Rethinking Roosevelt’s New Deal will help governments rebuild globally as well as locally

At first glance, the 1929 Wall Street Crash and COVID-19 pandemic have little in common. One was a stock market crash caused by unsustainable speculation in unregulated financial markets. The other is a global pandemic that arrived as the world was finally regaining financial stability post-2008.

when it comes to rebuilding after the COVID-19 pandemic, governments can learn a lot from their predecessors in the 1930s.

But some of the effects of these crises are similar. And when it comes to rebuilding after the COVID-19 pandemic, governments can learn a lot from their predecessors in the 1930s.

For the third blog in my series, I’ll take a look at how the lessons of the Wall Street Crash, the Great Depression and the New Deal can help the governments of today.

From local crisis to global recession

The Wall Street Crash precipitated the US Great Depression of the 1930s, which had a domino effect on the global economy. Banks failed, savers lost investments, businesses went bankrupt and unemployment soared.

Similarly, the COVID-19 pandemic started in one country and spread rapidly around the globe. And in doing so, it plunged 93% of the world’s countries into recession in 2020. The impact on jobs has also been huge: the UN estimates that global unemployment will hit more than 200m by 2022.

Thankfully, governments now have regulations in place to avoid the over-leveraging that caused the Wall Street Crash and, later, the global financial crisis. This, and swift government financial support for businesses, prevented banking institutions from taking a big hit from the pandemic-induced downturn.

Channeling Keynes

The parallels between the two crises extend to how governments responded.

In 1933, US President Franklin D. Roosevelt brought in the New Deal, focused on the 3Rs: Relief, Recovery and Reform. The deal dedicated unprecedented levels of deficit spending to infrastructure, quantitative easing (QE) and social welfare. The latter included temporary relief for the huge numbers of unemployed and under-employed.

After decades of market-based thinking, governments have responded to the COVID-19 pandemic along Keynesian lines – by using deficit spending to fund national rescue packages. They also made temporary changes to tax and other policies. Argentina gave essential workers a six-month exemption on income tax in 2020, for example. And New Zealand brought in emergency legislation to freeze rents and ban evictions.

There’s one key difference, though. While the New Deal was US-focused, stimulus programs now exist on a regional and even a global level. (Think the European Commission’s NextGenerationEU and, more recently, the G7’s Build Back Better World (B3W) initiative.)

Governments can learn from the New Deal’s failures as well as its successes

By marrying stimulus with reforms, the New Deal created jobs, stabilized prices and restored faith in the economic system. It also tackled environmental degradation and introduced welfare safety nets that survive today.

On the other hand, it was slow to ramp up, and its policies were sometimes contradictory. For example, in an attempt to reduce over-production and raise crop prices, farmers were given subsidies to take land out of production. But a substantial tax on food processing then limited the price increases they could command.

Unemployment also remained high until World War II, partly because the New Deal failed to stimulate the private sector to expand and create jobs.

Private sector capital will play a big part in funding the recovery

Governments today have clearly learnt from these and subsequent lessons. Overall, they’ve acted faster and bigger to stem the losses, protect the vulnerable and get their economies growing again. They’ve also recognized the need to mobilize the private sector to create jobs and stimulate growth, and to focus on green infrastructure. In June 2020, for example, South Korea announced a US$62b Green New Deal – a direct nod to history that includes building smart grids and “greening” existing infrastructure. 

global collaboration will always be crucial to overcoming the challenges of the connected world

To get the most out of these initiatives, governments will need to accompany them with coherent policies and reforms that tackle social inequality and environmental issues. And here, they have a crucial advantage over their 1930s peers: they can use AI and advanced analytics to scenario-plan and model possible impacts – fast.

Technology could also reduce inequities. EY teams use data analytics to help government agencies focus their scarce resources on their most vulnerable citizens.

So they could target families whose unique circumstances make them most in need of interventions – for example, to prevent homelessness or a child entering the safeguarding system.

The secret of global recovery? Global collaboration

Finally, global collaboration will always be crucial to overcoming the challenges of the connected world. Yet, as I’ve said in previous blogs, we should consider if our current global institutions are the right ones to do it.

For example, one of the reasons for founding the International Monetary Fund in 1944 was to prevent financial contagion in one market from affecting others. But its guardrails couldn’t stop the economic impacts of the virus from spreading around the world. (Though it’s given countries a lot of support, including debt relief for the poorest.) Meanwhile, global alliances like the G20 have received criticism for the speed of their support – both economic and practical.

we should consider if our current global institutions are the right ones to do it.

The crisis has also shown that decisive leadership matters – both at a national level and in global organizations. And the outlook here is good: the Biden Administration has already taken the lead on the G7’s B3W initiative as well as its global corporate tax reform.

National governments should implement multilateral initiatives like the B3W while incorporating the lessons of the New Deal, enhanced by technology, into domestic policy. In doing so, they’ll be able to rebuild their own economies while helping to create a safer, more resilient world.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.