To Spend or Not To Spend

To examine the effect the stimulus had on the economy, it’s necessary to understand the economic philosophy behind it while parsing the figures. The conflict between Democrats and Republicans on this issue is largely a debate over the economic theories of two men: Milton Friedman and John Maynard Keynes.

Mitt Romney called it “the biggest, most careless one-time expenditure by the federal government in history.” Paul Ryan characterized it as “a case of political patronage, corporate welfare, and cronyism at their worst.”

“It” was the American Recovery and Reinvestment Act of 2009, colloquially known as the “Obama Stimulus.” The Republican narrative is that Americans would have been better off not taking on more debt and allowing the omniscient markets to work themselves out. (This argument was noticeably absent in 2008 when President George W. Bush signed a stimulus bill for more than $150 billion.) Before  Obama signed his stimulus bill into law, House Republicans had voted against it. Every single one of them. In the Senate, only three Republicans approved the bill.

So we know where the parties stood in 2009—pretty much where they stand today. Democrats largely believe that the stimulus prevented the complete, Depression-like collapse of the economy. Republicans believe it had no effect on the economy and, furthermore, the additional debt will be our ultimate undoing. Republicans are correct to say that the stimulus had few offsetting revenues and blew yet another enormous hole in the budget deficit. They did not make this argument, however, when our country decided to wage two decade-long wars abroad while simultaneously reducing taxes. But the reality of the unfunded stimulus expense exists. So the question remains: Did the stimulus work?

Both Democrats and Republicans point to FDR’s New Deal to answer this question historically. Republicans take the short view that FDR’s programs had little effect on the nation’s economy as the economy double-dipped in 1937. Democrats take the long view that this date coincided with the Roosevelt administration’s decision to back off federal spending and that a resurgence of federal funding ultimately mitigated the decline. There is general consensus that the tipping point that put the nation back on a path toward prosperity was World War II and the wartime economy. Despite this philosophical harmony, Republicans are still loath to admit that the top marginal income tax rate in 1941 was 81 percent, and by 1945 it was 94 percent. That’s how you pay for war.

So while it can be instructive to look back and apply historical lessons to the present, the picture is incomplete because the circumstances are vastly different. To examine the effect the stimulus had on the economy, it’s necessary to understand the economic philosophy behind it while parsing the figures. The conflict between Democrats and Republicans on this issue is largely a debate over the economic theories of two men: Milton Friedman and John Maynard Keynes.

Born in 1912, Friedman would come to be recognized as one of the great economic minds of the modern era. A Nobel Prize-winning economist who taught at the University of Chicago, Friedman held a wide range of core libertarian views and is often credited as one of the principals of the ideology. Throughout his career he argued the benefits of monetary policy and the folly of fiscal policy. Think TARP versus stimulus. In other words, maneuvering liquidity through the system in a centralized fashion was an appropriate measure of government intervention whereas providing government funding for programs via the Treasury was not.

This is not to say that Friedman would have approved of President George W. Bush’s TARP “bailout” of the banks (Friedman died in 2006 before the financial world came unraveled) or even of the Federal Reserve itself. In a perfect world, Friedman would have abolished the Federal Reserve altogether, which is a common rallying cry among Libertarians who also promote a return to the gold standard no matter how economically or politically impossible this would be. Again, the theory being that private markets would be more efficient, accurate and apolitical with respect to pegging the value of currency in real time.

But if Friedman’s economic policies have dominated the years since Gerald Ford was in the White House, it was English economist John Maynard Keynes who dominated the years prior, beginning in 1933 with his paper, “The Means to Prosperity.” Keynes’ recommendations for dealing with recessions and depressions would fundamentally alter Europe and America’s approach to the Great Depression. Keynes’ first assumption, considered revolutionary at the time, was called the “paradox of thrift.” Simply put, if businesses and consumers collectively tighten their belts during difficult times, the effect would be a downward spiral in the demand for goods and services.

Under Keynes’ theory, this self-perpetuating loop of plunging demand would necessarily result in a decline of both profitability and confidence. Keynes believed the antidote was government spending. Specifically, the further the funding went down the economic chain the better. Businesses and consumers, those with the greatest need for liquidity, were likely to circulate government funds through the economy faster than institutions such as banks that might be more prone to hold onto liquidity. The net result, due to what Keynes coined the “multiplier effect,” would be spending that works its way through the normal economic channels via the purchase of goods and services at the consumer level, labor and equipment at the business level.

