(Previous installments of “The Keynesian Myth” are here and here.)
Balancing Act
As Richard Adelstein (1991, p. 177) observes, far from taking Keynes’s advice that he ratchet-up the federal government’s deficit spending, “Roosevelt held fast to the ideal of a balanced budget and remained the chief opponent within the administration of an aggressive program of public works.” Instead of making spending on public works a central component of the New Deal’s recovery program, Vladimir Kazakévich (1938, p. 476) explains, FDR regarded it as a mere “auxiliary to [that program’s] other schemes.”
Despite Roosevelt’s desire to avoid large deficits, for three fiscal years during the 30’s—1934, 1936, and 1939—his administration’s deficits were higher than Hoover’s largest. But as I noted in a previous essay, the ’36 deficit was only as large as it was because Congress passed a $2 billion veteran’s bonus bill over FDR’s veto. As the chart below shows, though federal expenditures themselves more than doubled between 1933 and 1937, federal receipts also rose considerably. Consequently, Roosevelt’s deficit spending never quite reached 7 percent of GDP in any fiscal year before the U.S. entered the war.
Furthermore, as Bradford Lee (1982, p. 65) points out, according to standard measures of the “full employment surplus,” no two consecutive New Deal budgets packed a greater fiscal-stimulus punch than that of Hoover’s 1930 and 1931 budgets; and relative to modern notions of fiscal stimulus, that punch was nothing more than a feeble jab. “In brief,” E. Cary Brown (1956, p. 869) says, wrapping-up his classic reappraisal of “Fiscal Policy in the ‘Thirties,” “it took the massive expenditures forced on the nation by the second world war to realize the full potentialities of fiscal policy. Until then, the record fails to show its effective use as a recovery measure.”
If these facts seem surprising, it’s because, as Keynes’s influence grew during the 1950s and 1960s, historians became increasingly inclined to treat the New Deal as a practical application of Keynesian thinking, to which FDR gave his unstinting support. According to this account, if deficit-financed spending on public works didn’t go far enough, it was the fault, not of FDR himself, but of his more conservative cabinet members and advisors. The generally excellent Zach Carter (2020, p. 292), for example, follows many other writers in pinning the blame on Henry Morgenthau who, he says, “urged Roosevelt to pursue a balanced budget to improve the confidence of businessmen in his leadership.”
But such accounts should be taken with a grain of salt. In truth, Julian Zelizer says in an essay published a little over two decades ago, fiscal conservatism was less a constraint upon than “a key component” of the New Deal, and that was so not just because some of Roosevelt’s most important appointees and advisors were fiscal conservatives but because Roosevelt was one as well. Hence his condemnation of Hoover’s deficits during the ’32 campaign. Hence his own promise, during his October 1932 campaign speech in Pittsburgh, to balance the federal budget, provided he could do it without letting anyone starve. Far from seeing “a complete and honest balancing of the Federal budget” as a goal at odds with ending the depression, Roosevelt considered it the only “sound foundation” for a “permanent economic recovery.”
Nor did Roosevelt change his tune once in office. Determined to keep his promise, he chose the rabidly orthodox Lewis Douglas as his Budget Director in 1933, and had him prepare the legislation that became the Economy Act of March 1933, slashing the Federal budget by $243 million. Roosevelt had hoped to slash it by more than twice that amount. “Too often in recent history,” he told Congress in a message defending his economic plan, “liberal governments have been wrecked on rocks of loose fiscal policy.” According to Arthur Schlesinger (1958, p. 10), whose account of Roosevelt’s efforts is nothing if not sympathetic, “Roosevelt spoke with deep sincerity. His fiscal notions were wholly orthodox. He saw little difference so far as budgets were concerned between a household or a state government on the one hand and the federal government on the other.”
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