What Lessons Can We Take from FDR’s New Deal and the Mobilization for WWII to Apply to the Green New Deal?

April 23, 2019 by stephenshubert

The Chair of the local Democratic Party, David Turnoy, spoke at the Orcas Island Earth Day commemoration.  He is what he had to say:

“As a longtime student of history, I find it useful to look to history for lessons that we can apply today.  After all, what is the point of studying history unless you can use lessons from the past to build a better future?  We have heard a lot of talk in recent months about a Green New Deal, but one of the biggest stumbling blocks brought up is the perceived cost.  Has our country ever faced such an existential threat that required a complete remaking of our economy?

When Franklin Roosevelt became president in 1933, the country was into its 4th year of suffering with the Great Depression.  One fourth to one third of American adults were out of work, a total of 13 million people.  Gross domestic product (GDP), a good measure of the economy, had been shrinking for years.  The previous president, Herbert Hoover, had a strong belief that by leaving business alone to do its thing, the country would naturally emerge from the Depression.  Unfortunately, this was not the case, and to reward Hoover for his lack of action, homeless camps around the country were referred to as Hoovervilles.

FDR knew he needed to come in with an activist agenda, and his first 100 days were full of action.  He began setting up all the alphabet soup agencies that the New Deal came to be known for.  Immediately, elite critics derided his plans as “creeping fascism” or “closet communism”.  A West Virginia senator called the New Deal despotism, tyranny, and the annihilation of liberty.  Far-right militias formed; there was even a sloppy plot by a group of bankers to overthrow FDR.  Meanwhile, self-styled centrists cautioned FDR to slow down and scale back.  Does this remind you of what we hear today regarding a Green New Deal?  We hear things in the mainstream media like, “You don’t want to make so many changes at once, this is too big and too quick, we should wait and study more.”

But FDR jumped right in, and in the first full year of the New Deal, 1934, GDP was up by 10.8%.  The following two years saw growth of 9% and 13%.  But in the 1936 election, a number of cautious conservatives were elected to Congress, and in order to try to accommodate them, FDR cut government spending.  As a result, GDP shrank in 1937 to 5.1%, and in 1938 it went negative to –3.3%.  Fiscal conservatives seem to always want to cut spending, claiming they are worried about the deficit, except when it suits their purposes to vastly overspend the amount of revenue coming in.  The all-time hero of the Republicans who criticized “tax-and-spend liberals”, Ronald Reagan, was a big deficit spender himself, tripling the deficit back in the 1980s, and there was not a care among them in 2017 when Trump and the Republican Congress passed a massive tax cut bill that by far mostly benefitted the wealthy and large corporations, adding a significant amount to the deficit.  In both of these cases, we were told that tax cuts for the wealthy would trickle down to us everyday folks, and in both cases, that failed to happen.  Yet even now we are hearing from these same people that we must cut social spending to rein in the deficit.  So don’t ever believe the arguments that we must cut spending due to the deficit; it is a totally disingenuous argument.

After the backtracking of 1937 and 1938 in the economy, Roosevelt resumed massive deficit spending, which shot GDP up to 8%, and it continued to increase from there.  Once the US got into WWII, in 1942 defense spending quadrupled the amount added to the debt by $23 billion, which then tripled to $64 billion in 1943, bringing growth up to 19%. If that much had been spent in the first year of the New Deal, it would have ended the Depression right there and then.  Deficits during the New Deal were between $2-$4 billion, $20-$55 billion during the war.  The US won the war, and we came out of the war with a stronger economy than ever.

Another facet of the economic program was an increase in income taxes.  Before FDR, the highest marginal tax rate was 25%.  Under FDR the highest rate went first to 63%, then 79%, then during the war to 81%, 88%, and finally to 94%.  This tax policy gave Roosevelt more revenue to use for his programs and the war effort.  And, in fact, the highest income tax rate stayed in the 80s and 90s until 1963, during which time we had some of the best economic years in this country’s history, which was also the time period when the middle class finally became widespread.  Eventually income tax rates started going down, the highest rate staying in the 70s until 1981, and then down in the 30s for more than the last 30 years.  Interestingly, there has been a large increase in the percentage of returns subject to this top rate.  Could we tap into this larger demographic to have more revenue available for a Green New Deal?  Could we tailor tax policy so that people at these high levels of income could write off some of their income by investing in programs that fight climate change?  All it takes is the political will.

