Historical comparisons can be powerful, even when they need intellectually to be handled with care. There is a global consensus that the financial crisis of 2008 is the worst since the Great Depression of the 1930s. The bursting of asset price bubbles, the collapse of many financial institutions, the freezing of credit, the contraction of effective demand, the economic slowdown that has spared no country or continent, recession across the developed world, the adverse effects on the livelihoods and food security of hundreds of millions of people in developing countries, deep forebodings of worse to come, and an underlying fear that the real economy will not turn round for some years have combined to depress people’s spirits worldwide. During such a time of troubles, the clock seems to move very slowly — and it has moved very, very slowly for the American people (nearly 67 million of whom voted for ‘yes we can’ change). They have huge expectations of the role of government in bringing economic order to their lives. They find the transition from a deeply unpopular administration whose policies they hold responsible for the present mess to a new dispensation that will take over in January 2009 excruciatingly long and costly.
They worry over the power vacuum in the world’s largest and most powerful economy, which is in the grip of not depression but what Nobel Prize-winning economist Paul Krugman calls depression economics. He explains what he means by this in his accessible new book, The Return of Depression Economics and the Crisis of 2008, and also in a recent newspaper column: “for the first time in two generations, failures on the demand side of the economy — insufficient private spending to make use of the available productive capacity — have become the clear and present limitation on prosperity for a large part of the world” and “the usual tools of economic policy — above all, the Federal Reserve’s ability to pump up the economy by cutting interest rates — have lost all traction.” Doing something, almost anything, to get credit to flow again and create demand to make use of the economy’s capacity are the keys to recovery, which means John Maynard Keynes “is now more relevant than ever.” For the United States, Professor Krugman favours a major stimulus package of the order of $600 billion. He also advocates throwing out of the window faint-hearted notions of fiscal prudence and adopting, as Franklin D. Roosevelt did in the 1930s, a strategy of trying things out.
“The country needs and, unless I mistake its temper, the country demands,” FDR famously proclaimed in 1932, the year this patrician who was considered a political lightweight swept into historical ignominy an ideologically blinded, do-nothing President Herbert Hoover, “bold, persistent experimentation. It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something.” These words (ghosted, incidentally, by a reporter) anticipated the New Deal and the thrilling, if flawed, experimentation of FDR’s first hundred days in office. The 32nd President of the U.S. was not known to be well versed in economics: when Lord Keynes, an admirer of his programme, visited him in the White House in 1934, FDR was bewildered by the Englishman’s “rigmarole of figures” and supposed him to be “a mathematician rather than a political economist” while the visitor confessed that he had expected the President to be more economically literate.
Seventy-four years later, an intellectually better prepared, if politically less experienced, President-to-be faces a “crisis of historic proportions” (to use his own words). He knows he won big, by close to 7 percentage points, on November 4 thanks largely to the financial crisis and on the strength of his promises to restructure and reform the economy in a fairer, more equitable, and sounder direction. But Mr. Obama’s medium- and long-term economic agenda has been overtaken by crisis events. In response, he has promised big, bold, and far-going action to jolt the economy back into shape. He will start his presidency with a huge legislative advantage: a Democratic hegemony in Congress. The Obama stimulus package is widely expected to surpass the expectations of the big league Keynesians. The President-elect has even promised that his economic recovery plan would create 2.5 million new jobs by 2011. He has announced a high-powered economic team — led by Tim Geithner, a fiscal bail-out top gun, and Larry Summers, a card-carrying Keynesian — that seems to have raised confidence levels on both Wall Street and Main Street. The man who would have no truck with the November 15 Washington Summit on Financial Markets and the World Economy has now made it a point to emphasise that the economic crisis was “no longer just an American crisis” and that his administration would reach out to countries around the world to craft a global response. But that is not all. Unlike President-elect FDR who in early 1933 rebuffed all efforts by lame-duck President Hoover to draw him into joint proclamations to tackle the banking crisis, who refused to “tie [his] hands” before becoming President, Mr. Obama has found his ‘we have only one President at a time’ gambit to be politically unsustainable. So he has let his good personal rapport with George W. Bush (FDR and Hoover had poisonous personal relations) develop into some kind of coordination to calm the jittery financial markets.
The size, orientation, and details of the Obama stimulus package aside, the key question on the minds of the historically minded is: will President Obama show the history-making leadership qualities — the self-confidence, the spirit of experimentation, the hopefulness, the warm empathy with working and middle class people, the first class temperament — that FDR brought to handling the unprecedented challenge of the Great Depression, which was actually brought to an end only by the Second World War?