The forgotten side of FDR

... by economists at least. FDR was an experimenter who understood the need for institutional innovation during uncertain times.  Here is what he said in May 1932:

The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something. The millions who are in want will not stand by silently forever while the things to satisfy their needs are within easy reach.

Repeat after me: "bold, persistent experimentation." 

The question for the members of Obama's old-new economic team is whether they will remain true to their fundamentally conservative instincts, or engage in the creative experimentation for which their ample talents render them highly suitable.

Comments

[bob]

While I don't have the exact quote handy, Obama said something so similar to that in one of his first press conferences as President Elect, that it was certainly a reference to FDR and meant to convey his intent to do exactly that, at least to those who are familiar with FDR philosophy.

[Per Kurowski]

Dany Rodrik suggests that Obama's old-new economic team “engage in the creative experimentation for which their ample talents render them highly suitable”

Could he explain what in his opinion is the profile of a person “highly suitable for creative experimentation” and explain to us why such person would have kept those marvelous qualities hidden and had not come out earlier and warned us about what was to happen.

As a relative newcomer to the US, one of the things that have astonished me is the ease with which everyone falls into the “deeply appreciating” of normal and often even quite mediocre routines. If there is something we could get out of this crisis it is to teach our children the importance of questioning and having much less respect for the opinions of anyone who wriggles with pleasure when he is referred to as an “expert”.

[wamelke]

Here is from Kennedy School Leadership expert, Ron Heifetz: "Leadership operates..and requires an experimental mindset-the willingness to work by trial and error-where the community's reactions at each stage provide the basis for planning future actions."

An interesting account of Roosevelt's leadership style is Arthur Schlesinger's The Age of Roosevelt: The Coming of the New Deal. It is fascinating to see how Roosevelt has exraordinary receptivity, love of flexibility, experimentation and creative conflicts among his subordinates.

[Justin Rietz]

I won't belabor the point - FDR's experiments(and Hoover's, for that matter) utterly failed. Did anything fruitful come out of their experimentation beyond proving that massive government interference in the economy is disastrous?

The world economy is not a lab for economic experiments. With all due respect, I am surprised an economist of Dani's stature would encourage such an idea.

[Brett]

Quite the contrary - we learned quite a bit of valuable macroeconomic information from the New Deal experiments.

As for FDR's "experiments", they hardly failed, or at least not all of them; they managed to get the banking system back on-line, and when FDR wasn't engaging in trying to set-up idiotic cartel-like systems like the NIRA and AAA (which gave use the current joys of American agriculture), or trying to slash the deficit in weak economic times (like he did in 1937 by drastically slashing spending on things like the WPA while raising taxes), he generally did pretty well.

[Youri Kemp]

Hello to all,

Its refreshing to see the same remedy for economic success, be the same today and the same yesterday--diversification, basically. LOL...

FDR tried to link the concept of moving away from mass production of particular established goods, to satiate established interest and raise capital, only, and then to it being bad for growth and the economy by having a lack of choice for the consumer, which in the ultimate event, the consumer rules and the goods produced, is to provide him/her with a particular service or good.

This restriction of having it otherwise breeds complacency and stagnation. Or, on the worst end of it, create a crippling economic funk----- the Smoot Hawley tariff, gave the death blow to the depressive state of the economy of the late 20’s and early 30’s. No domestic innovation and no forced innovation, from abroad. The USofA was lucky to have major wars looming, which took the attention of other major powers in the allies, away from it and on Hitler.

Countries should always move towards producing goods for the consumer--this is the only possible outcome if there is going to be competition in the free market- especially in regards to the USofA.

Saying this, as truthful as it is, is easier said than done- considering the amount of lobbying power certain organizations have in place, for the specific purpose of stopping innovation and punishing the innovator. The oil companies and car companies are the key culprits in regards to handicapping the energy and transportation market in the USofA. And, Bill Gates can attest to his handcuffing on his intellectual innovations, in the USofA and in the EU.

What has to happen- and I am saying this directly to the issue of lack of movement on alternative energy- is to go boldly into the future of providing new and innovative service and niche market goods in the USofA. JUST DO IT! Car companies should take note, as well. I am not one for the car companies bail out. They should, just adjust to American’s needs and tastes. Why would they want to force us to buy a car that we don’t want? Why should I pay them, to produce a car people don’t want? That’s just dumb!

Diversification is the only way to compete under globalization and the only way, for the USofA now, to become a true leader again.

Best,

Youri

http://globalviewtoday.blogspot.com/

[Justin Rietz]

He generally did pretty well? What is your proof? While you may claim that his policies lessened the depth of the Great Depression, the reverse case is just as easy to make, if not more so.

