Tuesday, September 20, 2011

It is the 1930s All Over Again

Here is a bit from an article by John B. Judis in The New Republic where he interviews Mitt Romney and poses the question of why all the political leaders want to re-create the mistakes of Herbert Hoover in the 1930s:
This August morning, in the wake of the battle over raising the debt ceiling and Standard & Poor’s decision to downgrade America’s credit rating, he has come to Concord, New Hampshire, to speak to the local Chamber of Commerce. Beforehand, he agreed to answer a few questions from reporters.

In an opening statement, Romney blamed Standard & Poor’s decision on President Obama. The president’s spokespeople, he said, “would substitute Harry Truman’s ‘The buck stops here’ with a new motto: ‘The buck stops somewhere else.’ The truth is the buck stops at the president’s desk, and he needs to reassert the leadership necessary to restore America’s financial foundation.” To achieve such a foundation, Romney endorsed the congressional Republican plan, dubbed “cut, cap, and balance,” which would slash $111 billion from next year’s budget, reduce federal spending as a percentage of GDP from 22.5 to 19.7 percent in six years, and adopt a balanced budget amendment to the Constitution. The plan represents an attempt to achieve private-sector prosperity through public-sector austerity.

“Mr. Romney,” I said, after he had fielded several other questions, “I want to ask you something about history. You know, when Herbert Hoover had to face a financial crisis and then unemployment, his strategy was to balance the budget and cut spending, and that made things worse. When Roosevelt came in, unemployment was twenty-five and went to fourteen percent by 1937. With deficits. Aren’t you repeating the Hoover mistake?” Romney’s grin turned quizzical. “Do you really think so?” he asked me. “I do think so, but you go ahead,” I replied.

“Let’s go back to the Hoover days,” Romney began. “The issue in the Hoover years was what was happening in the budget that year. This year, we are spending $1.6 trillion more than we take in, and that would have made anyone in either party blush if they saw numbers like that. And the issue today is not just this year’s deficit, it’s deficits as far as the eyes can see. ... America has to rein in the excessive spending not just this year, but over the long period of time.”

I didn’t think it would be proper to turn Romney’s press conference into a debate about history, so I let his answer stand. But he seemed to be suggesting that the premise of my question was flawed because deficits are much larger today and will probably continue unabated. And they are larger—but that is because our GDP and government are also larger. Meanwhile, if our deficits stretch “as far as the eyes can see,” so did the deficits in Hoover’s day, which continued unabated for 16 years. Romney was insisting that there was nothing to be learned from Hoover’s response to the Great Depression. But, in fact, what happened in the United States and Europe in the ’30s is an excellent—perhaps, the best—guide to what is happening to us now.

Yet it’s not just Romney and the other Republican presidential candidates who seem oblivious to the lessons of the ’30s. From David Cameron to Angela Merkel to Japan’s new Prime Minister Yoshihiko Noda, many of the world’s leaders are convinced that austerity is the way to fix our broken economy. President Obama—at least judging by his recent jobs speech to Congress—seems to understand that this approach is leading to economic disaster; but he may have waited too long to begin making this case to the American people, and the odds that he can actually get any kind of massive spending bill through Congress, now or even after 2012, remain low.


TODAY’S RECESSION does not merely resemble the Great Depression; it is, to a real extent, a recurrence of it. It has the same unique causes and the same initial trajectory. Both downturns were triggered by a financial crisis coming on top of, and then deepening, a slowdown in industrial production and employment that had begun earlier and that was caused in part by rapid technological innovation. The 1920s saw the spread of electrification in industry; the 1990s saw the triumph of computerization in manufacturing and services. The recessions in 1926 and 2001 were both followed by “jobless recoveries.”

In each case, the financial crisis generated an overhang of consumer and business debt that—along with growing unemployment and underemployment, and the failure of real wages to rise—reduced effective demand to the point where the economy, without extensive government intervention, spun into a downward spiral of joblessness. The accumulation of debt also undermined the use of monetary policy to revive the economy. Even zero-percent interest rates could not induce private investment.

