Feb 212009

An article at wowowow.com summarizes Obama’s first 30 days:

…so far the reaction to the new administration’s programs has been decidedly negative. Investors, among others, have panned the plans; the stock market is off nearly 10% from the day before the inauguration, or more than 800 points on the Dow Jones Industrial Average.

That made me wonder what happened to the stock market in FDR’s first hundred days. I didn’t find the kind of chart I was looking for, but I did find this summary in Washington Business Journal:

On March 4, 1933, Franklin Roosevelt inherited a Dow that had lost 82 percent of its value in the previous four years. That was the day Roosevelt famously declared that “all we have to fear, is fear itself.” Once Wall Street reopened after the bank holiday immediately imposed on Inauguration Day, the Dow Jones rose 15 percent in the first day of trading March 15, 1933, and rallied 75 percent in the first 100 days of Roosevelt’s presidency.

So is the market telling us that we already tried these Keynesian theories once, and unlike last time we now know what to expect? That’s probably not it, exactly, because in a way they have been tried more than once.

But I did find an interesting tangent at realclearmarkets.com, in an article by George Bittlingmayer and Thomas W. Hazlett titled, “The market is shorting Obama’s ‘stimulus’.”

Many claim that World War II brought us out of the Great Depression, but the lesson to be learned is still being debated. Federal budget deficits soared (reaching 26.5 % of GDP in 1942 as calculated by Harvard economist Robert Barro), providing Keynesians an argument for spending as stimulus. But WWII also brought a profound shift in the New Deal’s regulatory policies. Attorney General Thurman Arnold’s vigorous campaign to break-up “the bottlenecks of business” in major industries like steel, chemicals and electrical equipment was shuttered, and America’s largest corporations enjoyed a respite from threats of dismemberment (Arnold was kicked upstairs to a judgeship). As Thomas K. McCraw writes in his superlative Schumpeter biography, “Under the life-and-death pressure of war mobilization… the Roosevelt Administration, which had been hostile toward alleged monopolies, now decided that big business must lead in the job that had to be done.”

What’s interesting about this is that phrase about a “shift in the New Deal’s regulatory policies” with the onset of World War II. I had recently come across references, I don’t remember where, that suggested the national government had great difficulty making itself unregulate the economy after WWII was over. So if WWII-era regulation was itself a respite from New Deal regulation, then I need to learn more about 1930s’ regulation.

Despite having been brought up from childhood on a steady diet of anti-New Deal sentiment, I either wasn’t told about this aspect of the New Deal when I was young, or I wasn’t paying adequate attention.