The 1930s Recession Could Return as Soon as This Friday

The sharp decline from the 3.1 percent growth in the previous quarter to the contraction by 0.1 percent in the fourth quarter has not as yet lead to widespread fears that the United States is about to enter another recession.

Not yet anyway. But given that much of the cause of the decline can be attributed to cuts in government spending, I’m quite concerned that this news is but a harbinger of things to come after sequestration sets in beginning this coming Friday, March 1st.

We are, after all, facing another government-manufactured showdown on March 1st, as well as a probable government shut down near the end of March when the stopgap measure that has been financing the federal government expires.

GOP Dysfunction Scares Investors-Not Debt

Most knowledgeable economists, except Nobel Laureate Joe Scarborough (in his own teeny weeny mind of course), agree that the uncertainty brought about by the dysfunctional nature of obstructionism by the hard-right in Washington is having a negative effect on the economy. But what we don’t hear about is the direct effects that cuts in government spending have had on job growth. The overwhelming majority of Americans are not, for example, aware that one of the primary drivers of our doggedly high unemployment rate is the sharp decline in public sector employment-in basic terms, the massive layoffs of teachers, firefighters, police officers, and other public sector employees over the past two years.

Most Americans are equally clueless in recognizing that one of the main ways President Obama managed to stop the downward economic spiral at the start of his first term was through the funding of public sector jobs via the stimulus funds that were channeled to state and local governments. It was the cessation of that federal support, and the GOP-led House’s refusal to support the president’s modest request for additional federal dollars to support state and local governments in his jobs bill, that initiated the recent public sector decline.

So here we are at the beginning of President Obama’s second term and the U.S. economy is still in a very fragile state. What truly bewilders me is that so many Americans are incapable of seeing-or just simply refuse to acknowledge-the direct link between government spending and jobs. After all, it was undeniably the deep cuts in federal defense spending that helped push the economy into negative territory in the last quarter of 2012.

In the face of such economic realities, any other Congress would support the type of modest spending proposals President Obama put forward in the American Jobs Act. But rather than provide funding for the employment of teachers, firefighters, police officers, rather than put hard-pressed Americans to work rebuilding our dismal infrastructure (now rated 23rd in the world), Congress would rather engage in another endless round of bickering about the perils of deficit spending.

Once again, by not understanding the difference between beneficial deficit spending and the harmful breed-as practiced by Presidents Reagan, Bush I and Bush II-Americans will once again fall for the simplistic call of the deficit hawks; those genius oracles of doom who persist that without an immediate and massive reduction in the level of federal spending we face an imminent economic collapse.

By the way: Europe? UK? How’s that deficit hysteria working out for you? Don’t worry, soon enough, conservatives will get their way and we’ll have 25% unemployment too.

Yet Another Similarity to Pre-Great Depression

More eerily similar by the day, approximately three-quarters of a century ago President Roosevelt faced the exact same argument at the beginning of his second term.

Thanks to the stimulus spending of the New Deal, the U.S. economy had been growing at an average annual rate of over 11 percent. Fearing inflation, his more conservative economic advisors, like Treasury Secretary Henry Morgenthau, urged the president to cut spending, balance the budget, and tighten the money supply. But the U.S. economy—which had seen the largest drop in the unemployment rate in history—was still fragile, and the result of the government spending cuts too soon was a disaster. Unemployment shot up, industrial production declined, and the country soon found itself in the midst of a double-dip recession which culminated in the Great Depression.

Although FDR realized quickly how bad his mistake was and reversed course back to Keynesian economic policies (counter-cyclical deficit spending) that he had begun at the start of his first presidential term—which quickly turned the U.S. economy around–the damage had already been done to the American people as well as to FDR’s political fortunes.

Millions of Americans needlessly lost their jobs, 25% unemployment became reality and the president took a pounding in the 1938 midterm elections, making his social and economic reform agenda much more difficult to achieve.

Hopefully, President Obama has studied what happened to FDR in 1937. At the very least he should not give up on his insistence that Congress provide a modest level of support for additional federal spending on behalf of state and local governments. He should also insist on further federal spending on infrastructure.

As FDR said, these measures do not represent wasteful spending; they represent an investment in the American people, an investment in what he liked to call “human capital.”

Human capital whose health and well being is not only critical for the present but also for the future.

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  3 comments for “The 1930s Recession Could Return as Soon as This Friday

  1. Patriot 1776
    February 26, 2013 at 11:54 am

    Something I have a question about??

    I, like most people I know, tend to think of economic problems happening in 2 key areas. Jobs and the banking system. (regardless of the cause – this is where they tend to surface)

    Currently the Fed is buying approximately $50 billion per month is various kinds of securities – from bonds to mortgages. There plan is to sell them when things turn around.

    My question is – what happens if the Fed takes a huge loss? What if they get 60 cents on the dollar? How will this affect the banks and our economy.

    I do not know and do not hear it discussed. I believe there is a small but growing and very real chance of this happening.

    Any ideas?

  2. Mechasr
    February 25, 2013 at 10:03 am

    It seems to me that as long as state legislatures are hell bent on cutting jobs whatever they do at the federal level won’t do much good. Federal funding for cops, firefighters, teachers, etc. may make it easier for states to keep them working, but it doesn’t force them to keep them working.

    IMHO, there’s gotta be a change at the state level. More than anyplace else, that’s where the austerity measures are really being implemented.

  3. Winky_Dink
    February 25, 2013 at 7:25 am

    A sobering look at how history repeats … if we cut our nails to the “quick” … all that’s left is the pain when we try to touch something.

    Budget Hawks soon turn into economic Vultures … cause the woes and then glide away on the updrafts of public sighs.

    Ugh. –WD

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