A great deal of attention is paid to the short-term effects of spending on infrastructure as large public works projects during the Depression became the most visible and lasting testaments to Keynesian economy theory during the Roosevelt era. But many Keynesian theorists argue that these types of projects also contribute to the long-term health of the economy, with the best possible result being partnership with, and ultimately transition to, private industry. A great example of this is the Tennessee Valley Authority (TVA) established under FDR, which ultimately became a private utility. But long-term infrastructure projects don’t have the immediate effect of direct government spending at the bottom levels of the economy.

Larry Summers, the notoriously prickly economist, has had a remarkable career serving in both the Clinton and Obama administrations (Summers was Treasury Secretary briefly under Clinton) and as one-time president of Harvard University. Tapped to join Obama’s transition team, he is credited with determining the strategy for bailing out the faltering American economy. In his book, The New New Deal, Time magazine senior staffer Michael Grunwald writes, “At Brookings, [Summers] proposed a technocratic approach to Keynesian stimulus that has dominated the debate ever since. A stimulus package, he argued, should be timely, targeted, and temporary.”

This guiding philosophy would result in a three-tiered approach to Obama’s stimulus. The first would be accomplished through tax breaks for the vast majority of Americans. The second would be through entitlement spending such as extending unemployment benefits and prolonging health insurance coverage for laid-off workers. It also provided direct aid to states to help plug budget gaps to prevent the layoffs of teachers and reductions to Medicaid. The third was investment in programs deemed “shovel-ready.”

This last point is somewhat controversial because few, if any, infrastructure projects can begin work at a moment’s notice. But on this, Obama was clear that funds would be found to target America’s aging infrastructure and invest in new projects on the drawing board, even if their timetables weren’t immediate.

Keynesian economists such as Joseph Stiglitz quickly lauded Obama’s plan, though most of them  believed the $787 billion package was only about half of what was required to properly address the crisis. Another Keynes disciple, Nobel Prize-winning economist and columnist for The New York Times, Paul Krugman, has been extremely vocal that the stimulus, while swift and necessary, was “woefully inadequate.” Nearly everyone on Obama’s transition team would concur, but the thought of a stimulus package topping $1 trillion was politically radioactive. Besides, almost everyone involved at the time hoped for a second crack at stimulus funding in Obama’s first term. And while most of Obama’s political advisors understood how difficult this would be, no one could have predicted how hard the Republican Party was preparing to fight against any new proposal from the Democrats.

Perhaps the most astounding revelation in Grunwald’s book is how Obama’s inner circle — especially the most cynical among them like the explosive Rahm Emanuel or acerbic Larry Summers — understood that the package was political suicide. In fact, they were prescient in this regard as the stimulus provided the freshly-routed GOP with a rallying cry and a strategy to take back control of the House of Representatives during the 2010 mid-term elections.

In reality, the Recovery Act did more than just pump taxpayer dollars temporarily into the economy and drive up the national debt. It put federal funds into the hands of agencies and consumers who had the ability to spend them in a timely fashion. This came in the form of tax cuts for the middle class, an extension of unemployment benefits and medical coverage, state aid to support endangered Medicaid programs, healthcare and student loans. It was the ultimate return to Keynesian philosophy.

Opposition to blanket stimulus funding isn’t fundamentally misguided. After all, no government can sustain unlimited subsidies without someday having to recoup these costs. This brings us to the second half of Keynes’ theory. If the government is supposed to aid a recovery during a recession by pouring funds through the economy, then it must likewise increase revenue during the boom times that follow. There are only two ways to do this: raise taxes or cut spending. Or both. The problem is that we haven’t meaningfully done either in decades.

While cutting spending is very much a part of the Republican narrative, increasing taxes is anything but. In a perfect world of no government intervention or regulation, the markets would simply figure it out and restore balance because recessions and depressions are, after all, bad for business in the long run. Having said that, this type of “boom and bust” behavior creates great potential short-term benefits, as volatility is a savvy investor’s best friend. But Keynes never meant to eliminate the boom and bust nature of the economy. His policies were intended to mitigate the depths and the peaks.

