Tuesday, June 30, 2009

FDR and Obama

It is worth noting that FDR inherited a very bad economy. Upon taking office in March of 1993, FDR faced a 25 percent unemployment rate. Obama faced a 7 percent unemployment rate when he gave his inaugural speech in January of 2009. Real GDP had declined over a a third from its peak by March of 1933, when FDR was sworn in. When Obama assumed office real GDP was a little less than two percent below its peak. FDR faced a serious crisis; Obama faced a mild recession.

Both Obama and FDR were swept into office with large Congressional majorities which meant, that in the short run, they could get whatever legislation they wanted passed. The future would be determined by that legislation. FDR's effort to fight the depression failed. By the end of the decade, unemployment still remained at nearly twenty percent and the economy had little or no growth in FDR's first two terms. There were other FDR accomplishments, no doubt, but providing for economic recovery was not an FDR accomplishment, it was an FDR failure.

And now it's Obama's turn. The main difference is that Obama inherited a recession, not an economic catastrophe such as FDR was facing. The recession that Obama inherited was somewhat more serious than average for a postwar recession, but by no measure, is it the most severe....yet. Pundits that compare the current recession to the Great Depression are unfamiliar with the facts. This is, so far, at best, a fairly severe recession...no more, no less.

America recovers quickly from recessions and the US would, no doubt, be on the way to recovery in this recession were it not for the Obama program. Like FDR, Obama believes that recessions are caused by evil people ("greed and corruption" -- his favorite phrase). Therefore the cure is to purge those evil people. And, this, Obama intends to do. Like FDR, Obama see those in business as generally evil people. No doubt, there are some evil people in business (none in politics or government, thank goodness).

If you believe that recessions are caused by "bad actors," then by all means, root them out. In Obama's case, this means go after business folks -- tooth and nail. Run them out of town. Clamp down on them. Impose harsh new regulations. Tax them heavily and raise the cost of their employees. That ought to do the trick. Much of this, of course, was the FDR plan as well. FDR waged war, wherever and whenever he could, against businesses large and small. FDR succeeded. He crushed what remained of the spirit of business in the 1930s. The result was massive unemployment that persisted for nearly a full decade (while incidentally, the rest of the world was recovering). The US went it alone in the 1930s. The world came out of the depression by 1933 but not the FDR-lead USA.

So where is Obama taking us. Down the FDR trail? Are we condemned to relive the nightmare of the 1930s? It is possible that Obama can turn a 7 percent unemployment economy into a 25 percent unemployment economy. He's certainly off to a good start. A combination of "cap and trade" and "health care reform" might just do the trick. Toss in "card check" and five or six expensive new employer mandates and massive new taxes and Obama might just be able to follow FDR's path.

There is one key difference: FDR had no roadmap to follow. He tried every trick in the book to try to turn the economy around, but he made three huge mistakes and they mattered: 1) He raised taxes; 2) He had Congress enact the NRA; 3) He demonized business and businessmen throughout his presidency. These three mistakes destroyed any hope for economic recovery in the 1930s.

But, now we know better. We now understand that workers have to be hired by someone. Mere consumption spending alone won't do the trick. You can buy Chinese goods if you like. How do you get American companies to hire employees? Obama doesn't seem to understand that this is the sole issue. There is no other. Instead, the entire Obama economic program involves showing that business is evil and must be curbed, controlled and taxed -- especially if they make the mistake of having any employees. The Obama economic programs begin with the assumption that if you make employees more expensive, then employers will be more willing to hire them. FDR made that same assumption.

So, the future could be grim. Much depends upon whether Congress buys into the "toxify employees" solution to our economic woes. If you make employees and businesses toxic, then the economy has no real chance of recovery. FDR and Obama may truly end up with similar results. But FDR had a good excuse...no one knew any better. What's Obama's excuse?