Monday, September 06, 2010

1938 Deja Vue

With the Neanderthals in the GOP demanding that government spending be slashed - of course without identifying what they'd cut - Paul Krugman has a timely column that looks at the parallels between 2010 and the situation in 1938. Krugman makes the case that only more government spending can get the economy truly headed back in the right direction. The question is whether we will learn from history or go down the wrong path and the resulting economic stagnation that is taking such a heavy toll on so many American families. Unfortunately, I fear that those inside the belt-way who worry only about short term political gain will convince a public woefully ignorant of true history, including economic history, to move in the wrong direction. The possible winners will be the GOP that created the financial bubble in the first place and then opposed corrective action. Especially, given the leadership vacuum in the White House and Obama's insane reliance on economic advisers who were deeply involved in creating the current mess. Here are some column highlights from the New York Times:
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Here’s the situation: The U.S. economy has been crippled by a financial crisis. The president’s policies have limited the damage, but they were too cautious, and unemployment remains disastrously high. More action is clearly needed. Yet the public has soured on government activism, and seems poised to deal Democrats a severe defeat in the midterm elections. The president in question is Franklin Delano Roosevelt; the year is 1938.
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Now, we weren’t supposed to find ourselves replaying the late 1930s. President Obama’s economists promised not to repeat the mistakes of 1937, when F.D.R. pulled back fiscal stimulus too soon. But by making his program too small and too short-lived, Mr. Obama did just that: the stimulus raised growth while it lasted, but it made only a small dent in unemployment — and now it’s fading out.
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And just as some of us feared, the inadequacy of the administration’s initial economic plan has landed it — and the nation — in a political trap. More stimulus is desperately needed, but in the public’s eyes the failure of the initial program to deliver a convincing recovery has discredited government action to create jobs.
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The story of 1937, of F.D.R.’s disastrous decision to heed those who said that it was time to slash the deficit, is well known. What’s less well known is the extent to which the public drew the wrong conclusions from the recession that followed: far from calling for a resumption of New Deal programs, voters lost faith in fiscal expansion.
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From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today. Had anyone proposed spending even a fraction that much before the war, people would have said the same things they’re saying today.
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The economic moral is clear: when the economy is deeply depressed, the usual rules don’t apply. Austerity is self-defeating: when everyone tries to pay down debt at the same time, the result is depression and deflation, and debt problems grow even worse.
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But the story of 1938 also shows how hard it is to apply these insights. Even under F.D.R., there was never the political will to do what was needed to end the Great Depression; its eventual resolution came essentially by accident.
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I had hoped that we would do better this time. But it turns out that politicians and economists alike have spent decades unlearning the lessons of the 1930s, and are determined to repeat all the old mistakes. And it’s slightly sickening to realize that the big winners in the midterm elections are likely to be the very people who first got us into this mess, then did everything in their power to block action to get us out.

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