Shedding all government spending and letting the markets work it out was precisely the advice President Hoover received from Treasury Secretary Andrew Mellon after the market crashed in 1929. Hoover didn’t actually follow his advice. Instead, he set in motion many of the public works projects and federal spending plans continued by Franklin Roosevelt. The Depression was hung around Hoover’s neck in part because he chose to portray an aura of calm and confidence even though Rome was indeed burning.

Hoover fought vigorously behind the scenes for some of the programs that would make Roosevelt one of the most popular presidents of all time. Hoover’s biggest problem was actually Roosevelt. Because Hoover rarely took the opportunity to point out that the economy collapsed as a result of his predecessor’s policies and then failed to defend himself against Roosevelt’s subsequent attacks, he became unfairly synonymous with the Great Depression. This little bit of history was not lost on Obama.

Today, comparisons abound between the circumstances surrounding both the Great Depression and the (dare I say) current depression. Politicians and historians will forever debate their similarities and how they both arrived. But there are also current comparisons we can draw relating to Keynes’ paradox. In Europe today, where austerity is the mainstay of the economic recovery attempt, unemployment remains untenably high. In both Spain and Greece it hovers around a bruising 24 percent. Before the stimulus, the US economy shed 800,000 jobs in January of 2009 and GDP growth was negative. Since the beginning of 2010 America has added an average of 143,000 jobs every month and experienced positive GDP growth, although everyone acknowledges it’s a slog. But this kind of forward momentum amply defends the stimulus.

Beyond facts and figures, be sure to listen closely for what you cannot hear. Perhaps the most incredible aspect of the stimulus is the lack of fraud associated with the spending. The oversight has been so rigorous and the process so astoundingly transparent that almost no one is crying foul at the veracity of the disbursements. Instead, opponents gnash their teeth and shout at the rain about Solyndra, the failed California solar plant manufacturer, at every turn. And that’s about it. Forget the fact that the mechanism for funding Solyndra was established in 2005 and Solyndra was selected to participate in the program in 2007; if opponents of the stimulus want to make this their Alamo, so be it. Out of nearly $800 billion invested, one failed solar manufacturer is all you’ve got? Even Bain Capital would have relished this level of success.

So, did it work? I side with Krugman. The answer is that the stimulus package was a good start, but it should have been bigger. Nearly all of those involved in creating the stimulus recognized at the time that it would prevent catastrophe but fall short of prosperity. Unfortunately, our politics are so poisoned today that uttering the phrase, “should’ve been bigger,” is truly the third rail. There is no more room for a reasoned debate in America. But the fact remains that without the stimulus several state budgets would have collapsed, all but bankrupting Medicaid, far more roads and bridges would have fallen further into disrepair, middle-class Americans would have had less in each paycheck and millions more people would have fallen off of the unemployment rolls and into poverty.

All told, Ryan’s claims of  “patronage” and “cronyism” fell apart the moment he lobbied to divert federal funds to his district; Romney’s claim that the stimulus was “careless” underscores either a deep misunderstanding of the shrewd, tactical and successful nature of the program or a further illustration of his belief that no person, corporation or municipality deserves financial support, even under the most severe economic circumstances. Romney’s recent disdainful comments about “47 percent of Americans” may give weight to the latter sentiment, which should give us all pause.

The Fundamentals of Fundamentalism

The circumstances that promoted the rise of the evangelical Christian doctrine in the 1920s and ’30s bear a striking resemblance to our current situation.

The sight of so many conservative Christian presidential candidates attempting to out-holy one another during the GOP debate this past weekend was curious but not without precedent. The role of Christianity in the American political system predates the formation of the nation itself, with the more fundamentalist aspects playing a larger part during difficult economic periods. While it can be said that religion informed the political ideologies of the men who established the framework of our nation, fundamentalism was largely relegated to the fringes of American politics until the first part of the 20th Century.

The circumstances that promoted the rise of the evangelical Christian doctrine in the 1920s and ’30s bear a striking resemblance to our current situation and help to explain—as history often does—why right-wing religious views are influencing the social, political and economic platforms of the GOP candidates.

Prior to the Great Depression, the evangelical set were more like babbling mystics than an influential political force. Think Jimmy Swaggart or Jim Bakker. The mainstream transformation came when successful, white Christian men who accumulated and maintained great wealth during this time were looking for absolution of the guilt they felt while their fellow countrymen fell upon hard times. Enter Abraham “Abram” Vereide, the man perhaps most responsible for the modern fundamentalist Christian movement in America.

