Thinking about Freezes, from 1938.


So Obama is going to be freezing non-security discretionary spending. RA at Free Exchange has the best writeup. It’s worth noting even respectable neoliberal deficit hawks like Brad Delong are pissed off about this (posts one and two).

Since it’s feeling like 1937 all over again, I’m just going to jump ahead and start digging up my favorite “We Told You So” editorials from 1938. You should read the following from the New Republic. It’s an editorial directed at Franklin Roosevelt who had decided in 1937 to start fiscal austerity measures and balance the budget while the economy was still weak, causing a second dip in the depression. The similarities are eerie:

Bruce Bliven, “Confidential: To the President,” New Republic, April 20, 1938:

THE NEWSPAPERS have told us during the past week or so, Mr. President, that you have at last decided to return to the policy of “pump-priming” through large federal expenditures. Amounts running as high as four or five billion are being mentioned. I am one of the millions of people who earnestly hope that these plans will be put into effect.

No one can any longer doubt that the present depression is an extremely serious matter. The Federal Reserve Board index has sunk from 118 a few months ago to 79 at present…

I can well understand, Mr. President, with what grim humor you must have listened, in recent months, to the anguished hows of business men-anguished because you had taken their advice and they didn’t like it. For years, every self-appointed spokesman for business had been demanding that you should balance the budget. To be sure, nobody suggested that we should accomplish this by increasing taxation to the level of the British, for example, which is about three times as high as our own. On the contrary, they wanted you to perform this mystic and sacred rite by economizing in expenditures. Since nearly all the abnormal spending in your administration had been for relief, that is obviously where the wanted the cuts to be made.

There is a deadly parallel between the downward movement of the business index and this enormous drop in federal spending. I am not saying that the curtailment of relief was the only cause of the trouble, or even the chief cause…no one can doubt that the sudden withdrawal of hundreds of millions of dollars of federal relief funds, the smashing of thousands of projects all over the country, did contribute materially to the creation of our present misery. Your triumph over your foes-on this point, at least-is complete.

To be sure, they do not hate you any the less because you have demonstrated that on this extremely important matter they were wrong and you were right. If anything, they hate you more than ever. One of the great mysteries that historians of the future will puzzle over is why you have aroused such bitter animosity….Taxes during your administrations have on the whole been amazingly light…Your very mild efforts to regularize Wall Street, to make the electric utilities behave, to obtain recognition of union labor, have been matters on which most sensible men have agreed with you. They have been directed chiefly against the small minority of bandits whom the majority has always wanted to discipline if it could.

Those who were demanding economy, a year ago, and now don’t like it, have gone back to the old cry about “confidence.” If you would only do something to restore confidence, they say, business would go on zooming across the landscape, full of vitamins…

Replace “electric utilities” with “health care insurance industry”, and also assume that real legislation has actually passed, and it’s the same argument. (I love the “full of vitamins” line at the end.) I couldn’t find this online and got it from my library’s online resources. I would certainly take it down ASAP if my posting it upsets the owners.

But I think magazines with a presence from this time period should make a quick point to post both the “balancing the budget in a recession is a bad idea” editorial from 1937 and the “thanks for realizing that was a terrible idea” editorial from 1938 (or the opposite argument) in light of the upcoming State of the Union. (This is perfect intern work.) I think The Nation has some pay-walled (maybe here, here, or here?). Harper’s, The New Republic and The Atlantic all should have more. It might even make a really good article. I’ll see if I can find more myself….

Also: Make sure to read Bruce Bartlett on this line of argument: Is Obama Repeating the Mistake of 1937?, which has an excellent history of the time period.

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5 Responses to Thinking about Freezes, from 1938.

  1. chrismealy says:

    Is it 1937 or is it 1930?

  2. Mike says:

    Oh dear. I suppose it depends on how you think the financial sector is doing….

  3. Not the Mike You're Looking For says:

    I agree with the points made in the Free Exchange and Bartlett pieces, but let’s not get carried away with the 1937 analogies. Obama’s proposal, unwise at it may be, is pretty small proportionately. Also, recall that the Fed raised reserve requirements in ’36, which I’m inclined to believe had a greater effect on the economy. (Yes, I know that Bernanke’s been talking lately about paying interest on deposits, etc., but I’m not convinced that he isn’t just trying to jawbone the markets.)

  4. sraffa says:

    The histrionics by people on the left that I usually agree with is striking.

    Let’s look at the spending effects. The administration says it will save $250 billion over 10 year. 2008 GDP is about 14 trillion, and to be conservative, assume no nominal growth. 25 billion/14000 billion is 0.00178, or less than a fifth of a percent of GDP per year. It’s a rounding error.

    Plus, the point is to cut the deficit once the economy recovers, which it should have done before the beginning of the next decade.

    Naturally, this freeze goes in the wrong direction in the short-run, but not very much in any direction in any case. It’s also great politically, because it give him something to counteract Republican criticism about the deficit. I hope the cuts we see are largely for ag subsidies, so that rural red-staters will need to explain why reckless spending is needed for their rich farmer friends…

    • sraffa says:

      From the WSJ:

      Sen. Saxby Chambliss (R., Ga.) welcomed the president’s decision to “rein in government spending,” but complained the proposed budget “unfairly targets farmers and ranchers to achieve savings and fund Washington-based programs.”

      I guess we’ll see how this plays out, but so far, the spending cuts seem reasonable (in character). I’d rather see pork cut and a good jobs bill than neither.

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