May 20, 2018
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The Mistake of 1937

The year 1937 has special significance to economists. That is the year the federal government began to reel in spending programs aimed at propping up and stimulating the depressed economy. When the economy again dipped, the lesson learned was that the oxygen mask and IV tube must not be removed just because the patient talks about leaving the hospital.

Earlier this year, Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, boldly maintained that rather than the $1 trillion stimulus plan proposed by the Obama administration, $3 trillion should have been injected into the economy. The stimulus plan that finally passed totaled $787 billion, less than the president wanted.

A second stimulus plan has been discussed, but the political reality is that such a package would die a quick death. Underlying the opposition to further stimulus — whether it be aid to ailing state governments, tax breaks for home buyers or another “cash for clunkers” program — is the federal deficit. The deficit for the 2009 fiscal year that ended Sept. 30 is $1.42 trillion, a record.

Deficits are universally understood to be bad; bad for the economy, bad for the taxpayers who ultimately must retire the accumulating debt, and bad for the elected officials who support them.

But there are times to borrow and spend. Just as an entrepreneur borrows from a bank to launch a business that later reaps profits, the government must spend to spur economic activity which later produces tax revenue.

White House budget director Peter Orszag explained the administration’s thinking to NPR: “We have to realize the appropriate deficit for this year or next year is much different than what the appropriate deficit is out in 2016 or 2017. We are living in exceptional times. The difficulty is that by providing tax relief and additional spending, deficits help to spur economic growth, but then when the situation returns to a more normal environment, the effect flips and becomes adverse. We need to transition from one to the other, and that’s a very difficult line to walk.”

The goal, he continued, is to “be on a glide path” from the 10 percent deficit “to something around 3 percent,” but done in a manner “that avoids the risk of repeating the mistakes of 1937.”

Yet the Wall Street Journal reports the White House Office of Management and Budget “has asked all cabinet agencies, except defense and veterans affairs, to prepare two budget proposals for fiscal 2011 … one would freeze spending at current levels [and] the other would cut spending by 5 percent.”

In 1937, President Franklin Roosevelt faced debt of his own making. President Barack Obama faces a balance sheet he inherited from President George W. Bush that includes two wars ($931 billion to date), tax breaks ($3.9 trillion over 10 years) and a Medicare prescription drug benefit ($400 billion over 10 years). Knowing when to come about — too soon could see the sails lose wind, too late could put the economy on the rocks — may be the biggest decision the president makes.

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