Spartacus Blog

Donald Trump and the Economic Crisis

The election of Donald Trump on 8th November, 2016, was the most significant political event since Adolf Hitler managed to persuade the Reichstag to pass the Enabling Act on 24th March 1933. I say this not because I believe Trump is a fascist who is about to become some sort of dictator. In fact, I think over the next four years he will illustrate just how difficult it is for the President of the United States to implement his political ideas. Even if he was allowed by Congress to carry out his proposed programme, it would not solve the economic problems faced by those who voted for him. If there is a great deal of dissatisfaction now, it will be far greater in 2020.

Why the election of Trump is so significant is that it dramatically reflects the crisis in our economic system. It was the Wall Street Crash in October, 1929, when shares lost 47 per cent of its value in twenty-six days, that created the Great Depression. At the time many thought this was the end of capitalism and large numbers of people became socialists and communists. Others were attracted to the far-right and became committed fascists.

Politicians responded to the crisis in different ways. Ramsay MacDonald, the 63-year-old British prime-minister, was slow to react to the crisis that caused large-scale unemployment. Relying on the advice of the economist John Maynard Keynes, the former prime-minister, David Lloyd George, published a pamphlet, We Can Conquer Unemployment, where he proposed a government scheme where 350,000 men were to be employed on road-building, 60,000 on housing, 60,000 on telephone development and 62,000 on electrical development. The cost would be £250 million, and the money would be raised by loan.

Philip Snowden, his Chancellor of the Exchequer, rejected this proposal and wrote in his notebook on 14th August 1930, that "the trade of the world has come near to collapse and nothing we can do will stop the increase in unemployment." By December 1930, 2,725,000 people in Britain were recorded as being unemployed (20% of the insured workforce), and exports had fallen in value by 50%.

Snowden was mainly concerned about the impact of the increase in public-spending. At a cabinet meeting in January 1931, he estimated that the budget deficit for 1930-31 would be £40 million. Snowden argued that it might be necessary to cut unemployment benefit. Margaret Bondfield looked into this suggestion and claimed that the government could save £6 million a year if they cut benefit rates by 2s. a week and to restrict the benefit rights of married women, seasonal workers and short-time workers.

In March 1931 MacDonald asked Sir George May, the retired former company secretary of the Prudential Assurance Company, to form a committee to look into Britain's economic problems. At the same time, John Maynard Keynes, the chairman of the Economic Advisory Council, published his report on the causes and remedies for the depression. This included an increase in public spending and by curtailing British investment overseas.

Philip Snowden rejected these ideas and this was followed by the resignation of Charles Trevelyan, the Minister of Education. "For some time I have realised that I am very much out of sympathy with the general method of Government policy. In the present disastrous condition of trade it seems to me that the crisis requires big Socialist measures. We ought to be demonstrating to the country the alternatives to economy and protection. Our value as a Government today should be to make people realise that Socialism is that alternative."

When the May Committee produced its report in July, 1931, it forecast a huge budget deficit of £120 million and recommended that the government should reduce its expenditure by £97,000,000, including a £67,000,000 cut in unemployment benefits. The two Labour Party representatives on the committee, Arthur Pugh and Charles Latham, refused to sign the report.

On 5th August, Keynes wrote to MacDonald, describing the May Report as "the most foolish document I ever had the misfortune to read." He argued that the committee's recommendations clearly represented "an effort to make the existing deflation effective by bringing incomes down to the level of prices" and if adopted in isolation, they would result in "a most gross perversion of social justice".

The vast majority of Labour MPs refused to support the May Report and MacDonald went to see King George V and offered his resignation. Under pressure from the king he was persuaded to form a National Government that was mainly made up of Conservative and Liberal MPs.

