The most serious economic and financial crisis since the Great Depression has been a source of recrimination, between the political left and right and between business and government, unmatched in 80 years. Business interests were hostile to virtually all elements of president Franklin Delano Roosevelt’s New Deal. Businessmen polled in 1939 by the American Institute of Public Opinion overwhelmingly blamed uncertainty caused by administration policy and the president’s hostility to business for impeding economic recovery. FDR in turn disparaged his critics as self-serving “economic royalists.” “Government by organized money is just as dangerous as government by organized mob,” he declared in 1936, using language that would make President Barack Obama’s speechwriters blanch.
But what we have not had in response to this crisis is far-reaching social, economic and financial reform comparable to that in the 1930s. Obamacare has raised the share of Americans with health insurance. But it is a small step by the standard of federal initiatives in the 1930s such as social security, unemployment insurance, child labor laws and a federal minimum wage.
Similarly, the government’s initiatives to modernize the country’s infrastructure pale in comparison with the 1930s. Talk of high-speed trains and smart energy grids notwithstanding, there is nothing approaching the ambition of the Grand Coulee Dam or Tennessee Valley Authority.
Finally, there is nothing resembling 1930s financial reform, which included the Glass-Steagall Act prohibiting deposit-taking banks from engaging in investment-banking business, and creation of the Securities and Exchange Commission to provide government oversight of stock and bond markets. We could have broken up the big banks or force fed them so much capital that even the largest shock would not cause them to fail. Instead we have the Volcker Rule, which is so complex as to be unworkable.
We might have addressed the rating agencies’ conflicts of interest by prohibiting them from both advising issuers and rating their securities. Instead we merely obliged them to publish their methodologies and report on the historical performance of their ratings. We could have forced complex derivative securities to be standardized and traded on exchanges. Instead we settled for requiring institutions trading such instruments to hold modestly larger financial reserves, or “margin,” to guard against the risk of not being able to complete a transaction.
In contrast to the 1930s, then, it is hard to argue that we have made the world a significantly safer economic place. The question is why.
One potential explanation is that Americans today are skeptical about the ability of government to solve problems. But a hard look at the 1930s provides ample evidence that they were equally skeptical then. Similarly, while business interests today may push back against radical reform, it is hard to conclude that they are more powerful now than then.
The true difference this time, as I argue in my book Hall of Mirrors, is that we averted the worst. We avoided another Great Depression. As Obama himself noted, no one wants to be defined by what he avoided. Still, preventing a repeat of the great economic catastrophe of the 20th century is a monumental achievement.
But it is that very achievement that sapped the appetite for more ambitious reform. The depth of the Great Depression and the collapse of banks and securities markets in the 1930s discredited the prevailing financial regime. This time, depression and financial collapse were avoided, if barely. This fostered the belief that the flaws of the system were less. It weakened the argument for radical action. It took the wind out of the reformers’ sails. Success thus became the mother of failure.
That failure also has another aspect, however. By not doing more to fix the financial system and economy, we doomed ourselves to a painfully slow recovery. Growth since 2009 has run at barely half the rate typical of recoveries from recessions, two quarters of relatively rapid growth in mid-2014 notwithstanding to the contrary. Recovery from the 2008-09 recession is slower even than U.S. recovery starting in 1933.
But as that weak recovery has persisted, the prospects for reform have begun to shift. For five years after 2008, there was no discussion of the role of inequality in the crisis. But in 2014 we had the phenomenon of Thomas Piketty and his best-selling, if unread, book, Capital in the 21st Century, which was less a catalyst for that discussion than a symptom of dawning awareness of a chronic problem.
Similarly, after five years of slow recovery, there is finally a discussion of whether persistent low interest rates afford an opportunity for a federally funded program of infrastructure renewal.
Finally, the process of financial reform is not over. It has now moved from the stage of legislation to rule-making by the Federal Reserve and SEC. Those rules have been slow, painfully slow, in coming. But now that they are being promulgated, a number of them are more demanding than the financial lobby and other observers had expected, reflecting the lasting impact of financial problems on the economy.
Compared to the 1930s, we have had a different kind of crisis. As a result, we have had a different kind of reform. But we have also had a different kind of recovery. This last fact in turn means, for those with more ambitious reform aspirations, that all is not lost.
Barry Eichengreen is professor at the University of California, Berkeley and author of Hall of Mirrors: The Great Depression, the Great Recession, and the Uses – and Misuses – of History (Oxford 2015)