By Paul Krugman
Suddenly, everything old is New Deal again. Reagan is out; FDR is in. Still, how much guidance does the Roosevelt era really offer for today’s world?
The answer is, a lot. But Barack Obama should learn from FDR’s failures as well as from his achievements: The truth is that the New Deal wasn’t as successful in the short run as it was in the long run. And the reason for FDR’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious.
About the New Deal’s long-run achievements: The institutions FDR built have proved both durable and essential. Indeed, those institutions remain the bedrock of America’s economic stability.
Imagine how much worse the financial crisis would be if the New Deal hadn’t insured most bank deposits. Imagine how insecure older Americans would feel right now if Republicans had managed to dismantle Social Security.
Can Obama achieve something comparable? Rahm Emanuel, Obama’s new chief of staff, has declared that “you don’t ever want a crisis to go to waste.” Progressives hope that the Obama administration, like the New Deal, will respond to the current economic and financial crisis by creating institutions, especially a universal health care system, that will change the shape of American society for generations to come.
But the new administration should try not to emulate a less successful aspect of the New Deal: Its inadequate response to the Great Depression itself.
Now, there’s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that FDR actually made the Depression worse. So it’s important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts. The New Deal brought real relief to most Americans.
That said, FDR did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the 1930s, by the MIT economist E. Cary Brown, reached a very different conclusion: Fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.”