Up to this point I have been talking about government spending, and certainly there was plenty of that during the New Deal.  But the other major effort of FDR’s administration was to encourage private investment, making the business community a partner with the government in restoring the economy.  The main effort to promote this came in the guise of the Reconstruction Finance Corporation (RFC), an independent agency within the federal government that set up lending systems to channel private capital into publicly desirable investments.  The RFC created new systems of insurance to guarantee those loans, delivering profits to businesses in peril during the Depression and helping union members, farmers, and consumers, all without spending a dime of taxpayer money.

In 1934 excess reserves across the country totaled more than $1 billion (in 1934 dollars), a considerable sum at that time.  Banks and corporate coffers overflowed with capital; there had been so many business failures that these institutions felt unable to invest profitably, afraid of the risk.  Without an outlet for those funds, even the still solvent banks would fall apart eventually—and so would the country. Capitalism depends on the investment and reinvestment of capital.

So the RFC jumped into the breach, focusing first on housing.  It designed mechanisms to channel bank money into the economy in the form of mortgages.  The key innovation was to have lenders chip into an insurance pool organized by the federal government so that if a borrower defaulted on a mortgage, the lender would be paid out of the pool in low-yielding bonds.  This FHA-administered insurance pool made mortgages safe for banks again.  In a few months, FHA programs lent more money than the Public Works Administration spent during the entire decade, putting some 750,000 people back to work.  No lenders had to comply with the FHA, but if they did, their business was easier to conduct.  Risk-free loans with guaranteed buyers provided a strong—yet noncoercive—incentive to lend private capital.  The government issued no loans and paid for no insurance, while creating new markets for lenders.  The FHA preserved private enterprise while accomplishing a public good

The RFC followed this up by setting up the Rural Electrification Administration (REA).

Most rural areas still did not have access to electricity, as the major stumbling point for rural electrification had always been the perceived expense.  Utilities wouldn’t string all those lines for just a few customers; private utilities would not bear the expense of rural electrification. Therefore, the REA found a middle path between big corporations and big government in the form of rural cooperatives.  The REA offered new cooperatives 20-year loans at 2.88%—a number set to cover the government cost of borrowing through the RFC.  The REA accepted applications from proposed cooperatives and examined the proposals for “economic and engineering feasibility.”  The REA did not manage the actual work, it just provided capital and technical support.  The REA also made five-year loans available “to finance wiring of farmsteads and installation of plumbing systems,” making possible the modernization of American farms and farmhouses, which in turn made it possible for rural Americans to buy electrical goods from private companies.  The REA returned a modest profit to the RFC and also showed that America could be cheaply electrified, causing other entrepreneurs to take notice. Rather than “crowding out” private initiative, government provided an example that worked, leading to installment lenders providing new services and even to electrical utility companies beginning to string lines out into the countryside.

Encouraging investment in new industries dovetailed with the need to prepare for war.

The RFC did for planes and other instruments of war what it had done for houses and electrification by creating channels for capital investment through the Defense Plant Corporation (DPC).   The DPC was positioned as an intermediary between investors and borrowers, providing capital for planes and munitions in two ways: the first as a lender, and the second through tax benefits.  Tax benefits came in the form of accelerated depreciation schedules for war-time plant investment. Over the course of the war, this dual system directed $25 billion into manufacturing.  The DPC channeled the equivalent investment of 25 percent of the entire GDP in 1940.  DPC financing added the equivalent of half of the entire prewar manufacturing capacity to the country by the end of the war.

