Expert Commentary

Green New Deals Won't Stop Deflation

Talk of “new deals” abound as governments recognize what’s coming. And the deflationary depression hasn’t even got going yet.

This week, U.K. Prime Minister Boris Johnson pledged to “build, build, build” in an attempt to galvanize the U.K. economy as it stares into the abyss. Boris Johnson sought to compare his pledge with Franklin D. Roosevelt’s “New Deal” of the 1930s. The comparison does not stand up at all. Johnson is planning to spend £5 billion on infrastructure projects, money that was, in fact, already allocated. FDR’s New Deal projects amounted to around $700 billion in today’s money, with iconic structures such as the Hoover Dam and LaGuardia Airport being built. Nevertheless, the U.K. and other governments are planning that the fiscal expansion currently underway will be invested in upgrading and improving infrastructure, much of it with “sustainability” (environmentally friendly) at its core.

Why are governments doing this? Probably the main reason is that they are beginning to realize that the economy is not going to bounce back quickly as they are all hoping for. Many capital cities are staring down the barrel at the prospect of mass unemployment as the private sector is forced to slim down and, in many cases, close its businesses. Mass unemployment is not a recipe for getting re-elected and this is what FDR recognized. By creating an army of public workers, Roosevelt gave Americans an income, and any sort of income in a deflationary depression is like gold dust (ironic, since FDR also stole everyone’s gold, but that’s another story.) Roosevelt was re-elected in a landslide victory in 1936.

The history books give credit to FDR for dragging America out of the Great Depression, but he was simply in the right place at the right time. Social mood had already reached its nadir before the election in 1932 and FDR was elected because desperate Americans were already looking for a “new deal.” Social mood trended positively into 1937, manifested in the stock market rally, but the negative mood of the correction took over between 1937 and 1942. As the chart shows, by 1942 the economy (as proxied by the stock market) was back at the level it was at when New Deal public works started. It wasn’t until well past 1942 that business reflections of social mood really started to trend positively, despite all the grand New Deal efforts. This is why many historians believe that, rather than FDR’s New Deal ending the Great Depression, it was actually the Second World War that finally galvanized economies back to life. Of course, we disagree with the causality but agree with the sentiment. No amount of massive public works programs will cause an end to deflation. What causes an end to deflation is when social mood starts to accelerate positively.

That won’t stop politicians trying though. Whether you believe it to be genuine or not, Boris Johnson’s enthusiasm for big ideas has propelled his career. Critics would say that his grandstanding marks a lack of attention to detail, but nobody can say he lacks vision (be it naïve or not). Last year he suggested that a bridge could be built between the mainland Great Britain over to Northern Ireland. Perhaps that will be his, and this deflationary depression’s, Hoover Dam, but it’s going to take a lot, lot more than £5 billion to do it.

New Deal Public Works Start DJIA