The Great Depression began in the fall of 1929. For years, Congress and the Hoover administration tried to keep the Federal budget deficit down, restraining spending increases to well below what was needed and attempting to balance them with tax increases – while the economy continued to collapse and jobs continued disappearing by the millions. By the time FDR took office in 1933 and began the New Deal, this had been going on for almost three and a half years. Unemployment was 25%.
Economic expansion began in April of 1933, and continued going strong under the New Deal for the next four years.
By 1936, GDP and industrial production were above their pre-crash peaks; unemployment was down to about 15% and falling rapidly. And by 1937, as reported in in this post from the Campaign for America’s Future:
A second cyclical downturn officially began in May 1937 when FDR, always a fiscal conservative, mistakenly thought the economy had become self-sustaining and slashed public spending programs to balance the budget. These harsh and premature spending cuts caused another severe recession that ended after 13 months in June 1938.
[…]
When the economy again contracted sharply in late 1937 and early 1938, FDR quickly reversed course and rapid growth immediately began again. GDP soared by 10.9 percent in 1939 and industrial production soared by 23 percent.
[ Read more: The “FDR Failed” Myth ]
Roosevelt learned his lesson quickly: With unemployment still high, it was not the time to cut spending. Economic recovery had to come first; without recovery, measures to reduce the deficit would be doomed.
A similar story, on a smaller scale, is playing out in front of us today. 2007’s financial crisis precipitated a financial and economic collapse in 2008. Barack Obama took office in 2009, and economic recovery began immediately, and continued under Obama’s stimulus spending. Since Obama’s stimulus was relatively paltry and lacked the scope and scale of FDR’s New Deal, recovery was not as robust, but it did continue until stimulus spending began to sputter. And now, two years later, we’re once again about to prioritize the deficit above jobs and the economy during a time of high unemployment.
Today’s Congress has forgotten this lesson from history. Republicans are dead-set on repeating the mistake of 1937 because they desperately refuse, despite all evidence, to believe the obvious. Obama and Congressional Democrats are willing to follow them down this cliff, allowing Republicans to sacrifice American jobs and the economy on the altar of their ideological purity.
Will our economic story follow the outline of the Great Depression’s, complete with an avoidable mistake that harms millions of people’s lives? Do you want the second chart to show a second sharp sustained downward dip, like the first chart shows in 1937-1938?
seascraper says
FDR raised income and capital gains tax rates in 1937. The Republican congress reversed his rate hikes in 1938.
cos says
Wouldn’t it have been the very same Congress in 1937 and 1938?
Yes, the mistake of 1937 was to focus on the deficit in a misguided way, assuming that economic expansion was now self-sustaining, and cutting spending and increasing taxes. Both the spending cuts and tax increases were reversed in 1938 because it had clearly been a mistake.
It was the same Congress, and the same FDR administration, in both years. You seem to be eager to put a partisan spin on it *and* to focus only on tax increases while pretending that spending cuts – which mattered much more – didn’t even happen.
seascraper says
.
HR's Kevin says
After all, no one has yet proposed a plan that would actually bring a budget surplus without increasing taxes. The most sensible approach would be to simply try to get the budget/tax structure back to what it was the last time that we had a surplus during the Clinton term, which obviously would involve ending our presence in Iraq and Afghanistan, eliminating the Bush and Obama tax cuts (yes, there were tax cuts under Obama although Republicans like to pretend there were not), and doing something about the expensive Medicare prescription plan. Personally, I think we should also cut the defense budget by at least half. Finally, there isn’t the slightest evidence supporting either the claim that increasing taxes for the wealthiest Americans would hamper economic growth or its corollary that decreasing such taxes improves growth.
seascraper says
You want to go back to 1937?
HR's Kevin says
I want to go back to the Clinton economy, not relive the depression.
I am not sure how you could conclude that I “hate FDR” from what I wrote, without resorting to some sort of crazy line of illogic.
seascraper says
Cos says austerity (cutting spending in 1937) was bad.
I point out that austerity also included raising taxes in 1937.
Cos says raising taxes was a little bad.
I ask whether he’s against raising taxes, because Obama wants to raise taxes.
You say raising taxes is great.
You are both on the same side. This is why austerity is winning. You guys have no plan or reasoning no matter how many charts and graphs you throw up there. They cut spending in 1937 for the reason the public is in favor of cutting it now: because it was never meant to stimulate anything. It was just a ploy to get more money for people in and around government.
SomervilleTom says
The misguided desire for austerity in 1937 provoked the second dip of the double-dip Great Recession. The misguided desire for austerity now will do the same now.
In 1937, the reasons WHY austerity during a severe recession is a bad idea weren’t known. They ARE known now — in large part because of what happened after the mistaken government policy of 1937.
The stubborn, ignorant, and willfully blind adherence to dogma in the face of compelling evidence to the contrary is the hallmark of the right wing today. We see it in the Global Warming debate, we see it in the evolution debate, and we see it in economic policy.