Vereide was able to coalesce the successful strategies and teachings of other soul-surgeons and evangelists of his era. By rationalizing the financial success of his followers as the earthly manifestation of Christ’s will, he was able to mold a new Christian doctrine that recognized wealth, power and influence as deliberate and divine endowments. As it turned out, mass absolution and wider acceptance came in the form of Jesus Christ as seen through the lens of Bruce Barton’s bestselling book, The Man Nobody Knows.

Barton, who is more enduringly known as the second “B” in the ad agency BBD&O, which exists even today, published The Man Nobody Knows in 1925. It was an instant phenomenon. Barton’s Jesus was the ultimate winner, the consummate salesman. The book was a pocket guide to winning with Christ that helped extricate Christianity from purely religious constraints and bring it to a wider audience as only a professional adman could.

By 1933, when the nation was in the throes of the Depression, Vereide’s organization began to take shape. The political outgrowth of his movement was formalized in Seattle with the creation of the New Order of Cincinnatus. The parallels between the New Order and the Tea Party today are undeniable. Like the Tea Party, the New Order cherished free market ideals and conservative morality, and organized against taxes and big government.

Vereide’s followers heartily rebuked then-President Herbert Hoover for bailing out Wall Street bankers whom many Americans believed to be responsible for the stock market crash of 1929 just as the Tea Party chastised the Bush administration for doing the same with the Troubled Asset Relief Program (TARP). Both groups found their footing, however, railing against the subsequent administrations for battling economic downturns with public works projects, specifically FDR’s New Deal and Obama’s Stimulus Package. Likewise they share similar views regarding social welfare programs, and were able to elect candidates to battle these reforms. Even the great adman Bruce Barton went on to secure a seat in Congress under the slogan “Repeal a Law a Day.”

Vereide’s organization lives on today through the efforts of a rather enigmatic figure named Douglas Coe, who took over the group upon Vereide’s death in 1969 and transformed it into one of the most influential and highly secretive organizations in the modern era. The only public recognition of the group known today simply as “The Family” is the National Prayer Breakfast held every year in Washington, where political and business leaders assemble to pay tribute to Douglas Coe’s cabal. Most of what transpired beyond the breakfast remained a complete mystery until Jeff Sharlet, a reporter and expert on religion, stumbled upon Coe’s secret world, which he unraveled in his 2008 book titled The Family: The Secret Fundamentalism at the Heart of American Power and his 2010 follow-up C Street: The Fundamentalist Threat to American Democracy.

Sharlet painstakingly details the roots of fundamentalism in America and illustrates the many ways in which The Family’s perversion of Christianity as a doctrine of power has transformed modern political life in America. The ultimate testament to the work of The Family is fully on display in the platforms of candidates such as Michele Bachmann, Rick Perry and Rick Santorum—not to mention the political juggernaut waiting in the wings that is Sarah Palin. But before Bachmann there was Frank Buchman, founder of “Moral Re-Armament,” whose closeted reputation was more Marcus Bachmann than Michele, if you catch my drift. Before Palin there was Arthur Langlie, figurehead of the New Order of Cincinnatus, and before Perry there was Bruce Barton.

When placed in historical context, the great revelation of the Tea Party is that there’s nothing particularly innovative about it. As young as our nation is, we’re now old enough that everything old is new again. In Vereide’s time Vladimir Lenin was the Osama bin Laden of the day and Communism was today’s Islam. The rise of the German economy and the grand display of Nazism in the 1936 Olympics openly mocked America’s failing economy in the midst of the Depression just as China’s present-day ascension and the grand pageantry of the 2008 Olympics in Beijing taunted Americans during the Great Recession. And just as FDR became the bête noire of the New Order of Cincinnatus, so too is Barack Obama to the conservative, evangelical wing of the Tea Party.

What I find interesting about the parallels between our past and present circumstances is that there is room for both sides of the debate to find comfort. Christian fundamentalists can take heart in the notion that their wing of the Tea Party is an idea whose time has finally come while opponents of radical evangelicals may take solace in the fact that fundamentalism ebbs and flows with the vagaries of the economy. It’s simply a matter of perspective, or perhaps it’s a lack thereof.