The bank holiday allowed the banks to shirk their responsibilities and left depositors with no ability to access their money for days. 5,000 banks did not reopen their doors after the holiday, and 2,000 never would - not a sign of great success. Moreover, the drastic move created a general public panic about the condition of the economy and it is questionable if it did any benefit for the economy in the medium to long run. (Friedman and Schwartz claimed that "the cure was worse than the disease"). This seems to be a general theme among Keynesians - damn the long run (I always note that Keynes had no children).

He then took the U.S. of the gold standard, allowing the government to print money at will. The long term consequences - inflationary booms and subsequent busts - have led to a seemingly never ending cycle of economic troubles.

Even assuming his bank policies resulted in some good, the rest of the New Deal was a disaster, and was bound to be so given FDR's economic philosophy regarding recessions. FDR believed that low prices cause recessions, not the other way around. His answer? Destroy goods in an attempt to drive up prices. Just at the time when people were suffering massive job losses and therefore loss of income, he made goods more expensive than they would have been had he abstained. The fact is that there was inflation during the 1920's (prices went up even though productivity was increasing), and the deflationary pressures were a balancing side effect of this inflation.

Moreover, while it is often argued that FDR's government work programs helped to get the economy moving, he funded these programs with increased taxes. Thus, not only did he make it more difficult for private businesses to recover and grow by driving up wages, he punished those who were profitable (not to mention inefficiencies of government projects versus private business).

[simone]

I openly encourage them to experiment with your wages and life. Once they identify a successful approach I will ask them to replicate the approach with other Harvard faculty members.

On a more serious note, I must say that I find the manner in which economist speak about experimental methods childish. More reading and study is in order.

[Brett]

Raising taxes was one of the bad sides of FDR's New Deal policy, and I noted that to some degree in my comment in my point about his efforts to balance the budget in the Depression.

I find it interesting that you cite Friedman for one point, yet ignore the fact that he argued that the problem with the Great Depression was a lack of action on the part of the Federal Reserve to flood the economy with liquidity - i.e, take the currency off the gold standard.

As for the Boom-Bust Cycle, that existed even when the US was on the gold standard (and it went back on the gold standard as part of the Bretton Woods Accords, in case you forgot). Blaming the end of the gold standard for that is disingenuous.

[Justin Rietz]

Brett -

I apologize if my comment seemed to suggest that you that you hadn't pointed out some of the negative aspects of the New Deal. Rather, I was making a point of how bad the negative aspects were. I believe it is important not only to look at the number of good and bad outcomes of FDR' "experiments", but also their relative impacts on the economy

As for Friedman, I don't agree with all of his analysis and recommendations.

Regarding the boom-bust cycle, the U.S. didn't return to a gold standard with Bretton Woods, but rather to an exchange standard and thus a looser link to gold.

As to your first point: The 19th century was not exactly a "government free" era in American monetary history, and the U.S. was by no means on a strict gold standard during the entire century. A central bank (actually two) with powers to affect the money supply existed in the first half of the 19th century, the second have being established to deal with the debt/inflation problem caused by the War of 1812. In the 1860's, President Lincoln introduce the "Greenback", a fiat money used to finance the U.S. Civil War. This, to no surprise, led to inflation. Greenbacks continued to be used by the U.S. government to attempt to control the money supply into the 20th century.

Regarding the gold standard itself, in the second half of the 19th century, the U.S. government changed policy several times regarding the use of a silver, gold, fiat, or combination monetary system, so monetary policy was by no means stable.

[barry]

I have to side with Justin on this issue. All that experimentation that Brett defends resulted in the only economic correction that we associate with an entire decade, and it is hardly encouraging to hear those who should know better extol such approaches as worthy to emulate today.

Also...the assumption here calling for more experimentation is based on the idea that we do not already know how wealth is created. Why?

[Youri Kemp]

Nice discussion.

Youri
http://globalviewtoday.blogspot.com/

[Dave Levy]

In regards to some comments, I think the following should be pointed out:

1) None of us lived in the 1930s. From any account of someone who did, it sounded like hell on wheels. I would challenge anyone (including myself) to act better, smarter, more effective than FDR in those times.

2) Today, the Fed Funds rate sits at 1%. The effective rate is 0.52%. That means we live in ZIRP -zero interest rate policy- land. The only Macro economic choice is Fiscal Stimulus.

3) Dani's point is the following: We live(d) in an economy fueled by consumers and no national savings. This is shown through out current account deficit. We can't just give tax cuts as fiscal stimulus: that will only fuel our indebtedness to foreigners. What we need is real government programs that will fuel domestic demand. Maybe that's infrastructure, maybe that's more renewable energy. But we need a portfolio of well managed investments that will help fuel the rise of domestic demand and re-grow our economy.

