Back in the Great Depression, President Roosevelt thought it was necessary to reinvest in our country and put Americans to work building our nation’s infrastructure. His programs put thousands of people to work, and increased the country’s workforce. The Republican party back then, much like today, pushed for austerity measures. The national debt was too high. We couldn’t afford to do these things, is what told President Roosevelt. FDR gave the GOP what they wanted and decreased spending in 1937. What happened next is exactly what happens to all economies when the cash flow stops moving, it dips into a recession or worse.
You would think that the Republican Party today would have learned from their past folly, but unfortunately, they have not. In the month of June of 2011, a jobs report came out and it showed a net jobs gain of 18 thousand. The underlying issue here is 39,000 public sector jobs were eliminated in June and over the course of 8 months, almost a quarter million public sector jobs were lost. There is no wonder why the economy is losing steam, there are almost a quarter million people without a job, that used to spend money in the economy. 60% of our economic activity comes from spending and the consumer. Those 239K former workers spent their checks at the local shops and markets. Now they are tightening their belts.
Now, Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. So he is from their side of the aisle.
It is starting to look like 1937 all over again. As the table below indicates, the economy made a significant recovery after hitting bottom in 1932, when real gross domestic product fell 13 percent. The contraction moderated considerably in 1933, and in 1934 growth was robust, with real G.D.P. rising 11 percent. Growth was also strong in 1935 and 1936, which brought the unemployment rate down more than half from its peak and relieved the devastating deflation that was at the root of the economy’s problems.
By 1937, President Roosevelt and the Federal Reserve thought self-sustaining growth had been restored and began worrying about unwinding the fiscal and monetary stimulus, which they thought would become a drag on growth and a source of inflation. There was also a strong desire to return to normality, in both monetary and fiscal policy.
On the fiscal side, Roosevelt was under pressure from his Treasury secretary, Henry Morgenthau, to balance the budget. Like many conservatives today, Mr. Morgenthau worried obsessively about business confidence and was convinced that balancing the budget would be expansionary. In the words of the historian John Morton Blum, Mr. Morgenthau said he believed recovery “depended on the willingness of business to increase investments, and this in turn was a function of business confidence,” adding, “In his view only a balanced budget could sustain that confidence.”
Due to FDR caving to GOP demands back then, much like President Obama today, the gross domestic product plunged, 3.4 percent in 1938, and the unemployment rate rose to 12.5 percent from 9.2 percent in 1937.
It seems we are about to repeat this scenario again. The GOP has forced the President’s hand to make dramatic cuts because of the looming debt ceiling default. This may plunge the United States back into a deep recession that could last another year.
What happens a year from now? The Presidential election, and regardless of what the White House says, unemployment will matter in this election and the Republican Party knows that an improving economy means Obama will be re-elected and that they could also lose the House to Democrats again.