On 8th September 1931, the National Government's programme of £70 million economy programme was debated in the House of Commons. This included a £13 million cut in unemployment benefit and a 10% cut in public sector wages. Tom Johnson, who wound up the debate for the Labour Party, declared that these policies were "not of a National Government but of a Wall Street Government". In the end the Government won by 309 votes to 249, but only 12 Labour M.P.s voted for the measures.

Of course the cuts did not have their desired impact on the economy. Snowden's measures were deflationary and merely reduced purchasing power in the economy, worsening the situation, and by the end of 1931 unemployment had reached nearly 3 million. By 1933 over 25% of the insured workforce were out of work.

In the 1932 Presidential Election, the American people rejected the austerity policies of Herbert Hoover and elected Franklin D. Roosevelt to office. As William E. Leuchtenburg, the author of Franklin D. Roosevelt and the New Deal (1963), has argued: "Franklin Roosevelt swept to victory with 22,800,000 votes to Hoover's 15,750,000. With a 472-59 margin in the Electoral College, he captured every state south and west of Pennsylvania. Roosevelt carried more counties than a presidential candidate had ever won before, including 282 that had never gone Democratic. Of the forty states in Hoover's victory coalition four years before, the President held but six."

During the election campaign Roosevelt promised to reduce taxation. After taking office he initially rejected the idea of increased public spending. However, by the spring of 1933, the needs of more than fifteen million unemployed had overwhelmed the resources of local governments. In some areas, as many as 90 per cent of the people were on relief and it was clear something needed to be done. His close advisors and colleagues, Frances Perkins, Harry Hopkins, Rexford Tugwell, Robert LaFollette Jr. Robert Wagner, Fiorello LaGuardia, George Norris and Edward Costigan eventually won him over to a new approach to the problem.

On 9th March 1933, Roosevelt called a special session of Congress. He told the members that unemployment could only be solved "by direct recruiting by the Government itself." For the next three months, Roosevelt proposed, and Congress passed, a series of important bills that attempted to deal with the problem of unemployment. The special session of Congress became known as the Hundred Days and provided the basis for Roosevelt's New Deal.

The government employed people to carry out a range of different tasks. These projects included the Works Projects Administration (WPA), the Civilian Conservation Corps (CCC), the National Youth Administration (NYA), the National Recovery Act (NRA) and the Public Works Administration (PWA). As well as trying to reduce unemployment, Roosevelt also attempted to reduce the misery for those who were unable to work. One of the bodies Roosevelt formed was the Federal Emergency Relief Administration which provided federal money to help those in desperate need.

To help pay for these measures Roosevelt persuaded Congress to pass the Wealth Tax Act in August, 1935. It was a progressive tax that took up to 75 percent on incomes over $5 million. Roosevelt admitted that the tax had created a great deal of hostility: "The forces of organized money... are unanimous in their hate for me - and I welcome their hatred. I should like to have it said of my first administration that in it the forces of selfishness and of lust for power met their match."

When Roosevelt took office the national deficit was nearly $3,000,000,000 and the unemployment-rate was 23.6%. His Treasury Secretary Henry Morgenthau, and aides within the Treasury Department favored an approach that sought to balance the federal budget. But other advisers in the President's inner circle, including Harry Hopkins, Marriner Eccles and Henry Wallace, had accepted the recent theories of John Maynard Keynes, who argued that technically advanced economies would need permanent budget deficits or other measures (such as redistribution of income away from the wealthy) to stimulate consumption of goods and to maintain full employment. It was argued that it was the attempt to balance the budget that was causing the recession.

President Roosevelt was eventually convinced by these arguments and he recognized the need for increased government expenditures to put people back to work. An important part of his New Deal programme was increased spending on government expenditures for relief and work schemes. From 1933 to 1937, unemployment was reduced from 25% to 14%.

Roosevelt was much attacked by his political opponents for not concentrating on reducing the national deficit. However, as Roosevelt explained in a speech in 1936: "To balance our budget in 1933 or 1934 or 1935 would have been a crime against the American people. To do so we should either have had to make a capital levy that would have been confiscatory, or we should have had to set our face against human suffering with callous indifference. When Americans suffered, we refused to pass by on the other side. Humanity came first."

