The indifference of the Obama administration toward the staggering sums the government is borrowing is something to behold. At $1.6 trillion yearly, the federal budget deficit promises to eat us alive in the near future. In financial circles and in commentary, sirens are beginning to wail about the matter. Bond king Bill Gross has announced that at this point, buying Treasuries is a sure loser. Bush economic advisor Greg Mankiw has predicted that by the next decade, the IMF will have to guarantee the US with an austerity package.
When was the last time there was true panic "“ in the political sphere "“ over the deficit? Not the last several times deficits reached historic levels. In the 1980s, when deficits hit 6% of GDP (compared to today's 11%), there was carping in Congress, but no serious efforts at remediation. In the 1940s, when the debt was double today's mark (at 120% of GDP), the US was content to kick the can and have an insidious inflation cut the thing down.
True panic over the deficit in the innards of Washington last happened in the depth of the Depression, 1932. And it was the worst thing that has ever hit this economy.
Here's a fact the textbooks always omit. Over his four years in office, President Herbert Hoover increased federal spending like nobody's business. From 1928 to 1932, spending went up in real terms by a staggering 97%. As for Hoover's successor Franklin Roosevelt, it took him eight years (and the exigency of World War II), to get expenditures increased by the same amount.
So how did Hoover pay for the blowout spending (spending which, it should be noted, proved useless in stopping the horrible descent in output, employment, and living standards from 1929 to 1932)? He didn’t. In 1930, against the advice of the economics profession, he tried a massive tariff. Federal receipts only plunged in its wake. Congress suggested a national sales tax. A flood of constituent mail nixed the idea. Finally Hoover settled on an increase in income-tax rates on the order of 150%.
The Revenue Act of 1932 took the marginal rate of the income tax from 25% to 63%. It also introduced a slew of progressive rate brackets "“ 55 of them "“ that would nail anyone who happened to have a good year with a higher tax bill. Here was Hoover's reflection on the act's passage:
"The willingness of our people to accept this added burden in these times in order impregnably to establish the credit of the Federal Government is a great tribute to their wisdom and courage. While many of the taxes are not as I desired, the bill will effect the great major purpose of assurance to the country and the world of the determination of the American people to maintain their finances and their currency on a sound basis."
Two years later, the US devalued the dollar by 75%. For fifteen years after 1932, the budget remained grossly unbalanced. And the living standards of the 1920s would not return until the 1950s.
The secret to the incredible length of the Great Depression "“ which persisted throughout the 1930s "“ was that the US sucker-punched the private sector with the 1930 tariff and the 1932 tax increase. When FDR replaced Hoover as president in 1933, he took a positive step by stopping deflationary monetary policy. But the economic expansion that soon began got stifled, because instead of counteracting Hoover's moves in fiscal policy, FDR built on them. FDR took the marginal income-tax rate up another 16 points and strove to intimidate business into production and employment. By 1939, net growth over a decade was nil. Then came a world war that took the budget deficit to a peak twenty times that which had kept Hoover up at night in 1932.
We now know that there is one thing that macroeconomic policy has to do for the economy to get rolling and for fiscal accounts to have a prayer of balance. Policy must be directed toward growth. Growth policy is that of stable money in the context of modest exactions on the government's part in the form of taxes and regulation. We paid a terrible price for being oblivious to this lesson in the 1930s and 1940s. Another opportunity to attend to it is materializing today.
's Categories: Economics, Op/Ed, Policy, Politics, byline=Brian Domitrovic
Pr. Domitrovic,
You concerned about the deficit. I would point out that on January 1, 2001 there was not deficit at all, the was a 100 BUSD *surplus*, there was no need for anyone to shut down any the government. The massive overspending and borrowing all began under the Republican administration of George W. Bush and the Republican controlled congress of 2001 "“ 2007.
http://en.wikipedia.org/wiki/File:Revenue_and_Expense_to_GDP_Chart_1993_-_2008.png
So where were you and other conservative thinkers during the Bush Administration when the government first went from surplus to deficit?
There was never any surplus. Go to the Dept of Treasury website and look up Govt Debt and you will see that it has grown every year. And recognize that this is only the cash flow deficit portion. The unfunded liabilities have been growing by trillions every year. If govt followed the rules it insists companies follow wrt financial reporting, ie GAAP, you would see what a problem this is. Check out John Williams Shadow Government Statistics website. And this is not a partisan situation. Fiscal conservatives like myself have been critical of out-of-control govt expenditure for as long as we have been paying attention. The donkey and the elephant are merely two faces of the same problem. Boston U Professor Laurence Kotlikoff estimates total federal debt and unfunded liabilities at over $200 Trillion. We are not just at the edge of the precipice, we are in freefall.
Hello gstrebel,
I have to disagree with you most strongly, there was a very real surplus. I provided a link documenting it. Here is a contemporary news story…
http://edition.cnn.com/2000/ALLPOLITICS/stories/09/27/clinton.surplus/
I would draw the readers attention to this particular quote: “Rep. J.C. Watts, R-Oklahoma, chairman of the House Republican Conference, said the GOP wants 90 percent of the surplus used for the debt. In a CNN interview, he said the other 10 percent should be used to “take care of a lot of priorities we have, like prescription drugs, making sure that our education needs are met, making sure some of our national security needs are met, and doing that while at the same time protecting the Social Security surplus and the Medicare surplus.”
So the Republican Party in 2000 knew of and acknowledged the existence of a surplus.
So you are correct, this is not a partisan issue, there was indeed a surplus which the Republican Party threw away with a wild spending and tax cuts.
Great! So how do you get growth? Nothing seems to be working.
Brian, I have to disagree with you in regards to smoot-hawley had in some way caused the depression
http://www.bea.gov/national/nipaweb/TablePrint.asp?FirstYear=1929&LastYear=1938&Freq=Year&SelectedTable=5&ViewSeries=NO&Java=no&MaxValue=103.6&MaxChars=5&Request3Place=N&3Place=N&FromView=YES&SmallFont=Y&Legal=&Land=
Notice that there is a slight decline in both exports and imports by the end of 1930. The trade balance remained around 0 during the entire time. Exports bottomed in 1932 "” 2 years before any revision or modification of Smoot-Hawley occurred.
The Smoot-Hawley Tariff was signed into law on June 17, 1930, and raised U.S. tariffs on over 20,000 imported goods. Legislation was passed in 1934 that weakened the effect of the Smoot-Hawley Tariff. In effect, the legislation functionally repealed Smoot-Hawley. Thus, the effects of Smoot-Hawley cover only the period between June 17, 1930, and 1934. This is the time frame that should be focused on.
You must be logged in to post a comment
Log in with your Forbes account
Create an account to join Forbes now
I'm a professor who's interested in our economic history and the theory that went into making it "“ for good or ill. On Past & Present, I blog about how history can help illuminate the economic challenges we face today, and how very often historical sources do validate free-market economics. I'm author of what's now the standard history of supply-side economics, Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity (2009). I have a Ph.D. from Harvard, teach at Sam Houston State, and live in that game capital of the Americas "“ Houston.
Read Full Article »