Jonny Wilkinson looks back at what worked then, and explains why Barack Obama’s stimulus package is the right way to go.

After almost a decade of partying, the wretched hangover has finally kicked in. It hit the stock market in the final quarter of 2008, and now it has hit home. Thousands of Americans down on their luck across America have joined others setting up camp underneath bridges, next to railway lines and even in fairgrounds. ‘Tent cities’ now scourge the urban landscape; filled with unemployed electricians, truck drivers and plumbers, they reek of drug use, prostitution and violence. The notorious ‘New Jack City’ in Fresno, California, named after the violent, drug-themed 1991 film, is perhaps the nastiest of the lot. ‘‘A filthy collection of rain- and wind-battered tents in a garbage-strewn lot,’’ is the New York Times’ grim assessment.

Not since the 1930s has the First World, let alone its zenith the United States, seen anything like this inside its own borders. Admittedly on a smaller scale, these camps are miserably reminiscent of the illegal shanty towns, or ‘Hoovervilles’ that spread like a brush fire across the United States during the Great Depression. If Barack Obama wants to abolish these cities and, with them, the deepening recession, some argue he should take heed of some of the lessons learnt from that decade of abject strife some seventy years ago, when Franklin D. Roosevelt was at the helm.

What worked then

It is difficult to pinpoint exactly why the Great Depression was so severe. Many scholars say it was caused by a lack of government intervention that would otherwise have curbed the unrestrained markets of the Roaring Twenties. Others say that the Wall Street Crash in 1929 would have simply turned into a manageable recession had the banks been rescued. But regardless of its causes, the effects of the Great Depression seem all too similar to what we are beginning to see today.

Roosevelt became the incumbent of the White House three years into the Great Depression when it showed few signs of picking itself out of the economic quagmire. By 1933 the banks were in a state of absolute ruin, 1,000 of them entirely bankrupt and not one giving out loans. Employment was at 25%, 15% higher than the alarming levels of today. Roosevelt’s idea to lift the economy out of its relentless downturn was a hotchpotch of schemes known as the New Deal designed to stimulate growth, first implemented in 1933. Professor Ross, an economist at the University of Cape Town, argues that the relative success of the New Deal came specifically from its stimulus packages; a series of Keynesian measures to promote government intervention (tax cuts and expenditure) aimed at revitalising the economy.

How it will work now

Current economists and politicians in both Congress and the media who object to such fiscal methods would do well to look back to what it did seventy years ago. The series of stimulus spending programmes looked at on their own definitively encouraged the 1930s economy out of a continual downturn. Moreover, it was the advent of World War Two at the end of the Thirties that can arguably dispel any doubts about the value of Federal spending. It is argued by some economists that it was America’s sudden need to spend that finally lifted the economy out of its mess.

The Great Depression was arguably the result of an array of weaknesses in the global and American economy, cured eventually by a catastrophic world war of epic proportions. The current global recession has been caused by other factors; its main contributor the inevitable bursting of the housing bubble. Despite its differences to the current recession, the crucial understanding that can be learnt from the Great Depression is that stimulus spending does help an ailing economy. The Congressional Budget Office, an independent American organisation, says that the stimulus package signed by Obama on the 17th February is indeed likely to curtail the severity of the recession, even if it won’t kill it out right. The package is a classic case of Keynesian economics. It is a package of $787 billion, focused on infrastructure expenditure and tax cuts, aimed to maximise political support. The problem we may find is exactly how the Obama Administration will go about putting it in place.

Possible potholes

There is little doubt from studying the Great Depression that stimulus spending does work. The problem is how far it can reach. Cracks could also appear in its implementation. Is it better, for instance, in the hands of the tax payer than in the hands of government? There was a lot of controversy over the huge influence of the ‘Buy American’ clause in the original stimulus plan, which some argue is heavily protectionist and could lead to trade wars. By the time the final plan was signed, however, the Administration had felt the pressure to honour its international trade obligations and had the clause watered down somewhat. Some say that it is still not enough, with critics at home and abroad arguing that it could still easily lead to a souring of trade relations.

In a report drawn up by the BBC, Professor Michael Porter of the Harvard Business School says there is no question as to whether the suffering American economy needs a stimulant similar to those used during the Great Depression. But finding and tackling the most severe roots of the problem is what is most important. Porter argues that the education system in America has been diabolically stagnating over the last 20 years, and argues that pumping money into education would be far more useful. Rather that, he claims, than simply shape nearly half of the $787 billion package around problematic tax cuts, which should only work if people spend rather than save the extra income they will earn. This could prove difficult if it takes a while for the signs of a recovering economy to filter through to the average American.

The other, and far more acute, problem a stimulus package alone won’t address is the state of the banks. As noted earlier, the banks in 1933 were in a complete vegetative state; the cause of much angst for Roosevelt when he took office. The recession now could well make a great depression of itself if the banks are not liberated from their toxic assets that arose from many an unpaid mortgage. Indeed, some argue that if it wasn’t for an idle Federal Reserve during the bank crisis of the early 30s, the Great Depression would never have happened. Ross argues that Barack Obama must endorse further federal spending and push through with his plan to indirectly buy up $1trillion worth of toxic assets from banks, arguably the wettest sand in the gears of the economy. The plan is to encourage private investors to buy up auctioned assets with significant help from government loans. This way, investors will bear relatively little of the risk involved.

If President Obama wants to leave a substantial legacy, then taking heed from Roosevelt’s term would leave him in good stead. Of course Obama faces a situation nowhere near as bad as that which Roosevelt did in the first 100 days of his presidency, but if he isn’t aware of the history behind him, he could well send America and the rest of the world plummeting back into the 1930s. Tent cities like New Jack will become the norm, a clear sign of how America slid pitifully into the economic swamp it thought it had conquered for good. Obama must evade this nightmarish scenario not just for the sake of America, but for the deliverance of the entire international community.

Jonny Wilkinson is a UCT student