You Cannot Cut Your Way Out of a Recession

It was the spring of 1937 and the country was finally emerging from the Great Depression. The long, hellish years of 25 percent unemployment and widespread poverty, misery and economic stagnation was in the past, and there was light at the end of the tunnel. By all accounts, it appeared the worst was behind the United States. Franklin Roosevelt was all but set to declare victory over the Depression, with his massive federal intervention in the economy a huge success. Government spending had bridged the gap long enough to increase demand and allow private spending to rise, reigniting the American economy. Then, suddenly, in the spring of 1937 something happened. Unemployment, which had been down as low as 15 percent (from a high of 25 percent) jumped back up. Production, profits, and wages, all of which had returned to their 1929 pre-Depression levels, sank. The economy hit a second-wave recession that lasted 13 months, extending the Depression right up to the cusp of World War II. What happened in 1937 that caused a recovering economy to sink back into the recession/depression abyss? The government, in its desire to avoid deficit spending at all costs, cut significantly back on spending. The Works Progress Administration and the Public Works Administration, which had together so successfully moved consumer demand up during the dark days of the Depression, saw their budgets significantly cut. PWA projects were halted. Unsurprisingly, this focus on budget-cutting and deficit-reduction had tremendous impact on the national economy. Unemployment jumped by five percent, from 14 to 19 percent of the population. More than 12 million Americans were once again unemployed. Manufacturing output sank by over one-third, and the race to the bottom was back on. Consumers no longer had money to spend, so businesses cut back on inventories and production, leading to more layoffs, leading to even fewer consumers with money to spend. Fast forward to 2011 America. The economy, which had been on the ropes with a banking scandal/crisis and the corresponding housing market bubble popping, survived after a massive infusion of cash from the federal government. Banking institutions were bailed out, possibly saving entire industries. After walking the economy back from the edge, things were better, but not yet good. Much like 1937, the focus turned from "how can we get the American people back to work" to "what are we going to do about all this debt?" In 1937, the result could not be more clear: the turn toward austerity plunged the economy back into a second Depression. Consumer demand dried up and businesses literally had no one to sell their goods to. The economy did not recover for years, not until government massively increased spending on war goods (first for Britain and the allies under Lend/Lease, and then later for ourselves when the United States entered WWII formally). Now, we have Republicans making the same mistakes with the economy, and trust me when I say we will get the same results. Cutting government spending now, with the economy still in tatters and with unemployment still far too high, will destroy whatever progress the economy has made the past three years. If you think the last year has sucked, you haven't seen anything yet. The funny thing is, it doesn't matter where the cuts come from. You name the place and I can show you how that will reduce consumer demand, and with it, reduce businesses profits, business investments, and even business production...and with that, reduce business payrolls. And thus the 1937 downward spiral is replayed here, in an era where we should know better. Progressives seem to understand this, even as their president does not. Paul Krugman, perhaps my favorite economist, has been beating the drum about the stupidity of cutting spending since the recession started, as well as the need for actual stimulus (large stimulus) to get the economy moving again. We can see the limited stimulus package didn't work, primarily because it was too small and not focused on actual stimulus. We can see that demand is simply not growing fast enough to push businesses to create jobs. We can see these things and we do nothing? Well, worse than nothing. We cut spending when we should be increasing it. We focus on deficits and debt when we should be focused solely on job creation, whatever the cost. We will all suffer for this folly.