Can Barack Obama Strike a 'New Deal'?

 

According to the statement released on November 15, 2008 at the recently concluded G20 Summit in Washington, “During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence.” Furthermore, it stated, “Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets or take into account the systemic ramifications of domestic regulatory actions...” The G-20 also agreed that the “inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcome” further added to the economic turmoil.

 

There is an emerging sense that the USA is revisiting the sepia pages of history as the economic crisis gains monstrous proportions by the day. The summer of 1929 saw clear indications that an economic depression that was bound to have a long-lasting impact was on the anvil given that production was on the decline and workers were rapidly losing jobs. Moreover, stock markets became places where the Americans expected to make huge fortunes by gambling on the price of stocks although the apposite function of the stock market was to provide facilities for the investment of capital in productive enterprises. Crucially, this was not happening anymore. As a result, the prices of stocks kept on rising. But the bubble expectedly burst and by October 1929, the stock prices had begun to fall by almost 80 percent at few places. The collapse of the stock exchange disrupted the whole process of circulation and distribution of wealth. These events marked the beginning of a depression that visited almost every country in the world and rocked the foundations of the economic structure of the West. Consequently, the businessmen stopped investing money in expansion of corporations, consumers began to buy less goods resulting in a decline of purchasing power and the 'durable' goods that were very crucial during the period of the "Roaring 1920s" were not in demand anymore. Production of capital goods and durable consumer goods declined directly impacting upon the growth of unemployment. The scene appears quite familiar today. 

 

During the election campaign of 1932, the Democrats focused exclusively on a balanced budget, cut in federal expenditures, stable value for currency, more federal spending on relief and public works, and non-interference in private enterprise. Roosevelt was elected at such time by the Democrats who were still considered a party controlled by the Southern conservatives and the machine politicians from the Northern cities. His support base comprised primarily of the labour force, farmers and the middle class. The three members who were most closely associated with the New Deal were Harold Ickes (Secretary of the Interior), Henry A. Wallace (Secretary of Agriculture) both of whom were former progressive Republicans and Frances Perkins (Secretary of Labor) who was a social worker.

 

As a matter of fact, the New Deal was aimed at two most fundamental aspects; first, to save the capitalist system by bringing about recovery; and secondly, to check bankruptcy and bring back business confidence. It brought about a general increase in prices and wages and also increased the consumer purchasing power. President Roosevelt opined that the economy was out of balance and that ought to be corrected by striking a balance between agriculture and industry, the wage earner, the employer and the consumer.

 

The National Industrial Recovery Act of June 1933 became the key pillar of the recovery programme during the New Deal period. This Act authorized the President to regulate banks, stabilize industrial prices and raise wages in order to stimulate the US economy to recover from the Great Depression. In the 1936 presidential election, Roosevelt campaigned on his New Deal platform and carried every state except Maine and Vermont. However, the Roosevelt administration cut spending and raised taxes, which in turn provided an impetuous economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections. According to Paul Krugman at The New York Times, "What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy's needs."

 

Indeed, the Obama administration too, would have to balance the delicate beam so that the jubilation of an Obama victory can withstand any potential economic misstep. "Change" is what Obama has incessantly called for and that is precisely what he will be expected to deliver as the US along with the world appear to be plunging deep into the financial muddle. Undoubtedly, the elation of the Democrats will surely be short-lived if they do not succeed in bringing about economic recovery. 

 

(Disclaimer: The views expressed in this article are those of the author and do not represent the views either of the Editorial Committee or the Centre for Land Warfare Studies)