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It’s Like 1937 All Over Again

March 3, 2013

Hello loyal readers!  This past Friday, we found out what happens when Speaker Boehner gets 98% of what he wants in reward for holding the country hostage on the debt ceiling: an arbitrary $1.2 trillion cut in government spending, $85 billion of which happens right now.  And when he says that the revenue issue was resolved in the fiscal cliff deal just remember, the $632 billion in revenue also came with $33 billion in cuts.  So yeah, totally fair and balanced.  Just like Faux News.

And for those of you that are students of history, or you know, just pay attention to world events (which is no one with influence over our Republican “friends” though, sadly) this love of austerity has happened before, and is currently being tried in Europe.  How’s that going for EuropeNot well.

And if you happen to suffer from a particularly virulent strand of xenophobia, we don’t even have to look to Europe to find salient examples of why austerity is a bad example, especially in a weak economy.  In the midst of the Great Depression, the economy took a belly flop in a kiddie pool.  Granted, it’s all relative compared to the Ishtar-sized flop that occurred between October 1929 through 1933.  And that was a long, heavy flop.  If you have been following the various economic arguments since the beginning of the downturn, chances are you’ve read about what happened in 1937.  Here, or here.  And now that we’ve actually taken several pointless bites out of our economy, maybe we’ll get our own reprise of it.  So what happened?

When President Roosevelt took office on March 4, 1933, this country was in terrible shape.  The 1929 Stock Market crash had resulted in an over 30% loss of the value of the market in less than a week.  And then things got really bad.  After a few rallies in 1930, the market hit the skids and by July of 1932 it was at 41.22.  And no, that’s not a typo (granted, it was never in the lofty numbers that it is today – it only broke the 1,000 point mark in the early 70s and I remember the awe when it cracked 10,000 for the first time).  So newly elected President Roosevelt took office, looked around him at the rumble of the economy and said – let’s get to work.  The New Deal, which is a catch-all name for the collective set of actions that included creation of the National Recovery Administration, the Social Security, and the Works Progress Administration, helped put people back to work and money into the economy.  I do not pretend to be an economic historian, or anything remotely similar, but the New Deal has been credited with holding this country’s economy together and pulling us out of the maelstrom of the early 1930s.

But in 1937, the economic recovery hit a roadblock.  Unemployment spiked, the stock market fell, and the recession in a depression had more than one economist left wondering “what happened?”  So what did happen?

1.            The payroll tax to fund social security was enacted.

2.            Government spending on relief programs diminished.

3.            Banks started lending less, due to tightening of monetary policy by the Fed.

Conservative economists, including Roosevelt’s Secretary of the Treasury, believed that the lack of a balanced budget was the issue, while New Dealers (bolstered by John Maynard Keynes himself, who is an anathema for Republicans during Democratic administrations and a guide in Republican ones) argued that the focus on a balance budget actually led to the recession.  The reduction in spending in order to balance the budget and decrease the deficit caused the backslide.

When faced with a choice between deficit reduction and increased government spending again – Roosevelt chose the latter.  This did not come naturally to him.  Roosevelt was, by his nature, a believer in cutting government spending, actually stating that he regarded “reduction in federal spending as one of the most important issues of this [1932] campaign.”  But reality is a sticky thing, and when the economy was teetering on match sticks, the 1937-38 recession showed that until a solid foundation is re-established, cutting federal spending was a dangerous proposition.  The reforms of 1938 put money back into recovery programs, including bolstering our infrastructure through the Works Progress Administration, and reforming our labor system through creation of a minimum wage and ending child labor in interstate commerce.

We’re about to see if our economy is strong enough to avoid a repeat.  Deficit reduction gets you hot and bothered?  Check out the Center for American Progress’s assessment of all the deficit reduction that has happened since President Obama took office.  The relentless cutting of state and local government resources has constantly hampered our recovery.  Check out this chart demonstrating the difference in employment between the private and public sector.  And now we’re going to furlough people?  Why?  Why would we consciously put more people out of work?  Take more money out people’s pockets?

In 1937, President Roosevelt had a choice between ideology and reality.  He chose reality.  If only our Congress had the strength to do the same.

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