Obama’s New Deal aspirations

Published 12:00 am Saturday, March 3, 2012


Alabama Policy Institute

In 2008, columnist Paul Krugman linked the coming Obama Administration ambitions with President Roosevelt’s New Deal in an article entitled “Franklin Delano Obama.” Now that President Obama has almost completed his first term, history provides an interesting perspective on how the Obama administration’s policies, such as the stimulus and the Patient Protection and Affordable Care Act, have taken America through the challenges of the recent economic recession.

From 1933-1936, President Roosevelt implemented New Deal programs to provide for “relief, recovery, and reform.” The basic Keynesian concepts shaping the New Deal revolved around government relief for those most affected by the Great Depression, federal programs to promote economic recovery, and financial reforms in hopes of preventing a future depression. President Obama’s policy positions during his first term in office seem to mirror New Deal rhetoric.

For many conservatives, the New Deal represents the worst of government intervention in the marketplace. While the New Deal is known for radical government spending and government expansion, the budgets during the New Deal stand in stark contrast to those under President Obama. Between 1933-1936, government spending averaged only 9.6% of Gross Domestic Product (GDP), and deficits averaged only 5% of GDP. Since President Obama took office in 2009, government spending has accounted for 24.5% of GDP, and deficits have averaged 9.3%, levels that have been eclipsed only by those incurred during World War II.

But Roosevelt and Obama are not the only Presidents to lead out of an economic recession. Ronald Reagan faced a recession that lasted almost as long as the recession facing President Obama and had an even higher unemployment peak. While Reagan certainly operated in the modern era of large government, his deficits averaged less than 4.1% of GDP during his administration.

The difference in growth of GDP is also staggering. Under the Reagan administration, GDP grew by 76.6%, it grew 36.5% under the New Deal, and, under Obama, GDP has only grown 7.3%.

Government spending coming out of the current recent recession is more than double that of the New Deal as a percentage of GDP, but America is seeing less than a quarter of the growth. So why is high government spending not having the same effect as it did under the New Deal?

In short, President Obama may be caught in a game of Keynesian catch-up. Under the New Deal, the government formed a significantly smaller portion of the nation’s economy than it does under the Obama Administration. The New Deal Programs essentially doubled government spending but, because the government was small, it accounted for less than 10% of the nation’s economy.

For the Obama Administration to replicate the spending of the New Deal, it needed to average spending of more than $4.5 trillion per year with average deficits of more than $2.3 trillion per year. To put it mildly, that option was not politically acceptable even when the President had both the House and the Senate under Democrat control.

When advocates for increased government spending say that the stimulus was not big enough, this is precisely what they mean. Unfortunately for them, America has been spending far too much for far too long. As a result, America cannot bear the economic drain necessary to engage in New Deal type spending without moving into the fiscal situation facing countries like Greece and Spain.

The Reagan years may offer some guidance. The federal government under the Reagan Administration was almost as large as the government under Obama when considered as a percentage of the economy. While limited government advocates may rail against the large size of either government, the similarity in size between the Reagan and Obama Administrations is a particularly good reason for American’s current politicians to look to it for answers.

Reagan engaged in a systemic tax simplification and top marginal rate reduction rather than pursuing programs designed to move large quantities of taxpayer and borrowed money out the door. With the help of Democratic sponsors in the House and the Senate, Reagan dropped the top marginal tax rate from 50% to 28%. Reagan was also able to pull many special interest tax provisions from the tax code.

Even the staunchest big government advocates should admit the amount of spending necessary to turn Obama’s programs into the “New Deal 2.0” is unlikely to materialize in the current political environment. As a result, America needs to consider other options rather than pushing more of the same policies expecting different results.