Roosevelt was attacked for not keeping his promise to balance the budget. Some went as far as accusing Roosevelt of being a communist. Those on the left hated Roosevelt because they believed that his policies helped save capitalism. However, his economic policies were popular with the American people and he defeated his Republican presidential candidates in 1936 (Alfred M. Landon), 1940 (Wendell Willkie) and 1944 (Thomas E. Dewey).

After the Second World War it European countries that were attracted to the economic ideas of John Maynard Keynes. Up until the late 1970s it provided a growing economy and low unemployment rates. It also help to narrow the gap between the rich and the poor. For example, the data available shows that the share of income going to the top 10% of the population fell over the 40 years to 1979, from 34.6% in 1938 to 21% in 1979, while the share going to the bottom 10% rose slightly.

Income share in the United Kingdom (1938-2010)

The 1973 oil crisis resulted in high inflation. In the UK inflation reached 26.9% in the 12 months to August 1975. In an effort to maintain the living standards of their members, trade unions demanded higher wages which in turn led to even higher inflation. The number of industrial disputes also increased during this period. On 22nd January 1979 more people in the UK took strike action, than on any day since the General Strike of 1926.

Margaret Thatcher was elected to power in Britain in 1979 and Ronald Reagan in 1980. They both embraced the economic theories of Friedrich Hayek and Milton Friedman that became known as Neo-Liberalism. This was a return to the world before the Great Depression in the 1930s. It was the resurgence of 19th century ideas associated with laissez-faire economic liberalism. They were also the economic policies that Karl Marx believed would lead to a socialist revolution.

Neo-Liberalism meant privatization, fiscal austerity, deregulation, free trade, and reductions in government spending in order to enhance the role of the private sector in the economy. It also involved passing legislation that weakened the trade union movement. These policies completely reversed the move towards a more equal society. Since the early 1980s the gap between rich and poor has widened considerably.

During this period China has emerged as America's main economic rival. Although it claims to be a communist country, in reality it is state capitalist economy. This gives it great advantages over laissez-faire capitalism. For example, it has totally control over the cost of labour. (This is what happened in Germany in the 1930s.) It also has complete control over investment in certain industries. It can therefore give out state subsidies to industries in trouble, for example, steel. It also invests in other countries and controls over 30% of America's national debt.

The second Great Depression took place in 2007. Its consequences are still being felt today. This time the major problem is not unemployment. Yesterday it was announced that Britain has an unemployment rate of 4.8%. The lowest in 11 years. USA has an unemployment rate of 4.9%. Why, therefore, did American workers vote for Trump? The reason is low wages. The majority of the American people have seen a fall in their living standards since the end of the 1970s.

Donald Trump did not win the popular vote in the 2016 Presidential Election. In fact, his 61,125,956 votes were not much higher than those figures obtained by Mitt Romney (60,933,504) and John McCain (59,948,323). The main problem was Clinton's vote (62,391,335) compared to that of Barack Obama - 65,915,795 (2012) and 69,498,516 (2008).

Will the proposals of Donald Trump work? Will Congress allow him to place high tariffs on goods imported from abroad? If they do it will cause inflation and is unlikely to persuade capitalists to invest in manufacturing in the United States. Do the businessmen who fund the political parties in America really want an end to the cheap labour provided by Mexico?

In his first speech after being elected Trump spoke of a massive investment in America's infra-structure. In other words, something similar to Roosevelt's New Deal. However, he is also committed to reducing taxes for the wealthy. How is he going to pay for this? Will Congress allow him to increase public borrowing?

I think he will probably cut defence spending and significantly reduce America military commitment to Europe and other areas, especially in the Middle-East. But this will not be enough to please those people who voted for Trump in the election. What kind of candidate will Americans vote for in 2020?