Depression Era Family
Around 1935, President Roosevelt, faced with the depth of the Great Depression, created a Jobs and Social Security Program to stabilize the American economy. He introduced some bold new initiatives:
Social Security
Public Works Administration
Federal Deposit Insurance Corporation
Rural Electrification Administration
Tennessee Valley Authority
Civilian Conservation Corps
Agricultural Adjustment Administration
to name a few.
Was this Socialism? The start of the nanny state? Soviet-style State Central Planning? There is much revisionist history about this, but the truth is the programs were hugely successful and transformed America into a world superpower. We were in a horrible depression: 20+% unemployment (see graph on right), bread lines, national pessimism about the future and the rise of the Communist Party in America which may have had more than 200,000 card carrying members.
The Roosevelt programs reversed the downward spiral and eventually resulted in an economic gusher, full of vigor and Free Enterprise. All this while we had the rise of the Labor Movement providing decent wages and benefits for our workers, and a phenomenal rise in the American Middle Class. The Great Depression was thus reversed, and once reversed American businesses and the capitalist system prospered to make us a world leader in economic, moral and military power. How did Roosevelt pay for all this and what is the lesson for us as we find ourselves in a similar situation?
First, we need a direct job creation program by the Government. Cutting marginal taxes, gutting environmental and safety rules, or eliminating social programs is not the answer. We have a demand implosion and boosting supply will not work. Ah, you say another big government program. How will you pay for this when we have this huge debt program? I am emphatically for responsible borrowing and living within our means, but unfortunately, we didn’t do that when we needed to and when the economy was bloating up during the Bush era, and now we are forced to deficit spend to avert a disaster.
Here’s how you pay for this. President Obama should present this analysis to the Nation when he explains how we’ll pay for his jobs proposal.
Each $1 billion per year spent by the government for direct jobs creation results in 14,000 jobs. We have 2,000,000 construction workers looking for jobs while in 2007 The American Society of Civil Engineers estimated that $1.7 trillion was required merely to stabilize the condition of core infrastructure. If all the needs are factored in—including new water supplies, a modernized continental rail system, a modernized electricity supply, and so on, the costs then add up to $8-9 trillion.
So say we spend $500 billion over five years ($100 billion/year) to create just a fraction of the much needed infrastructure and other (research, innovation, enterprise, education and retraining) projects. Here’s how the numbers shape out:
Expenditures
Expenditure over five years: $520 billion, including 20 billion in interest payment.
Direct jobs created for 5 years: 1.4 million (at 14,000 per $billion)
Direct Receipts and Returns
Tax Revenues (at $5000 per job/year): $35 billion
Unemployment and Welfare Payments Saved ($20,000 per person employed): $140 billion
So we’ll get $175 billion out of $520 billion back over five years in direct revenues.
Indirect Receipts
The 1.4 million new workers will spend the money they earn and feed it back into the economy and further job creation. This is called the Velocity of Money. If the velocity of money is a very conservative 2 times, it would be like the $100 billion we injected will result in $100 billion further boost. (During the Great Depression the velocity was estimated to be above 3.5 times. It goes up during bad economic times.) The chart on the right shows the current velocity to be above 2. This means another 1.4 million jobs and government receipts of another $175 billion!
So we now have paid for $350 billion of the $520 billion we spent ($175 billion times 2). But wait there are other benefits.
What about the infrastructure we built with the 1.4 million newly employed construction workers and others. Isn’t that a return to the tax payer? How to measure this return on our investment? It’s a bit more hazy. I would say that for each dollar spent by government let us assume they only produce 70 cents worth of infrastructure – the rest goes in inefficiency, government waste, decisional delays etc. So we get $500 billion times 0.70 or $350 billion worth of infrastructure.
We have more than paid for the $500 billion jobs investment! Also jobs created: 2.8 million.
When the economy recovers, as it did in 1940 for Roosevelt, we must go back to serious debt reduction. We have to keep taxes at a rational level – the Clinton era low but sensible levels will do. Also we have to reduce government spending then and bank the growth dividend from our job creation bill.
There are many other secondary benefits of this kind of spending by government. We reduce house foreclosures, reduce social instability and restore our credibility in being able to pay our huge debt.
If we seriously wish to pursue this line of reasoning and agree that our situation with jobs needs drastic action then I would advocate building a separate Agency (or even several Agencies) for jobs creation a la Roosevelt and give it the mandate to get us out of this economic crisis. This is completely contrary to the prevailing mood, but the prevailing mood is a politically manipulated ideological construct. Hopefully we can muster the strength to rise above it.
Mr. Obama, do you have the persuasive powers?
Another inspiring post. I hope President Obama is on your distribution list! Thanks for sharing your perspective, and for reminding me of the Roosevelt parallels. As always, I much appreciate your expert analysis of the numbers.
Thanks, Sue
What we should do is a no-brainer really. It’s sellable to the people if presented right.
A very succint, well-supported, rationally presented case that one doesn’t have to be an astro-physicist to understand (Republican astro-physicists excluded).
Great! … And very lateral to what I thought to be your area of erudition.