In sum, the RFC worked across economic scales, from local construction contractors to giant corporations.  It worked within the system to fix the system, relying not on abstract economic ideas like socialism or capitalism, but on practical business methods.  And it worked.  There was no single magic bullet, but a portfolio of opportunities.  The RFC did not ask Congress for money, it borrowed billions from capital markets and banks, and overall it made money.  The RFC developed different projects that turned cutting-edge technology into self-sustaining commercial enterprises.  There were many examples of how to harness private capital for the public good, and to help promote free enterprise, entrepreneurship, and technological innovation.

The government can spend taxpayer money on the Green New Deal (and it should), but direct spending is not the only option, and if the New Deal is a good guide, not even the most important option. Government power lies not just in spending, but in helping businesses overcome risk-aversion and finance new opportunities for growth.  As we imagine policies to fight climate change—certainly as crucial as fighting World War II—let’s remember how the New Deal really worked, so that we can do it again.

Government power, as stated above, is not just about spending but also about finding ways to move the private sector in a desirable direction.  In that vein, the Green New Deal can be seen as a resurrection of federal industrial policy.  It is not an attempt to control the private sector, simply a bid to collaborate with it by intervening to set industrial policy.  An old school of economic thought says that a strong manufacturing policy is an absolute necessity for large, developed nations.  Clearly the US has neglected its domestic manufacturing sector since the 1980s, a move that risks national failure.  And as for fighting climate change, for more than a decade, the biggest progressive ideas regarding curbing climate change have relied on technical or narrow market mechanisms, e.g., make emitting carbon dioxide costly, a carbon tax.  By prescribing industrial policy, the Green New Deal goes in a different direction, throwing all of American government and industry behind an attempt to make renewable energy cheap.

Wealthy countries became wealthy in the first place by supporting, protecting, and investing in strategic industries.  A nation’s other policies—around trade, infrastructure, even education—were ultimately designed to serve these chosen industries.  It is argued that a nation must deliberately and constantly invest in its means of making a living.  Nations that let the free market decide what they should do for a living decline to the bottom of the economic food chain.

From the start, the US has enacted policies to shift its economy into new growth directions—toward a new economic space of opportunity.  Throughout US history, government policy has encouraged certain enterprises in order to stay profitable.  Some examples include the Erie Canal, standardized parts for industry, railroads (the government provided free land), the New Deal, WWII, and the interstate highway system.  Even computers came from the government research and development budget.

Since 1980, the emphasis in economic policy in the US has been on deregulation and free trade; our manufacturing moved to other countries.  It is argued that the private sector cannot innovate without the public sector giving it purpose and direction; in fact, innovation depends on the state.  First, the public sector defines a challenge.  Then it asks—or demands—that the private sector address itself to that challenge, e.g., the Apollo space program.  Much of the money spent on the space program went to private companies who made the parts that made the space program successful.  The state can yoke the mission of fighting climate change to every aspect of its purchasing power.  Whether the government buys a company’s product, offers it a research grant, or loans it money should depend on its willingness to adopt certain Green New Deal goals. You don’t pick the winners; you pick the willing, says an economist.  The question should be: Who’s willing to engage across any sector—big firms, small firms, any size—to engage with Green New Deal strategies?  These strategies might include a renewable-energy requirement or a reduction in the physical amount of material needed to make a product.

The Green New Deal’s wide-ranging vision faces down a politically inconvenient reality: Fighting climate change will mean remaking the economy.  But we have remade the economy before, as evidenced by the examples above.  The original New Deal, when you read about it, is super practical. The biggest mistake is to see activist government as ideological.  It is neither left nor right, it’s just a super practical approach to problem-solving. If you want to solve problems on a huge scale, then let’s actually put some public institutions to work.

