Quantitative easing is a new name for an old concept – governments taking a role in stimulating flagging or flat-lining economies.
Old fashioned economic stimulus has a new name for the twenty-first century. Concepts such as Keynesianism, state intervention and pump priming have been replaced by quantitative easing. According to Bob McTeer, quantitative easing is “different from traditional monetary policy only in its magnitude and pre-announcement of amount and timing.”
And if we accept quantitative easing is not so very far removed from traditional monetary policy, it merely becomes the latest in a long line of government economic intervention. Nick Clegg told the Liberal Democrat conference in 2012 that Britain should invest its way out of the downturn.
Across the Atlantic, and were similar demands for the Obama administration to use the government’s economic heft to create jobs. This fueled the loud and increasingly antagonistic political debate over how successful fiscal stimulus policies are, and both proponents and opponents are looking to the past to reinforce their position.
Since the Second World War, the US Congress has passed economic stimulus bills during five of the past seven recessions — in 1964, 1971, 1975, 1981 and 2001. Jason Furman of the Brookings Institution’s Hamilton Project has noted that measurestaken in the 1960s and 1970s were relatively ineffective. This changed with prompt intervention in 1981, and by 2001 tax cuts came as the US slid in to recession, rather than following the start of economic recovery.
The Great Depression and New Deal
The golden age of government intervention came amidst the economic chaos and social despair of the Great Depression. In the period starting with the crash of the US stock market on Black Tuesday (29 October 1929) and the inauguration of President Roosevelt (4 March 1933) the US economy crumpled and confidence evaporated.
Industrial production almost halved, unemployment sextupled and foreign trade collapsed by 70% as America stumbled through the darkest days of the depression. Prices slumped by a third as the US entered a devastating deflationary spiral, compounding the economic and fiscal pressures. All this combined to give Roosevelt the worst Presidential inheritance since Lincoln’s receipt of a fracturing union in 1860.
Roosevelt’s policy response was immediate, energetic and arguably successful. In his election campaign he had promised a new deal for the American people, and this was delivered in the first hundred days of his frenetic administration. The closure and reform of the entire banking system was followed by federal work programmes (FERA, WPA, CCC and the NRA) and programmes to revitalise the agricultural sector and the poorest rural areas (such as the iconic Tennessee Valley Authority). So many acronyms and initialisms emanated from FDR’s White House that they became known as the ‘Alphabet Agencies’.
So does the New Deal offer lessons to inform today’s debate on stimulus? Unfortunately, it can be used as fuel for both sides of the debate. Proponents argue that the New Deal pushed the US economy into recovery. Keynesian economists suggest it helped, but did not go far enough (FDR was still keen to balance the books and was forced into reverses from 1937 by a resurgent Republican Party).
Opponents suggest the New Deal prolonged the Depression with Cole and Ohanian stating that “New Deal policies are an important contributing factor to the persistence of the Great Depression”. They have quantified their theory, and extrapolated that New Deal policies prolonged the Depression by seven years.
Their findings are echoed by Gallaway and Vedder, who argue that without the New Deal, the unemployment rate would have been 6.7% instead of 17.2%. But this interpretation is not without critics, including DeLong, who states that this work produces “flawed conclusions” based on “flawed foundations”, and the entire foundation “is made out of mud”
Lincoln’s New Deal
The unprecedented economic hardship of the Great Depression resulted in unprecedented levels of government intervention. But Roosevelt’s New Deal was not the USA’s first government stimulus package. Abraham Lincoln fostered an economic development programme that featured some of the most audacious displays of governmental involvement.
His administration oversaw the birth of the First Transcontinental Railroad, linking America from coast to coast and stimulating the development of vast expanses of her lonely interior. Under the Pacific Railroad Act 1862 the Central Pacific and Union Pacific Railroads received generous federal subsidies of both cash and land, encouraging them to forge ahead with ambitious line building plans. Lincoln was,according to Stephen Ambrose, “the best and most powerful friend the transcontinental railroads ever had.”
Grants of land were also the staple of his expansion of higher education through the foundation of Land Grant Colleges. This programme led to the establishment of colleges throughout the US, including prestigious establishments such as the University of California, MIT, the University of Vermont, Texas A&M and Cornell University.
Other Lincoln policies included Federal agricultural improvement programmes, protectionist tariffs which forged the development of the US steel industry and national control over the banking industry to free capital for investment. Some claim this set the scene for the rise of US economic dominance. Others suggest it precipitated the Panic of 1873.
The birth of dirigisme and Colbert
Crossing back to the Old World, and it is obvious that state intervention in the economy is as old as economic life. Whether it is the ancient Egyptian state grain stores orfixed price bread and wheat distribution under the Roman Republic, states have always meddled in the economy. One of the most concerted attempts to go a step further and direct economic development was found in France under King Louis XIV.
Jean-Baptiste Colbert was the Minister of Finance of France from 1665 to 1683 where hard work and thrift made him a respected advisor. He intervened in industrial policy, establishing the Manufacture royale de glaces de miroirs (the Royal Glass Works) to replace dependence on imported Venetian glass. The company continues to this day as one of France’s leading conglomerates under the name Saint-Gobain S.A.
Colbert established the French merchant marine, protected the fledgling Compagnie française des Indes orientales (French East India Company), reformed medieval guilds and restrictive economic practises and oversaw construction of the Canal du Midi. He eventually balanced France’s chaotic budgets, and returned the monarchy to surplus. All of this would be undone in Louis XIV’s numerous wars of expansion, wrecking Colbert’s carefully nurtured prudence.
Out of all of this the only clear lesson in the history of economic stimulus is that there is no clear right or wrong. Policy makers are damned if they do and certainly damned if they don’t.