USA Depression 2.0?

[Senexx]

The Great Recession is a replay of the Great Depression in many ways; one of them is fiscal policy. Let’s rewind the tapes:

-1929-1930: President Hoover’s first response is to do as little as possible to let market mechanisms do the job of “correcting imbalances.” The general consensus is that government deficit would lead to crowding out effects and so would worsen the economic situation. As a consequence, those first two years records a fiscal surplus (Figure 1).

-1931-1932: The economic situation worsens and enters into a debt-deflation process. Hoover is forced to increase government involvement through policies like the Reconstruction Finance Corporation. This leads to a fiscal deficit representing about 2.5% of GDP.

-1932-1933: Public opinion is outraged by the “massive” deficit and “waste.” Roosevelt runs a Presidential campaign that promises to bring back the federal government fiscal position into the black; he is elected in a landslide.


-1933-1936: Roosevelt puts in place New Deal programs and experiments a bit more with fiscal deficit. While the scale of ND programs is quite impressive, their actual impact on the deficit-to-GDP ratio is limited with a deficit of 5% relative to GDP. Unemployment rate (Figure 3) goes down from 25% to 9% if one includes WPA, CCC and others New Deal employees into the employed population (official data counts them as unemployed). WPA, CCC, and other work programs bring the US into the 20th century in terms of infrastructures (electrification, irrigation, schools, etc.). However, all this is completely overshadowed by outcries about the “unsustainable” deficit and the supposed “communistic” nature of the New Deal.

-1936: An election year, Roosevelt feels the pressure in terms of discontent regarding the deficit so he proposes to cut New Deal Programs massively (see Figure 2) and to lower other government expenditures.

-1937: Recession year. Roosevelt implements his proposal to “restore fiscal sanity.” The decline in government spending leads to massive layoffs, and so to a decline in wage earnings. Profits of companies also go down because of decline in aggregate demand. Nobody is happy even though the deficit-to-gdp ratio reaches 0%.

-Back to the present:

We are now in 1936 with the government focused on trying to cut deficit because “America cannot be great if we go broke”. The government proposes to cut government spending and to raise taxes.
Get ready for a replay of 1937 if the government goes through with its propositions. The first step in this direction seems to have been taken with Congress failing to extend unemployment benefits.
This constant hysteria about fiscal deficit is counterproductive, dangerous and unnecessary. The deficit to gdp ratio (and debt to gdp ratio) will go down by itself as the economy recovers, no need to cut government spending and to raise tax rates now. On the contrary, one should let government spending and tax levels be whatever they need to be to promote economic stability. As the economy recovers, government spending will go down and tax levels will rise (given tax rates) which will lower government deficit.

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[Leftwinger]

Yes, I read that the other day. History may not repeat itself exactly but it sure does ryhme.

The saddest thing is that it is largely avoidable.

[Outlaw Yogi]

History has many examples of powerful nations on the financial wane going to war to expunge [by invading the debtor] or addressing debt problems by stimulating their economic climate via manufacturing and related industries. Fortunately for U$A North Korea seems to be stepping up to the plate.

As for history not repeating itself, I can only wonder what planet you come from?
The phrase 'Those who forget the past are bound to repeat it' is proven correct time and time again, because while technology and its benefits has continually advanced, our behaviour hasn't changed in over 5000 years.

[Leftwinger]

Heretic, what I meant is that history DOES repeat itself - it doesn't look exactly alike each time but it's basically the same thing.

[mantra]

On the contrary, one should let government spending and tax levels be whatever they need to be to promote economic stability. As the economy recovers, government spending will go down and tax levels will rise (given tax rates) which will lower government deficit.

Isn't this what they do anyway?

Each time they go into recession, they drag the rest of the world down with them and now with globalisation it's a whole lot worse. If a country is in debt - surely they need to use a little restraint and not continue to gamble and spend at whim.

History has many examples of powerful nations on the financial wane going to war to expunge [by invading the debtor] or addressing debt problems by stimulating their economic climate via manufacturing and related industries.

Unfortunately the US and Australia haven't enough home grown manufacturing left to stimulate the economy. We sell our mineral resources to developing countries so they can grow wealthy with their manufacturing.

The US is leaning heavily on us again with their FTA and deployment of troops here - so it looks like another war could be imminent to get them out of this mess. The difference this time around is that we've helped China become stronger, while the US has become weaker.

Fortunately for U$A North Korea seems to be stepping up to the plate.

North Korea is an ally of China and hardly likely to be forsaken if the US becomes too aggressive.

[Outlaw Yogi]

My apology then Lefty for my apparent misinterpretaion/miscomprehension.

[Senexx]

On the contrary, one should let government spending and tax levels be whatever they need to be to promote economic stability. As the economy recovers, government spending will go down and tax levels will rise (given tax rates) which will lower government deficit.

Isn't this what they do anyway?

No. Otherwise saying "on the contrary" and the rest of the paragraph would be unnecessary.

Each time they go into recession, they drag the rest of the world down with them and now with globalisation it's a whole lot worse. If a country is in debt - surely they need to use a little restraint and not continue to gamble and spend at whim.

This is can all be easily fixed. They're all cutting spending and creating unemployment and will continue to drive unemployment higher until they begin to look like Japan from the 90s. It can easily fixed by spending. This spending will help the economy recover, the government spending will go down and tax revenue will rise which will lower any government deficit.

It is simple accounting in any country that has sovereignty over their currency and has it on free floating exchange.

The UK, US, Aust, NZ, Canada all have this.

[IQSRLOW]

It can easily fixed by spending. This spending will help the economy recover

The bolding highlights your limited understanding of the finance world.

The UK has been doing this for years, hence the reason they are a basket case. The underlying reason is that LW governments typically use govt funds to 'spend' while RW govts use govt funds to invest.

[J.W. Frogen]

It is different this time around because the USA was not a major debtor nation in the 30s, going into the depression she had a robust economy with a trade surplus, so government stimulus did boost confidence in the economy, no one feared the USA could not pay it off, this time it does not work because people fear the debt was so large before the crises stimulus spending only increases doubt about America's economic future. (Also Obama did not lead the stimulus process, direct it toward measures that would boost confidence, he just wrote Congress a blank check and they wasted enormous amounts of money.)

Even major debt holders like China are slowly diversifying their debt holdings away from the USA fearful she can never get out of the hole.

The Fed is also pumping money into the economy to prevent deflation two things can happend doing this when debt levels are high, a sort of economic stagnation Japan saw through the 90s when she tried to spend her way out of economic trouble or eventual hyper inflation if the policy works but they then can not dramatically cut money supply and the government reduce debt.

[AiA in Atlanta]

Bernanke should be fired ... pronto.