Finally, I will discuss how the US mobilized for WWII.  We have the perception today that due to the existential threat of fascism and the attack on Pearl Harbor, all individuals and companies jumped right on board with a total commitment to win the war; the reality is quite different.  Congress and the public were isolationist.  Industry was not eager to shift its focus from consumer goods to war materials; Roosevelt had trouble convincing industry to replace production of civilian goods with military production.  Much like today, getting cooperation was a challenge.  To further spur mobilization Roosevelt decided to appoint specific individuals to oversee mobilization in key industries, such as petroleum and rubber.  FDR brought corporate executives into government to head many commissions, so that corporations were involved in wartime planning along with FDR.  And in some situations, conversion to war production was required, e.g., the auto industry.

Businesses wanted government assurances that they would make decent profits while producing war materials for the military; they had been left high and dry at the end of WWI, having converted to wartime production and then being left holding products no longer needed when the war ended.  In seeking such assurances business leaders formed an increasingly strong relationship with U.S. military leaders, who desperately wanted to get war production going. Working together, business leaders and military leaders carried a great deal of political power, and could essentially force the president and Congress to rely on them for making key mobilization decisions.  Business advisers oversaw mobilization through small temporary agencies.  Business leaders were able to roll back many New Deal programs that competed with private business.  War mobilization was essentially turned over to the nation’s business leaders, who were quite willing to cooperate with the government as long as they were in charge.  The majority of government military contracts went to corporations whose leaders and representatives were serving as government advisers.

Private corporations received various financial incentives from the government to cooperate in the mobilization: substantial tax breaks, subsidies, guaranteed profits for production of war materials, and looser antitrust laws so that companies could more freely cooperate with each other.  The government spent billions to build factories and lease them to companies on attractive terms. The government sold the federally built plants to private companies after the war at bargain prices.

Deep government involvement doesn’t have to mean a command economy.  The parts of capitalism that spur energy, efficiency, and entrepreneurial skill were still in place during this war mobilization. What the war did was tap that energy, not constrain it.  For better or for worse, we have a capitalist system, and as long as we do, there is no reason not to use its best aspects to bring about the changes we need.

In conclusion, we have faced serious and even existential threats before.  The power of government spending in combination with private sector investment in industries promoted by government policy, along with the inclusion of private sector leaders in decision-making as long as they act in concert with the goal of fighting climate change, can move us to a much brighter future.  It will require facing down the big-monied fossil fuel interests, who donate huge amounts of money to our politicians who make the life-altering decisions.  It will require electing a president who will lead the government to set policy that will move us toward a green future, as opposed to our current administration that denies that climate change is even a problem.  Now that you know we have tackled such problems before, and that we know how to do this and how to finance it, you can help by working to get our legislators on board so we can make this happen.

 

Resources

Washington Post, Feb. 11

The Balance https://www.thebalance.com/fdr-and-the-new-deal-programs-timeline-did-it-work-3305598

US GDP https://www.thebalance.com/us-gdp-by-year-3305543

US Federal Budget History http://stats.areppim.com/stats/stats_usxbudget_history.htm

GDP Growth Rate https://www.multpl.com/us-real-gdp-growth-rate/table/by-year

Tax Policy History https://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-rates

The New Deal https://www.theatlantic.com/ideas/archive/2019/03/surprising-truth-about-roosevelts-new-deal/584209/

The New Deal: Government Spending and Private Investment https://www.theatlantic.com/science/archive/2019/02/green-new-deal-economic-principles/582943/

 

Maury Klein https://video.search.yahoo.com/yhs/search?fr=yhs-sz-001&hsimp=yhs-001&hspart=sz&p=a+call+to+arms+maury+klein#id=1&vid=2071199b4c25b8accd366d2bf619c317&action=click

Mobilization for WWII https://www.encyclopedia.com/education/news-and-education-magazines/world-war-ii-mobilization-1939-1943#IssueSummary

Mobilization

https://prospect.org/article/way-we-won-americas-economic-breakthrough-during-world-war-ii

Mobilization https://www.encyclopedia.com/history/news-and-education-magazines/mobilization-american-home-front

https://theintercept.com/2019/04/17/green-new-deal-short-film-alexandria-ocasio-cortez/

 

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