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In the Blockade Trap
by Ulrike Herrmann
Email: mbatko (nospam) yahoo.com
20 Nov 2012
Barack Obama must stimulate the economy with state spending. The astonishing example of Europe could convince republicans who in the past blocked everything... The monetary policy of a central bank cannot replace the fiscal policy of a government.
IN THE BLOCKADE TRAP
Economic policy in the US: Barack Obama must stimulate the economy with state spending. The admonishing example of Europe could convince republicans who in the past blocked everything
By Ulrike Herrmann
[This article published 11/9/2012 is translated from the German on the Internet, http://www.taz.de/wirtschaftspolitik-in-den-USA/105207.]
Berlin taz. The worst is prevented. The republicans had very clear goals for US economic policy. They wanted to weaken bank regulation - and lower the taxes for the rich again. Instead the republicans must now live with the fact that they lost the presidential election and a crucial Senate election. Elizabeth Warren will now represent Massachusetts in the Congress.
Warren is the best known bank critic in the US. She embodies that the American dream is still true sometimes. She was born as the fourth child of a worker family in Oklahoma City - and is today a law professor at Harvard. Her victory in Massachusetts can be seen as a symbol that republicans have lost economic power.
That is progress but does not solve the political-economic problems of the US. Republicans still have the majority in the House of Representatives. In the last two years, this led to a constant blockade so President Barack Obama could not carry out any economic policy even though the number of unemployed remained alarmingly high for a long time. If the US economy recovers slightly, this will depend on the Fed. The Fed pumped $1.5 trillion into the economy to force down credit interests. The strategy of quantitative easing certainly functions but only as a make-shift. In technical jargon, the monetary policy of a central bank cannot replace the fiscal policy of a government.
THE INTEREST PARADOX
This means: low interests do not automatically lead to firms taking credits to invest in their production. They also must be able to sell their goods. But customers are lacking in the economic slack period. Thus the seemingly paradoxical situation can arise that firms do not accept any credits when interests are at zero.
The US has been in this trap for months. In his first period in office, Barack Obama actually pursued fiscal policy and crafted an economic program to generate demand. However the republicans torpedoed this and instead forced an austerity course. Now the US heads for a "fiscal cliff." If compromises between republicans and democrats are not reached, tax increases and spending cuts will automatically take effect amounting to 5.1 percent of US economic output. That would lead directly to a new recession.
THE EURO ZONE'S FRIGHTENING EXAMPLE
The democrats who manifestly cherish one hope in the frightening example of the euro zone and in the national pride of Americans are alarmed. In an interview with the CNN broadcast station in early November 2012, the former Labor secretary Robert Reich explained how the two are connected. He warned against repeating "the catastrophic austerity policy of Europeans that could plunge the whole continent into the abyss." This argument may actually work among republicans. For many of them, Europeans are "communists" whose policy can only be wrong.
However the likelihood is great that the American national pride will be activated with another theme - the energy supply. For republicans, it was a constant theme in the election campaign that the US must free itself from oil imports from "hostile states." In his victory speech, Obama explicitly took up this theme and promised to make the US less dependent on oil.
This could be a change for implementing renewable energy nationwide. However drilling in national parks could increase instead. This should be feared. Oil is needed above all so every American can drive cheaply. Solar panels and wind-parks do not help here.
From Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/New_Deal
The New Deal was a series of economic programs enacted in the United States between 1933 and 1936. They involved presidential executive orders or laws passed by Congress during the first term of President Franklin D. Roosevelt. The programs were in response to the Great Depression, and focused on what historians call the "3 Rs": Relief, Recovery, and Reform. That is, Relief for the unemployed and poor; Recovery of the economy to normal levels; and Reform of the financial system to prevent a repeat depression.
The New Deal produced a political realignment, making the Democratic Party the majority (as well as the party that held the White House for seven out of nine Presidential terms from 1933 to 1969), with its base in liberal ideas, the white South, traditional Democrats, big city machines, and the newly empowered labor unions and ethnic minorities. The Republicans were split, with conservatives opposing the entire New Deal as an enemy of business and growth, and liberals accepting some of it and promising to make it more efficient. The realignment crystallized into the New Deal Coalition that dominated most presidential elections into the 1960s, while the opposition Conservative Coalition largely controlled Congress from 1937 to 1963. By 1936 the term "liberal" typically was used for supporters of the New Deal, and "conservative" for its opponents. From 1934 to 1938, Roosevelt was assisted in his endeavours by a "pro-spender" majority in Congress.
Many historians distinguish a "First New Deal" (1933-34) and a "Second New Deal" (1935-38), with the second one more liberal and more controversial. It included a national work program, the Works Progress Administration (WPA), that made the federal government by far the largest single employer in the nation. The "First New Deal" (1933-34) dealt with diverse groups, from banking and railroads to industry and farming, all of which demanded help for economic survival. The Federal Emergency Relief Administration, for instance, provided $500 million for relief operations by states and cities, while the short-lived CWA (Civil Works Administration) gave localities money to operate make-work projects in 1933-34.
The "Second New Deal" in 1935-38 included the Wagner Act to promote labor unions, the Works Progress Administration (WPA) relief program, the Social Security Act, and new programs to aid tenant farmers and migrant workers. The final major items of New Deal legislation were the creation of the United States Housing Authority and Farm Security Administration, both in 1937, and the Fair Labor Standards Act of 1938, which set maximum hours and minimum wages for most categories of workers.
