Doomed then and now

Politicians today might not want to remember, but, in the first phase of the Great Depression, the major economies, oblivious to the paradox of thrift, took steps that made things much worse. In the United States, Hoover, who was a Republican progressive in the tradition of William Howard Taft rather than Calvin Coolidge, responded initially to the stock market crash and the drop in employment by proposing a tax cut and a modest public works program. He also tried to bring industry together to agree to invest and to maintain wages and prices. But, when firms continued to cut back, unemployment continued to rise, and tax revenues dropped—creating a budget deficit—Hoover and the Republicans turned to cutting government spending and raising taxes on the assumption that a government, like a business, should not respond to hard times by going further into debt. In a news conference in December 1930, Hoover declared, “Prosperity cannot be restored by raids upon the Public Treasury.” In fiscal year 1933 (which began in June 1932), federal spending actually decreased. By March 1933, when Franklin Roosevelt took office, the unemployment rate had climbed to 24.9 percent from 3.2 percent in 1929.

In Great Britain, the economy had begun to decline after 1925, when the Tory government, rejecting Keynes’s advice, decided to go back on the original pre-World War I gold standard. By raising the price of the pound in dollars or francs, the Tories priced British exports out of the world market. In May 1929, the Labour Party ousted the Conservative Party, whom voters blamed for the downturn. But Labour Prime Minister Ramsay MacDonald pursued many of the same policies as the conservatives. MacDonald was a socialist and blamed a “breakdown” in world capitalism for Britain’s ills, but he thought that as the head of capitalist Britain, he had to adhere to the gold standard and free trade, while cutting the budget.

Keynes’s Liberal Party, led by former Prime Minister Lloyd George, advocated massive public works, but Labour leaders branded the Liberal proposals “madcap finance.” They rejected any idea of a third way between laissez-faire capitalism and socialism. As unemployment soared in Britain, MacDonald proposed raising taxes and cutting spending on unemployment insurance in order to balance the budget. MacDonald had always been averse to partisanship and had earlier urged the parties to put their “ideas in a common pool.” When Labour’s trade union members balked at his cuts, MacDonald created a national unity government with the Tories in 1931 and passed spending cuts and tax increases. By the next year, unemployment in Britain had risen to 22.1 percent from 10.4 percent of the wage-earning workforce in 1929.

In Germany, where the slump had begun in 1928, a coalition led by a Social Democratic prime minister held sway. Both the Social Democrats and their conservative coalition partners were committed to reducing Germany’s rising budget deficits, but the Socialists wanted to do so by borrowing money overseas, while the center-right parties advocated cutting the budget by slashing unemployment insurance. The government split and, in an election in 1930, a center-right coalition led by the Catholic Centre Party’s Heinrich Brüning took power. Brüning drastically cut spending and raised taxes, and, by 1932, when the next elections occurred, the German economy was in ruins. Production was at 40 percent of what it had been in 1929, and unemployment had risen to 33 percent.

In all these cases, the lesson was clear: Cutting spending and raising taxes to balance the budget had made things much worse. And, as these governments discovered, there was a political price to be paid. In the United States, Franklin Roosevelt and the Democrats turned out Hoover and his party by a landslide. The Republicans would not win the presidency again for 20 years and would remain the de facto minority party for almost 50 years. In the October 1931 elections in Britain, the Labour Party suffered its worst defeat. MacDonald would be expelled from the party, and Labour would not regain power until 1945. In Germany, Adolf Hitler’s National Socialist Party would best the other parties in the 1932 elections. And, in January 1933, Hitler would become chancellor.

Charismatic leaders can reshape and even defy their nation’s political culture. Franklin Roosevelt did so during his first term. But Roosevelt inherited a situation so desperate that the public was willing to tolerate any kind of experimentation. Obama entered office with some of the preconditions for radical reform. Crisis was in the air. Wall Street was in disfavor. Voters blamed the downturn on his Republican predecessor, George W. Bush. And he had the rudiments of a political movement. But the country was not in as desperate shape as it was in 1933, and the opposition was still functioning. To have put in place a program that might have spurred at least the beginnings of a recovery, Obama would have had to be both extraordinarily bold and fiercely combative. And he was neither.

In dealing with the downturn and financial crisis, the president was cautious—as evidenced by his choice of Geithner, who had presided over the Federal Reserve Bank of New York during the crash. Like MacDonald, Obama harbored a dream of bringing the parties and interest groups together behind his program. As The Financial Times’s Martin Wolf put it, “Mr. Obama wishes to be President of a country that does not exist. In his fantasy US, politicians bury differences in bipartisan harmony.” After the bruising battle over the debt ceiling, Obama may have finally put his dream of a post-partisan politics to rest and adopted a more aggressive political style. But the narrow opening for dramatic change that existed in early 2009 has probably closed.