According to press reports, the Obama administration plans to put forward a budget on Feb. 1 containing significant deficit reduction measures. Some liberal economists are warning that it is grossly premature to implement deficit reduction. Indeed, they believe that additional fiscal stimulus is necessary to prevent a double-dip recession. They argue that there is a danger we will make the same mistake that Franklin Roosevelt made in 1937, which crippled the economy's recovery.It is always reassuring to see that the leaders of today can rise to the occasion and an act as willfully blindly ignorant as any leader in the past. I guess Obama wishes to distinguish himself in this department and prove that he can produce an ever more impressive downturn than FDR was able to pull off in 1937. Obama is a very impressive leader and I have full confidence that he can pull off this masterful blunder with all the aplomb required. His golden tongue oratory will help ease the pain as he throws the American middle class back into the hellish landscape of a full blown recession/depression. I have every confidence in Obama's ability to pull off this kind of monstrous error. He has shown himself adept at pulling defeat out of the jaws of victory time and again. I stand assured that he will demonstrate this mastery yet again.
To evaluate the relevancy of 1937 to current economic and fiscal conditions we first need to review a little history of the Great Depression. First of all, it's important to remember that what we call the Great Depression was not a continuous downturn; it was really two back-to-back recessions. According to the National Bureau of Economic Research, the first ran from August 1929 to March 1933 and the second from May 1937 to June 1938.
According to current Commerce Department data, real gross domestic product fell sharply in 1930, 1931 and 1932, and modestly in 1933. But GDP rebounded strongly in 1934, growing 10.9% that year, 8.9% in 1935, 13% in 1936 and 5.1% in 1937. But in 1938, real GDP fell 3.4%.
For many years, economists thought this "secondary recession" was inherent in the nature of the business cycle. Today, however, economists generally believe that the only thing that caused the 1937-38 downturn was disastrously bad government policy.
Although right-wingers like to portray FDR as a giddy big spender whose profligate ways made the depression worse, the truth is that he was by nature quite conservative, fiscally. Indeed, when running against Herbert Hoover in 1932 Roosevelt was unsparing in his criticism of Hoover's spending and deficits. As he put it in an Oct. 19, 1932 speech:
"I regard reduction in federal spending as one of the most important issues of this campaign. In my opinion it is the most direct and effective contribution that government can make to business. In accordance with this fundamental policy it is equally necessary to eliminate from federal budget-making during this emergency all new items except such as relate to direct relief of unemployment."
Roosevelt vowed that every member of his cabinet would be required to support the economic plank of the Democratic Party's 1932 platform, which said, "We advocate an immediate and drastic reduction of governmental expenditures by abolishing useless commissions and offices, consolidating departments and bureaus, and eliminating extravagance to accomplish a saving of not less than 25% in the cost of the federal government."
While it is true that spending and deficits rose sharply once Roosevelt took office, the fact is that they never rose sufficiently to offset the fall in private spending that was at the heart of the Great Depression. This was proven to the satisfaction of most economists in a 1956 article by economist E. Carey Brown, "Fiscal Policy in the Thirties: A Reappraisal." According to my calculations, the deficits of the 1930s should have been at least five times larger than they were.
In early 1937, Roosevelt was preparing his budget for the next fiscal year, which began on July 1 in those days. Strong growth in the economy and tax increases over the previous three years, especially the institution of a new payroll tax for Social Security, had caused tax receipts to almost double from 2.8% of GDP in 1932 to 5% in 1936. Projections showed that budget balance was within reach with only a modest reduction of spending.
Roosevelt was also concerned about the reemergence of inflation. After falling 24% between 1929 and 1933, the Consumer Price Index rose by a total of 7% over the next three years and signs pointed to even higher prices in 1937. Indeed, the CPI rose 3.6% that year.
Rather than viewing this as a sign of progress, which had caused the stock market to almost double between 1935 and 1936, Roosevelt and the inflation hawks of the day were determined to pop what they viewed as a stock market bubble and nip inflation in the bud. Balancing the budget was an important step in this regard, but so was Federal Reserve policy, which tightened sharply through higher reserve requirements for banks. Between August 1936 and May 1937 reserve requirements doubled.
During 1937, Roosevelt pressed ahead with fiscal tightening despite the obvious downturn in economic activity. The budget deficit fell from 5.5% of GDP in 1936 to 2.5% in 1937 and the budget was virtually balanced in fiscal year 1938, with a deficit of just $89 million.
The result was a huge economic setback, with GDP falling and unemployment rising. For this reason, Obama's economic advisers have been warning for some time that stimulus must be continued until full employment has returned. As Council of Economic Advisers chair Christina Romer wrote in The Economist last June:
"The 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment."
Wednesday, January 27, 2010
Seeing Deja Vu All Over Again
Bruce Bartlett is a reformed conservative. After being a cheerleader for Reagan and the two Bushes, the scales fell from his eyes when Bush the Second pushed the US economy over the cliff and into the Great Recession. Here's an article he has written as part of his repentance: