April 24, 2018
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Party like it’s 1937: fears of backslide into recession have historical basis

Gabor Degre | BDN
Gabor Degre | BDN
People pose in the fron of the Spending Revolt bus in Paul Bunyan Park in Bangor for first of three scheduled stops in Maine. The tour started in July in Las Vegas, Nevada and protests government spending. Over the months people from all over the country signed the bus to show their support.


Fears of slipping back into recession have been on the radar since the federal government’s aggressive steps to pull the economy back from the abyss were approved in 2009. The cautionary tale most often cited is what the nation witnessed in 1937 and 1938; after the unprecedented Great Depression (spanning the 1929-1933 period), the U.S. economy dipped back into negative growth.

As unsettling as colossal federal budget deficits and debt are, cranking down the spending spigot may hasten and not inhibit another recession. The downgrading of U.S. credit also could clog the flow of money. Those who have studied the 1937-38 recession see alarming parallels between now and then.

As with any complex event spanning political, economic and social realms, there is no simple explanation of the 1937-38 recession. Regulations in the mid-1930s were changed requiring banks to hold more funds in reserve, perhaps slowing commercial credit. An “undistributed profits” tax on business was enacted to encourage bigger stock dividends, which policymakers hoped would put more money in the hands of spenders, but also may have slowed job growth. And for several reasons, labor costs — wages — increased by as much as 10 percent in the period, causing businesses to hire fewer people.

But according to many, limiting government spending was part of the problem.

“Until the Great Depression, the traditional fiscal policy had been one of balanced budgets,” according to an analysis by the Federal Reserve Bank of Chicago. “During the early stages of the New Deal, the vast expansion of the federal government was financed through debt, but by the middle of the 1930s, concerns were growing over the size of the public debt, which had gone from 16 percent of GDP in 1929 to 40 percent in 1936.”

In that year, there was a deliberate attempt to return to a balanced budget.

One of the biggest moves was to raise income tax rates. Previously, rates “ranged from 4 percent (starting at $4,000) to 59 percent (above $1 million),” according to the Federal Reserve of Chicago. ”They remained unchanged for income brackets below $50,000, but … the average marginal tax rate for incomes above $4,000 almost doubled, from 6.4 percent to 11.6 percent.”

If Congress ends the Bush-era tax holiday for the wealthiest Americans — as it should — its challenge is to avoid slowing the recovery. Spending cuts, too, must be weighed against losing what little forward momentum the economy is experiencing.

The recession from which the economy is now recovering began in December 2007 and ended in June 2009, making it the longest recession since World War II. Other recessions ranged from six months in 1980 to 16 months in 1073-75 and 1981-82.

There has been at least one recession per decade since 1948. The causes and remedies of each ought be considered by those crafting the debt-reduction plan.

But the most relevant antecedent may be the double-dip of the 1930s. Economic policy must trump the impetus to cut for its own sake. The best way to retire debt is to grow the economy.

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