The economic downturn of 1937-38, and the bitter split between the AFL and CIO labor unions led to major Republican gains in Congress in 1938. Conservative Republicans and Democrats in Congress joined in the informal Conservative Coalition. By 1942-43 they shut down relief programs such as the WPA and CCC and blocked major liberal proposals. Roosevelt himself turned his attention to the war effort, and won reelection in 1940 and 1944. The Supreme Court declared the National Recovery Administration (NRA) and the first version of the Agricultural Adjustment Act (AAA) unconstitutional, however the AAA was rewritten and then upheld. As the first Republican president elected after FDR, Dwight D. Eisenhower (1953-61) left the New Deal largely intact, even expanding it in some areas. In the 1960s, Lyndon B. Johnson's Great Society used the New Deal as inspiration for a dramatic expansion of liberal programs, which Republican Richard M. Nixon generally retained. After 1974, however, the call for deregulation of the economy gained bipartisan support. The New Deal regulation of banking (Glass-Steagall Act) was suspended in the 1990s. Many New Deal programs remain active, with some still operating under the original names, including the Federal Deposit Insurance Corporation (FDIC), the Federal Crop Insurance Corporation (FCIC), the Federal Housing Administration (FHA), and the Tennessee Valley Authority (TVA). The largest programs still in existence today are the Social Security System and the Securities and Exchange Commission (SEC).
From 1929 to 1933 manufacturing output decreased by one third. Prices fell by 20%, causing a deflation which made the repayments of debts much harder. Unemployment in the U.S. increased from 4% to 25%. Additionally, one-third of all employed persons were downgraded to working part-time on much smaller paychecks. In the aggregate, almost 50% of the nation's human work-power was going unused.
Before the New Deal, there was no insurance on deposits at banks. When thousands of banks faced bankruptcy, many people lost all their savings. At that time there was no national safety net, no public unemployment insurance, and no Social Security. Relief for the poor was the responsibility of families, private charity, and local governments, but as conditions worsened year by year, their combined resources increasingly fell far short of demand.
The depression had devastated the nation. As Roosevelt took the oath of office at noon on March 4, 1933, the state governors had closed every bank in the nation; no one could cash a check or get at their savings. The unemployment rate was about 25% and higher in major industrial and mining centers. Farm income had fallen by over 50% since 1929. 844,000 nonfarm mortgages had been foreclosed, 1930-33, out of five million in all. Political and business leaders feared revolution and anarchy. Joseph P. Kennedy, Sr., who remained wealthy during the Depression, stated years later that "in those days I felt and said I would be willing to part with half of what I had if I could be sure of keeping, under law and order, the other half."
New Deal (1933-1938)
Upon accepting the 1932 Democratic nomination for president, Franklin Roosevelt promised "a new deal for the American people".
" Throughout the nation men and women, forgotten in the political philosophy of the Government, look to us here for guidance and for more equitable opportunity to share in the distribution of national wealth... I pledge myself to a new deal for the American people. This is more than a political campaign. It is a call to arms.
Roosevelt entered office without a specific set of plans for dealing with the Great Depression; so he improvised as Congress listened to a very wide variety of voices. Among Roosevelt's more famous advisers was an informal "Brain Trust": a group that tended to view pragmatic government intervention in the economy positively. His choice for Secretary of Labor, Frances Perkins, greatly influenced his initiatives. Her list of what her priorities would be if she took the job illustrates: "a forty-hour workweek, a minimum wage, worker's compensation, unemployment compensation, a federal law banning child labor, direct federal aid for unemployment relief, Social Security, a revitalized public employment service and health insurance."
The New Deal policies drew from many different ideas proposed earlier in the 20th century. Assistant Attorney General Thurman Arnold led efforts that hearkened back to an anti-monopoly tradition rooted in American politics by figures such as Andrew Jackson and Thomas Jefferson. Supreme Court Justice Louis Brandeis, an influential adviser to many New Dealers, argued that "bigness" (referring, presumably, to corporations) was a negative economic force, producing waste and inefficiency. However, the anti-monopoly group never had a major impact on New Deal policy. Other leaders such as Hugh Johnson of the NRA took ideas from the Woodrow Wilson Administration, advocating techniques used to mobilize the economy for World War I. They brought ideas and experience from the government controls and spending of 1917-18. Other New Deal planners revived experiments suggested in the 1920s, such as the TVA.
The "First New Deal" (1933-34) encompassed the proposals offered by a wide spectrum of groups. (Not included was the Socialist Party, whose influence was all but destroyed.) This first phase of the New Deal was also characterized by fiscal conservatism (see Economy Act, below) and experimentation with several different, sometimes contradictory, cures for economic ills. The consequences were uneven. Some programs, especially the National Recovery Administration (NRA) and the silver program, have been widely seen as failures. Other programs lasted about a decade; some became permanent. The economy shot upward, with FDR's first term marking one of the fastest periods of GDP growth in history. Though a downturn in 1937-38 raised questions about just how successful the policies were, the great majority of economists and historians agree that they were an overall benefit.
The New Deal faced some vocal conservative opposition. The first organized opposition in 1934 came from the American Liberty League led by conservative Democrats such as 1924 and 1928 presidential candidates John W. Davis and Al Smith. There was also a large but loosely affiliated group of New Deal opponents, who are commonly called the Old Right. This group included politicians, intellectuals, writers, and newspaper editors of various philosophical persuasions including classical liberals and conservatives, both Democrats and Republicans.
The New Deal represented a significant shift in politics and domestic policy. It especially led to greatly increased federal regulation of the economy. It also marked the beginning of complex social programs and growing power of labor unions. The effects of the New Deal remain a source of controversy and debate among economists and historians.