Finally, in contrast to the usual post-World War II recession, our current downturn, like the Great Depression, is global in character.
Go read the whole article to get all the historical comparisons. It is tragic to see leaders stupidly recreating the decade-long mess just three generations later. I always thought that people learned from the past. But it is obvious that today's leaders are illiterate and simply haven't read history and refuse to learn any lessons from it.

Here is what ideological bigotry and moral blindness can create:
By March 1933, when Franklin Roosevelt took office, the unemployment rate had climbed to 24.9 percent from 3.2 percent in 1929.
The leadership by Obama in the US has been pathetic and ineffective. He shows no acquaintance with history and no curiousity about the historical parallels of today with the 1930s. He simply ignores the past and refuses to learn any lessons:
IN THEIR INITIAL response to the recession of 2008, leaders in the United States and Europe appeared to heed the lessons of the Great Depression. Obama, British Prime Minister Gordon Brown, and French President Nicolas Sarkozy each backed generous government spending programs to revive the economy, and they also advanced proposals for reforming the increasingly dysfunctional international monetary system. In the United States, Federal Reserve head Ben Bernanke and Council of Economic Advisers chair Christina Romer had both made their mark as academics with analyses of the Great Depression. And Britain’s Labour Party had become a bastion of Keynesianism after World War II. In short, there seemed little doubt that the follies of the late ’20s and early ’30s would be avoided this time.

But then problems began to arise. Obama’s initial stimulus proved woefully insufficient to stem the rise in unemployment. The $787 billion federal stimulus included $288 billion in tax cuts, which were as likely to be saved as to be spent; meanwhile, the stimulus was partially offset by an estimated $425 billion in state and local spending cuts and tax increases. The need for more spending was evident to Romer and to liberal economists, including Paul Krugman and former Council of Economic Advisers head Joseph Stiglitz; but Obama failed in his first year to press energetically for additional spending. His influential treasury secretary, Timothy Geithner, believed that, after the initial stimulus, the recovery was proceeding on its own, and Obama’s attention was focused on passing health care reform. By the end of 2009, the failure of the recovery to take hold had emboldened the Republican opposition and given birth to a new right-wing movement, the Tea Party, that called for a drastic reduction of government spending.

Republican victories in the 2010 election led Obama to backtrack. He embraced the rhetoric of austerity—calling on government to “tighten its belt”—and accepted spending cuts in order to pass a budget and win Republican agreement for raising the debt ceiling. Most of these cuts are slated to take place over a decade, but as much as $30.5 billion is to be cut in 2012. In acceding to the uncompromising Republican opposition, Obama made it less likely that the United States would recover from the recession during his first term. Recently, as Obama’s popularity sank, even among Democrats, and as the economy has continued to flounder, he has changed course, calling for $400 billion in new spending and tax cuts to create jobs; but the odds that Republicans will go along with him seem low.
What drives me crazy is that the Republican argument for austerity because there are deficits "as far as the eye can see" simply ignore that just 7 years previous to the 2008 collapse the US was in a surplus position because of Clinton and the growth in the late 1990s. There can be budget surpluses again if only the US can be put back to work. Instead, the Republicans want to cut spending and drive the economy down. But this simply means that the debts which are weighing on the economy loom larger as people have less money. It is a death spiral. Why can't they see that?

Judis concludes his article on a very disheartening note:
In the ’40s, it finally took a world war to bring about the conditions for reforming the world’s leading economies. The war established the United States as the unchallenged leader of world capitalism, and it convinced Washington that a renewed strategy of “beggar thy neighbor” would be self-destructive. The popular New Deal reforms also established a floor under government’s role. Western Europe and Japan followed America’s lead. Will it take another global catastrophe to convince the leaders of the United States, Europe, and Asia to halt the repetition of past errors—to recognize that they need to establish a new economic order? What will it take to convince the people of the United States that they have to overcome their cultural predilections against big government? These are the questions that will have to be answered over the years, but, in the coming election, I would expect they would meet with the same Cheshire Cat grin that I received when I asked Romney whether he wasn’t calling on America to repeat Hoover’s mistakes.

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