New Deal = New Economy

The lessons from the period between roughly 1925 and 1945 are profoundly important to understand where we are today and what the “new deal” aspect of the “Green New Deal” must deliver.  To absorb these lessons, we must first “unlearn” the false narratives about what happened and what we did.  The real story is both more frightening and more encouraging than the tale most American’s believe.  The common wisdom goes something like this.  “We had the roaring 20’s which came to an end with the stock market collapse of 1929.  That triggered the Great Depression which we needed WWII to escape.  Meanwhile FDR passed the New Deal which created a safety net for most Americans.”  While almost every American would concur with that summary it’s deeply misleading and badly inaccurate.

The Green New Deal is obviously focused on the challenges of climate change.  However, the “new deal” reference is both important and a source of confusion.  We as a nation do indeed need a “new deal”, but just what does that mean?  What did the original New Deal actually include?  What was the context and what did it do for America?

In truth, the 1920’s were roaring for some but misery for most.  Agricultural productivity was skyrocketing, which is a good thing overall, but was disastrous for many.  There was simply far too much food being produced, prices were collapsing, and rural bankruptcies were ravaging whole communities across the nation.

Exactly the same thing has been happening in today’s industrial sector.  Globalization and the rise of China have accentuated the challenge, but the underlying driver of skyrocketing productivity is the same as what happened to agriculture in the 1920s.

The new core of the 1920s economy was the industrial sector which was producing lots of new jobs but they were awful jobs.  People worked 60-70 hours a week without being able to earn enough to feed a family.  Industrial productivity was booming but none of that was flowing into wages.  Instead, it accumulated as speculative capital leading to asset bubbles, many of which were in real estate.  Meanwhile monopolists used their market power to squeeze out competition choking off smaller businesses.

The exact same things are happening in today’s job and small business market.  There are lots of new jobs being created, but they’re awful jobs.  Once again people are working 60-70 hrs per week and still struggling to get by.  And, small businesses are collapsing throughout the country particularly in small towns.  Big business is thriving, but the overall level of economic dynamism has been in decline since the early 1980s.

The market crash of 1929 was indeed bad and magnified by poor government policies including the passage of the Smoot Hawley tariffs.  Those tariffs backfired badly sending the already unstable and imploding agricultural sector into a death spiral.  With rural bankruptcies exploding and poor and stagnant wages the entire demand side of the economy imploded.  If you had asked any commentator in 1928 whether the economy was healthy and robust or fragile and riddled with hidden fault lines they would have laughed at the seeming absurdity of the question.  And yet, it was fragile.  It was poised on the edge of a horrific abyss that was invisible to those who focused solely on their wealth, the stock market and GDP growth.

Once again, we face the same situation.  In fact, the underlying metrics that showed how fragile the economy actually was in 1928 have all reached the same levels today that they did back then.  Today’s superficial commentators focused solely on the success of the wealthy, the growth of the stock market and GDP and the simple level of unemployment are suffering from the same blindness that led the nation into the abyss almost 100 years ago.

When confronted with this disastrous situation FDR did not build a safety net.  He redesigned the economy.  That’s the core essence of the New Deal.  It began with a new set of regulations for banking and finance that were designed to both provide immediate stability improvements along with ensuring the sector would be able to reliably provide the kind of capital raising and management needed by our growing industrial sector.  That was followed by the direct intervention of the government to manage agricultural supply, to stabilize prices, and to establish subsidy programs so that the continued growth in productivity would no longer wreak the same destruction on families and communities that it had in the prior decades.  Once both of those were in place the tide of rural bankruptcies came to an end and private capital began flowing back into the banks.

The industrial sector was well on its way to becoming the backbone of the economy, so it was crucial that it become a sector where people could earn a living.  That formula was achieved by legislating a minimum wage, the 40-hour work week and enabling the formation and bargaining power of unions.  For the next 40 years that formula worked, with wages tracking productivity as is essential for a sustainable economy.

Meanwhile FDR tackled our infrastructure which was trapped somewhere between our agricultural legacy and our growing industrial sector.  He built the roads, bridges, tunnels, airports, and shipping hubs needed to support industrial logistics. He built dams providing water and electricity throughout the western states and the electrical systems needed to bring Appalachia into the 20th century.  Yes, those programs also provided much needed jobs, but the legacy of what was built endures to this day, long after the jobs have gone.

All that infrastructure was soon put to use as FDR, through the Reconstruction Finance Corporation (RFC), began capitalizing the build out and tooling of America’s industrial base.  The RFC was basically a government bank and it used many different tools to accomplish that build out including facilitating the establishment of industrial collectives to spread financial risks.  By the end of WWII over half the total capital stock of America’s private sector had been paid for through the RFC.  In most cases the plants and equipment were leased to their private “owners” for one dollar per year and given to them for free at the end of the war.

As the GI’s returned home the final pieces of FDR’s redesigned economy were put in place.  The GI bill enabled thousands to seek mortgages and the entree to the middle class through home ownership.  It also provided an enormous education boost to the national workforce.

That’s the core of the “new deal.”  It was not a safety net, it was a new economy.  We had a redesigned financial sector; an agricultural sector with enough government support to ensure its continued productivity explosion would no longer destroy families and communities; an industrial sector that was recapitalized through government support, that had a revamped set of labor laws to ensure wages matched real economic value and a retrained and motivated workforce; and, a fully built-out national infrastructure of roads, bridges, airports, electricity and water supplies.

The end result was the greatest period of sustained and shared economic growth anywhere in history.  Was it capitalist? Was it socialist? What do those questions even mean and why should anyone care what label to put on it?  The result was an America that captured the dreams and imaginations not only of our country but all over the world.  It was achieved by altering the rules and regulations that governed the economy and through active, direct coordination and investment through the federal government.  Every one of us and every private and public institution played their roles and we thrived as never before.

Note that that version of the story doesn’t even mention social security.  It’s very important to our society and a crucial element of FDR’s legacy but a separate topic.  Far and away the most important lesson from the New Deal is the opportunity and need for government leadership in redesigning a failed economy so that it works for the nation as a whole.  We did it before and we can do it again.

If we are to truly have a Green New Deal it must include a redesigned economy that sustains communities ravaged by growing industrial productivity and that ensures the jobs coming from the new core of the economy are good jobs.  We need a redesigned financial sector and set of corporate governance principles that build new economic value instead of draining it into speculative financial gambling games. It also needs reinvigorated government support for the healthcare, education and human capital development needed to ensure our economy and citizens thrive. And, it obviously needs to include a green infrastructure appropriate for the challenges and opportunities of the 21st century.  That’s the New Deal we need to demand and help build.


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