The Magazine

The New Deal Metaphor

It's faulty, misleading, and dangerous--and a surprising number of Democrats are embracing it.

Jan 19, 2009, Vol. 14, No. 17 • By JAMES PIERESON
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Much as generals make the mistake of fighting the last war, politicians are prone to recycle old nostrums that were previously successful in getting us (and them) out of one crisis or another. For liberal Democrats, this typically involves the dream of replaying the New Deal and FDR's first 100 days. So strong is the hold of the New Deal over the liberal imagination that few stop to consider how different the world is today from the one Roosevelt faced when he took office in 1933 at the very bottom of the Great Depression.

It was to be expected that following Barack Obama's election there would be a flurry of calls from liberal pundits and Democrats in Congress for another New Deal, one even more ambitious than that FDR engineered. The president-elect has been called "Franklin Delano Obama" by one influential columnist who wrote that the problem with Roosevelt's New Deal was that it was too timid and lacking in vision. A recent issue of Time magazine carried a photo of the president-elect on the cover wearing an FDR-style top hat accompanied by an article drawing parallels between Roosevelt's leadership during the Depression and the opportunities now arrayed before Obama. Many are saying (with much relief) that the financial collapse combined with Democratic electoral sweeps marks the end of the Reagan-Thatcher era with its focus on free markets, open trade, and low taxes.

Neither the president-elect nor any of his close advisers has yet embraced the comparisons to FDR and the New Deal, perhaps for fear of creating expectations they cannot fulfill. He has, however, embraced the concept of an ambitious New Deal-type stimulus package that will include funds for public works programs, "clean" sources of energy, and other projects designed to stimulate consumer demand and create new jobs. The Wall Street Journal reported that "President-elect Obama is promising to intervene in the economy in ways that Washington hasn't tried since the 1970s, favoring some industries and products while hobbling others." It is sobering to recall that the policy experiments of the 1970s, which gave us a decade of alternating recession and inflation, were drawn from the lessons of the Depression and the New Deal. There is little reason to think that they will work any better today.

The New Deal metaphor in wide circulation today is based on the illusion that, since New Deal interventions were effective in dealing with the Depression, they are the right medicine for dealing with today's financial crisis and economic slowdown. This illusion is driven by a deep misconception: that the market-oriented policies of the past quarter century were a great mistake and should be replaced by a more coordinated set of policies that (it is argued) will yield more stable growth and a fairer distribution of income. Thus the New Deal metaphor is now invoked as a call to overturn the free-market revolution of the 1980s, just as the New Deal threw overboard the Wall Street-favored policies of the 1920s. Such hopes are based on a fairy tale version of the New Deal and a highly ideological interpretation of recent history. In combination, they provide a shaky foundation for current policy and are a trap for Democrats.

Much in contrast to President-elect Obama, who will enter office in the midst of a recession, FDR came into office in 1933 at the very bottom of the worst economic calamity in American history. The New Deal was erected in an unprecedented circumstance when the American economy had come to a near standstill. Between 1929 and 1933, unemployment rose from 4 to 25 percent of the work force, national output fell by more than 30 percent, the dollar value of U.S. exports fell by more than two-thirds, the stock market dropped close to 90 percent, and more than a third of the nation's banks failed. The Great Depression, as it came to be called to distinguish it from the mini-depressions of the 1870s and 1890s, was a catastrophe on a scale far beyond what anyone previously thought was possible. No one knew what to do about it, certainly not FDR who had campaigned on a platform calling for a balanced budget. When he took office, things were about as bad as they could possibly get, and there was little reason to worry about what today we would call "downside risk." Thus, Roosevelt took an experimental approach to the crisis, adopting various policies (many of them contradictory) in the hope that some might reverse the slide.