Assessing History in the Making
by Elisabeth Jacobs, ASA Congressional Fellow
The American economy is in the midst of a crisis of historic proportions. The bursting of the housing bubble and the ensuing collapse of the financial markets have wreaked havoc on the labor market. The economy has faced the loss of 5.1 million jobs since the recession began in December 2007, with almost two-thirds of the decrease coming in the last five months. The unemployment rate stands at 8.5 percent, 13.2 million Americans are unemployed, and nearly one in four of the unemployed have been looking for work for at least six months. Job losses that were once concentrated in manufacturing and construction have spread to all sectors of the economy. Rising unemployment means rising demand for government services, while state and local governments are in the red.
The federal government has responded to the economic storm with policies of extraordinary breadth. The American Recovery and Reinvestment Act of 2009, signed into law by President Obama on February 17, 2009, represents an unprecedented policy intervention committing $787 billion in federal dollars via a combination of aid to the states, tax cuts, and safety net spending. Combined with the monetary interventions currently underway via the Troubled Asset Relief Program authorized by Congress in 2008 to address the subprime mortgage crisis and a host of monetary interventions undertaken by the U.S. Treasury and the Federal Reserve, the government response to the current recession rivals any seen since Roosevelt’s New Deal-era economic policies.
A Not-So-New Deal
The debate over the American Recovery and Reinvestment Act on the floors of the House and Senate and in the pages of major news outlets included numerous accounts of the "dangers" of the New Deal. Spurred by repeated comparisons between the depth and breadth of the current recession and the Great Depression, and parallels between Obama’s aggressive agenda for recovery and Roosevelt’s New Deal policies, the debate was heated on the Hill this winter.
Academic (and not-so-academic) accounts of government policies’ failure to jump-start the ailing economy of the 1930s provided talking points for foes of the current government intervention. For example, a 1990s study by two economists gained prominence in the conservative Human Events newspaper, which is circulated to all congressional offices and widely read by the Senate and House staffers who play a critical role in providing decision-makers with talking points and information on which to base decisions. Wall Street Journal columnist Amity Shlaes argued that the Depression-era unemployment rate continued to climb because of Roosevelt’s New Deal policy interventions, or, as she writes, because of "the notion that government could engineer economic recovery by favoring the public sector at the expense of the private sector."
In response, proponents of the recovery legislation turned to academic studies as well. Research by the Chair of the Council of Economic Advisors Christina Romer (formerly of the University of California-Berkeley) and by Federal Reserve Chair Ben Bernanke (formerly of Princeton University) highlighted the importance of Roosevelt’s New Deal monetary policy decisions as critical to bringing the Great Depression to an end, and Romer has repeatedly testified to Congress that Roosevelt’s failure in the realm of fiscal policy was his timidity, not his aggression. Research by historian Eric Rauchway played a key role in helping supporters make the case that the New Deal helped slow the increase in the unemployment rate. All three scholars’ research suggests that the "mini-recession" of 1938 was precipitated by Roosevelt’s desire to balance the budget vis-à-vis a decrease in spending.
The proponents of the recovery bill prevailed, but the continued erosion of the labor market poses a challenge for the legislation’s supporters. The impact of the recovery bill is likely to take quite some time to wind its way through the economy and into the labor market. For example, unemployment rates are a lagging indicator of economic health, so the job market can remain quite feeble even as the nation’s economy is on its way to recovery.
Academic Social Scientists and the Economy
In light of the continued uncertainty that characterizes the economy and its future direction, the first round of debates over economic recovery legislation provides three important lessons about the role of academic social scientists:
- Studies of the success and failure of government policies matters. Empirical evaluation of policy interventions can play a critical role in the debate over a policy, as evidenced in the use of formerly obscure academic arguments on the inside-the-beltway Sunday talk shows and on the floor of the House and Senate. Once considered an academic exercise in history, research on the impacts of the New Deal has an important role to play in contemporary debates.
- Studies of the efficacy of the current recovery bill are critical. In the short-term, creative thinking that captures elements of the recovery bill’s impact by modeling an appropriate counterfactual could prove invaluable to understanding which government policies work and why. Moreover, scholars should begin to pay attention today—thinking creatively, developing models, and collecting data—in order to provide the more definitive analysis that will only be possible in the longer term.
- Finally, and perhaps of critical importance for sociologists, scholars should think creatively about indicators of economic recovery. For instance, economist Jamie Galbraith noted in recent testimony to the Senate Banking, Housing, and Urban Affairs Committee that one of the most important accomplishments of the New Deal was its "physical, moral, and artistic reconstruction of the nation." While much attention has been focused on traditional economic indicators (e.g. unemployment rates and GDP), scholars would be wise to identify other critically important indicators of a prosperous nation, providing clear theoretical (and, where possible, empirical) explanations for why such indicators matter. For instance, consumer confidence and its relationship to labor markets and economic growth could serve as rich terrain for sociological inquiry. Similarly, sociology’s longstanding disciplinary interest in neighborhood effects on various economic outcomes could serve as a powerful framework for discussing the impact of the housing crisis.
None of these points are purely academic, of course. As the debate this winter illustrated, social scientists’ thinking can play a key role in shaping policy debates. Moreover, many in Washington believe an additional round of stimulus will be necessary if the economy continues to slide. For instance, critics from the left, including New York Times columnist and Nobel Prize-winning economist Paul Krugman, have argued that the recovery bill was "too small," and suggest that a second stimulus bill is likely to be necessary this year.
Making the case for or against an additional injection of fiscal stimulus to the nation’s economy requires evidence, and providing that evidence is an important public service that could be performed by academics across the nation.
Elisabeth Jacobs, 2008 ASA Congressional Fellow, served on the Senate Committee on Health, Education, Labor and Pensions (HELP), which is chaired by Senator Edward Kennedy (D-MA).