It doesn’t matter whether “the public” is in favor of it or not; it will destroy the economy.
seascraper says
Than call your congressman and tell him you don’t want Obama to raise taxes as part of the debt limit thing and you want him to keep the Bush Tax Cuts
Christopher says
…if those tax cuts were being used to create jobs, but alas they are just being sat upon and doing nothing stimulative. Remember, the President has proposed to in fact keep the cuts on everyone’s first 250K. Beyond that the money is more useful in keeping the deficit somewhat under control where possible.
seascraper says
How is Obama’s proposal different from the tax increases FDR pushed through in 1937.
marcus-graly says
Per Wikipedia:
Senate
* Democratic (D): 76 (majority)
* Republican (R): 16
* Farmer-Labor (FL): 2
* Wisconsin Progressive (P): 1
* Independent (I): 1
House of Representatives
* Democratic (D): 334 (majority)
* Republican (R): 88
* Wisconsin Progressive (P): 7
* Progressive (P): 1
* Farmer-Labor (FL): 5
The next election, however, resulted in large gains for the Republicans, such so that, while Democrats retained their majorities, there was an effective coalition of conservative Democrats and Republicans blocked any further New Deal style legislation.
seascraper says
You’re right. The conservative Democrats rolled back the tax increases.
marcus-graly says
I’m not sure if it was the conservative or liberal faction the pushed for the rollback of fiscal policy, but it happened in 1938, when congress was still dominated by the liberals.
hoyapaul says
First you think that the Republicans were in charge of Congress after 1936 (of all elections!), even though the 1936 elections featured one the largest blowouts any party has ever achieved in American political history. Then you think that the conservative Democrats dominated congressional fiscal policy in 1938 — a completely false claim, given that the progressive wing of the party did extremely well in the 1936 elections and FDR was probably as powerful as any president following his first re-election to that point or since.
These historical inaccuracies do little to convince anyone of your position here.
seascraper says
Sorry, I forgot that conservative Democrats existed at one time.
Christopher says
Last I checked they still do – starting with the White House it seems!
cos says
I should note, BTW, that Hoover’s spending increases became significantly less restrained in 1932, and this may well have helped kick off the economic expansion that began in FDR’s first year, 1933. But my point isn’t to contrast Hoover vs. FDR, it’s to show that we need fiscal policy during an employment slump, and that cutting spending now with a misguided short term focus on the deficit is a very bad move. If Hoover’s substantial spending increase of 1932 was indeed the first step of the New Deal, that also supports my point. Hoover’s spending increases before 1932 were much smaller and, as I saw someone else write somewhere, were like bailing your boat out with a thimble.
nopolitician says
Hoover cut taxes late in 1929 in response to the Great Stock Market Crash. He was trying to stimulate the economy but It had no effect on the economy except to create budget deficits.
This set up the overwhelming demand for the Revenue Act of 1932, which increased taxes on just about everyone and cut government spending in order to eliminate the budget deficits. The lowest bracket went from 1% to 4% – quadrupling. The rate at $100,000 in income went from 25% to 56%. All kinds of deductions were eliminated. Clearly, this was too much at once. The economy slumped following this.
There is a kernel of truth to conservative anti-tax fervor; raising taxes on everyone would produce the same results, a decline in spending.
However, consider that the person earning $20,000 a year is very different from one earning $1m a year. If you take an extra 3% of the former’s income, that is 3% that is taken out of play in the consumer economy (especially if it is not used by the government elsewhere). If you take an extra 3% from the latter’s income, that is 3% taken out of the investment scene – people buying assets such as stocks, houses, and even speculating on the gold or oil markets. That has virtually zero impact on the consumer economy.
Hoover also enacted the Smoot-Hawley tariffs. Again, broad-based tariffs that crippled foreign trade. We need to address trade as well — because most of the consumer economy is fueled via buying cheap stuff from China. That is why attempts to stimulate the lower income brackets have done almost nothing, because those people are just buying more stuff from China and putting Chinese workers to work in the factories.
We obviously don’t want to cut off all trade, but we could stand to rebalance out trade with China, since we’re operating at a massive deficit. It might stink to have to pay more for a DVD player made in the USA, but if jobs start popping up here, I doubt people will complain for long.
So I think that the way out of this mess is to selectively increase taxes to shift money from the capital economy to the consumer economy, and to increase tariffs so that we don’t buy as much cheap crap from China and instead buy it either from our own workers, or from countries which have more balanced trade with the USA. We should also start a public works program to employ people who have been employed for more than a year (since these people are being rejected from private employment due to the very fact that they are unemployed). This will boost the consumer market, with more of the demand being met by domestic production (due to tariffs which make domestic manufacturing more competitive as compared to slave-labor produced goods from China).
dave-from-hvad says
apparently either in this country or around the world. Despite the clear evidence that government spending is good for the economy, particularly when economic times are bad, the response of the IMF and World bank, for instance, to the economic meltdown in Greece is once again austerity.
Taxes isn’t the issue here; it’s cutting public spending, eliminating public sector jobs, gutting programs for the poor, cutting Social Security and Medicare for the middle class, concentrating wealth in a few big corporations and exempting them from regulations and oversight, and promoting stock market speculation instead of manufacturing and innovation that will keep us on a sustained path to recession.
That’s the Republican and Tea Party agenda, and unfortunately the president and members of his party are unable or unwilling to do much about it.
HR's Kevin says
n/t