.  I want to see people get a job.  We have never made good on our promises.  I say after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot.

The source of Morgenthau's lament was found in the US unemployment rate.  Halfway through FDR's second term, official statistics showed the jobless rate hovering stubbornly in the mid-teens.  In his testimony to Congress, president Roosevelt's senior economic advisor was essentially admitting that the entire Keynesian construct of the New Deal was a failure.

Of course, those who continue to defend the validity of Keynesian economics point to WWII as definitive proof that their worldview is correct.  They argue it was massive wartime deficit spending on tanks, planes and ammunition that stimulated the economy out of its depressed state.  And with US unemployment falling to a negligible 4.2 per cent by 1942, at first glance this argument appears to have some merit.

But when one recalls the 12 million men who were conscripted during that time into the armed forces, the pro-Roosevelt narrative is found wanting.  With so many healthy males of prime working age being forcibly taken out of the labour force, it's no wonder that unemployment disappeared.  The phenomenon of Rosie the Riveter arose from GI Joe being sent to fight in Europe and the Pacific, not from the policies of John Maynard Keynes.

We see a similar track record of failure on the Keynesian policies of Barak Obama.  Almost immediately after his entry into office, president Obama and his Democrat Congressional allies enacted a $787 stimulus bill that was supposed to keep unemployment below 8 per cent.  President Obama promised that mid-year 2010 would become the US economy's ''recovery summer''.

But as of June 2011, unemployment numbers have increased by a whopping 1.9 million Americans since Barack Obama signed his economic stimulus package into law.  And over the same 28-month period, the Democrats have almost tripled the federal government deficit.  With the treasury borrowing 41 cents out of every dollar it spends, the spectre of a US sovereign debt crisis impedes the prospect of economic recovery.

Of course Julia Gillard and Kevin Rudd would have us think that the Australian version of Keynesian stimulatory economics worked an absolute charm.  Wayne Swan likes to portray himself as a veritable Macaulayan Horatius at the bridge, single-handedly holding off the oncoming hordes of economic depression.

But our current economic resilience owes much more to the $20-billion surplus bequeathed to Kevin Rudd by the departing Coalition team of Howard and Costello.  By contrast, the failure of the Obama stimulus program proves that you can't borrow your way to prosperity if you're already eye-deep in debt.

So what do all these grim economic tidings mean for Barack Obama's prospects for re-election?  Nothing good.  But it is instructive to look back from our current Great Recession to the Great Depression of the 1930s for indications of events to come.

By 1938, the bloom had well and truly come off the Roosevelt political rose.  Despite the vast alphabet soup of New Deal programs, America's economy continued to stagnate.  The numbers of families reduced to penury by sustained joblessness remained legion.  And at that year's mid-term elections, FDR and the Democrats paid the price of failure at the ballot box.

The November 1938 elections saw the Republicans pick up 72 seats in the House of Representatives and an additional six seats in the senate.  While the science of opinion polling was still in its infancy, there were indications that FDR was headed for defeat in 1940 as he sought to achieve something unprecedented in US history -- a third presidential term.

Professor David Kennedy of Stanford University holds that it was only the coming of WWII that saved Roosevelt from electoral defeat.  The conflict in Europe -- and in particular the fall of France in June 1940 -- allowed FDR to position himself as a strong national security president.  By contrast, the Republicans were tainted by the isolationism espoused by some of their leading contenders for the White House during that election year.

The flush of political triumph generated by the raid on Osama bin Laden has already faded.  The bump in the polls that the president enjoyed has long since evaporated, with Obama sinking back to an election-losing 48 per cent approval rating that has plagued him over the past 18 months.

If the Republicans can field a good candidate in 2012, Barack Obama's second term is in serious jeopardy.  Any incumbent president who runs for re-election in a stagnant economy plagued by high unemployment has an extremely tough row to hoe.

The only thing that's certain at this stage is that it'll be interesting to watch.


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