Thanks, Amit
good maths….
alternatively,
if rich class gets less greedy, middle class will have more money to boost domestic economy….
if rich stanford alumni donate less to stanford and more to public high schools….
if rich capitalist club of investors invest more in america than in china…
if rich corporations bring reserves home and invest domestically than holding abroad…
if an entrepreneur starts an IT company in St louis than abroad…
Very insightful article! Thanks. I do have a few questions though – apologies if they sound a bit naive:
(1. About the parallel made with the Great Depression and the methods used then, I think we are in a somewhat different place now in that:
– The ability of America to boost manufacturing and housing so as to super-charge the economy is limited due to our high labor costs as well as the emergence of China. Manufacturing isn’t America’s domain anymore as it used to be back then.
– The middle class of America is already richer now – we are past that phase where the rise of a middle class boosts an economy – China and India are in that phase now
(2. Some concerns related to the proposed 500 bln plan:
– Creating these jobs via infrastructure related projects may be a temporary boost. When the infrastructure project ends then what happens to this workforce that is now suddenly laid off?
– Pumping these dollars in the economy will result in inflation as well
– Regarding the $350 bln of indirect receipts from the resultant infrastructure – although tax-payers benefit by the infrastructure, they don’t directly get compensated in the form of cash and are overall probably in deficit due to the initial $500 bln of spending. For e.g.: Greece built a subway system which is of commendable value and quality but runs a deficit of about $500-$750 mln a year – so although the infrastructure exists – it doesn’t make the tax-payers richer.
Just playing devil’s advocate here – but indeed a very educational and informative as well as well-researched post!
Thanks!
-Sid
Regarding your first point: This recession is not qualitatively different than the Great Depression. The economy has gone through a sudden and large contraction. This causes the possibility of a dangerous spiral: no demand => therefore shutdown of production => therefore job losses => therefore even lesser demand. And so on. It is a self feeding downward slide that all capitalist systems are prone to. What we need is for the government to push us out of this spiral by creating demand in the economy. Demand means more production to meet the demand => which means more jobs => which further increases demand, and so on. The cycle gets broken and the natural productive capitalist forces take over.
China and our uncompetitiveness is not the issue here. We have 2 million unemployed construction workers who can build infrastructure. We can’t export infrastructure building. The infrastructure is crumbling and we need to fix it anyway. Why not put people to work?
Regarding your second point: I don’t think the government stimulus will be needed forever to keep the economy going. Once the demand builds up the economy will get back into a growth cycle. It always does, as happened with Roosevelt.
The $350 billion indirect receipts from the infrastructure are very real. They will enable more commerce through efficient transportation, communication etc. FDR’s highway system build up was a big money “loser” but gave the US businesses a fantastic edge and productivity boost.
Greece is not the same. They built a white elephant, overpaid their govt. workers and had no ability to adjust to changing circumstances.
The bottom line is that we have no painless solutions to a financial mugging we have suffered. The resulting runaway contraction must be actively reversed.
Thanks for commenting.
A comment:
(i) On one hand the Western market (US, Europe) is over-saturated with qualified work-force (listen to people far more informed and qualified than me saying this).
(ii) Technologies are getting developed that displace more human work-force; this trend will continue and probably accelerate; the only new jobs created will be a very small percentage which will require high specialization and training (not necessarily high-level of education: nobody seems to need theoretical physicists or ship-building civil engineers any more!) and some, perhaps quite a few, low-level service, subsidiary and auxiliary jobs (that work force will be created through on-the-job training). The net result is that no quality education of “masses” is needed or even desirable anymore and a shift in that direction has already started: for the past 10-20 years the so-called high-level education has been deliberately degraded and diluted; it’s being turned into a disneyfied experience.
(iii) Who is “responsible” for this? Obama – yes, let’s blame Obama! Bush – yes, probably more so! But in fact – nobody; it’s a process, like polar ice-cap melting or tectonic shifts that happen no matter what administration is in power; it may even look that a Bernie Sanders-like new US President can actually bring us – more dissatisfaction, yes, but also – a softer landing. For landing is unavoidable, like the collision of the Indian and EuroAsian tectonic plates.
(iv) What is another possible “exit” from this slide? Another war.
My $ 0.02 contribution.
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There are so many errors in this posting. First, FDR stole everyone’s gold and paid them $20.67/ounce. People had less than one month to turn the gold in otherwise you faced 5 – 10 years in prison and up to a $10,000 fine. It was called Executive Order 6102. Research it. Then, once he got all the gold, he immediately declared it to be worth $35.00/ounce. This essentially devalued the dollar by 41% overnight and gave him a license to print money. That is how he financed all those programs. By devaluing the currency thru theft. How would you like your bank account to be devalued 41% overnight and the value of your deposit transferred to the government? Secondly, this prolonged the Great Depression. The unemployment rate declined after we entered WWII, which successfully killed off a lot of workers, which decreased the unemployment rate because they were no longer looking for jobs. Thirdly, after WWII, the US was the only major economy left with an intact industrial base. Europe and Japan were essentially destroyed and had to rebuild. That is why we did so well after WWII. Your post is Keynesian delusions of grandeur. You need to look at history without rose-colored liberal glasses on. The government gets its money from the private economy (when it is not printing it out of thin air, which further devalues the dollar). Whenever the private economy is doing well, the government does well. Extracting money out of the private economy is the ultimate in hubris. The government always has a huge amount of waste and a large portion of it is spent on political pay-offs and corruption. The private economy always spends it more efficiently and productively. FDR should have looked at the way Harding and Coolidge handled the depression that they inherited from Wilson to see how to have ended the depression most quickly. Instead, he quadrupled down on the stupid policies that Hoover, another Progressive politician, instituted. This made things worse.