Paul Krugman, winner of the Nobel Prize in Economics in 2008, has written a cogent and timely op-ed in the New York Times illuminating what is currently going on at the nexus of economics and politics. For Krugman's biography click here. What is especially fascinating is his analysis of how reminiscent the present situation is of the dynamics existing in 1938 during the New Deal. Then as now, the United States stood at the crossroads of deciding whether to continue or contract government stimulus of the economy.
Krugman's piece, "1938 in 2010," begins with a setting up of the parallel scenario: "Here's the situation: The U.S. economy has been crippled by a financial crisis. The President's policies have limited the damage, but they were too cautious, and unemployment remains disastrously high. More action is clearly needed. Yet the public has soured on government activism, and seems poised to deal Democrats a severe defeat in the midterm elections." Sound familiar? It ought to. The situations facing Franklin Roosevelt in 1938 and Barack Obama in 2010 are eerily alike.
Krugman goes into how FDR listened to the deficit hawks in 1937 and pulled back New Deal expenditures, only to see the economy begin to soften alarmingly. He was able to rush some emergency funding through, which stabilized the situation, but public opinion had begun to set against any more deficit spending-just like today. The Gallup poll in March 1938 found that 63% favored cutting taxes on business and only 15% favored additional spending to improve the economy. In the midterms the Democrats "lost 70 seats in the House and 7 in the Senate."
Fortunately for the economy, the situation was retrieved by the need to rearm as the clouds of war began to gather over Europe in 1939. You ought to take a look at Krugman's piece to see how massive this government stimulus on an epic scale really was. For in economic terms, that is what the war footing essentially was from 1939 to 1945, an immense government spending and jobs program that achieved full employment and actually reduced the debt as a percentage of GDP as the national economy exploded.
Today we are again faced with the same dynamics, though there appears to be little chance of an overwhelming set of circumstances arising (such as the need to prepare for and fight WWII) to fortuitously restore the consensus for government spending to prime demand and end the Recession. In that sense, Krugman is right to make the case that we seem too often not to learn from history, that too many politicians and economists have been "unlearning the lessons of the 1930s" and appear ready to commit "all the same mistakes."
Krugman is right on the mark in closing with, "But always remember: this slump can be cured. All it will take is a little bit of intellectual clarity, and a lot of political will. Here's hoping we find those virtues in the not too distant future."
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