Thanks for reading and Happy Holidays!

www.spreadsoncredit.com

[Andrew]

FDR - proponent of randomized evaluations?

[Don the libertarian Democrat]

It's been years since I've read about this, but the FDIC comments are not surprising.

One of the reasons, as I recall in reading his adversaries, that they were so angry with FDR was precisely because they felt that he was betraying his class, his friends, and his own personal beliefs.

In being pragmatic and taking the chances he did, he had to face a lot of personal adversity from many who were formerly close to him.

That's my recollection. President Obama should do the same.

[evo]

can you read en spanhis, please ?

[gmoke]

Jonathan Alter was at Harvard today and emphasized this statement. He compared how many times FDR said "action" to how many times Obama does and contrasted their attitude toward action and experimentation with Bush's dogged dogmatism and inability to admit mistakes.

[Youri Kemp]

To Dave--

Excellent points. I think this is why fundamentally folks on all sides, are upset with this fiscal stimulus as is, because, it went the wrong way (subsidy) and to the wrong set of people--on top of giving the same, seemingly, corrupt financiers wads of cash with virtually no oversight, you also--and very blatantly-- gave more money to the folks who did not know how to spend it properly in the first place and gave the same old system, more money to frit away, to the same old base and the same old foreign interests.

Paulson and Bush, simply dug America's hole allot deeper for the future, by them trying to wriggle out of a current mess. I though Sec. Paulson was being very cheeky, with going to congress with a 3 page note asking for $700 billion. It almost seemed like ransom money. I knew politicians were making a snap judgment on this financial bail out. Half of the Senate should be fired on the spot-- including more than a few congressmen.

I won't call names like McCain...but, we know who they are!!

The financial system, since at least the early 2000's and perhaps since the late 90’s, is in desperate need of an overhaul. Not to blame globalization entirely for the lack of US regulation on the financial system and not for the current lack of production in the USofA, but, to say that financial globalization, in particular, did not play a major part in exacerbating this mess, would by lying to everyone here.

So, while we muse on whether or not FDR style policies are necessary and to what extent, if they are, experimentation--if it leads to diversification as I assume it will--is the only way to secure the future. And, during our daydreams, we can’t run away from the major problem, while we try to chase down solutions which may not have anything to do with the root issue.

I would say candidly, however, anything that gets us past this stalemate in the financial system and in the wider economy, when we talk about production and financing production and innovation, is worth the effort.

I would not endorse a blank check entirely, but I would write another check for innovative and brand new ideas. The automobile companies had to present a new business model to the US congress. The financial system needs to be forced into doing the same.

While I do not, also, appreciate the politics behind even the consideration of giving any politician a blank check to make mistakes, under the banner of "we have to experiment.”. But, the stark reality of it is, what else do we have!?!?!? And, it will be what the doctor ordered. I don't think there are any novices on the Obama team. GO FOR IT!

Team Obama has a present and very real domestic challenge for his presidency. It’s not the war on terror. It’s not the war on drugs. It’s not even the battle for healthcare. It’s the battle for control, accountability and transparency in the US financial system.

I hope that battle does not end up in a stalemate, like the other so called "wars".

Youri
http://globalviewtoday.blogspot.com/

[Brett]

You raised a good point, Dave, about the 1930s. Keep in mind that economics was still much less sophisticated than it is today; FDR basically had to be either an experimenter, or do nothing - and that latter was unacceptable in the public's view.

[Beezer]

I've got it. Anyone can sell anything to us. As long as they make it here.

[Cam]

Some of FDR's "creative" approach included the NIRA and slightly less restictive Wagner Act: microeconomic disasters that held wages and prices way above equilibrium levels, keeping unemployment above 15% until almost the end of the decade. This is a country that historically had had minimal unemployment. Many other countries who didn't follow these policies saw their recovery come much faster.

Other than providing some faith in the economy, going off gold, and hence ending deflation (only precipitating something that was about to occur anyways), praise for his "creativity" should be quite limited and not be looked at inspirationally today.

[ODILLE Benoit]

Do you REALLY think that FDR was a keynesian ???

You're missing something : Keynes was an eugenist and a supporter of british imperialism while FDR was totally opposed to british Empire.

Don't forget the history of the US and the principles that underlie their creation. The "American System of Political Economy" was the complete opposite of a keynesian-like liberal system.

Think about it...

[Eric H]

The real benefit of "bold, persistent experimentation" is that you can change what you are doing, or at least claim to or at least give the appearance of changing, long before any deep analysis has been completed. Then, when the economy finally recovers, you can claim that your favorite policy or group of policies was successful. It doesn't matter if you actually prolonged the problem, or did nothing to help or hinder recovery; what really matters is the appearance of action.

Politics and political economy are not necessarily the same, or even aligned.

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