1937 – Back to the Future

I wasn’t around in 1937 but in that year President Franklin Delano Roosevelt, facing pressure from deficit critics, decided to lessen the government’s role in spending as a way of getting out of the Depression. After five years of what we call today stimulus programs, FDR turned his attention to balancing the books and avoiding huge deficits.

Most fair-minded economists state that FDR’s decision on deficit spending had a significant effect on prolonging the Depression. Only the onset of World War II got the US out of the Depression, and of course the war was the ultimate government stimulus plan.

President Obama is now locked in a similar debate with Congress and his political rivals over continuing if not expanding the stimulus program or instead turning his attention to deficit reduction by cutting spending. Many Americans are deficit hawks as they see the government acting irresponsibly and digging us deeper into a fiscal hole. They are encouraged in their deficit fears by the Republicans who feel they have the issue to take back Congress and perhaps the presidency.

But many historians of the Roosevelt era point out that by failing to continue government spending, the US slipped back into a depression. It was government spending that was clearly moving the country back on track, but the change of direction to deficit reduction brought the country back into the dumps.  

Obama’s economic team is afraid that stopping the stimulus effort will create a double dip recesssion. They too are concerned with deficits, but they are also confident that the spending spree will create enough econmic energy to make the country healthy again, and then the debt incurred by stimulus spending can be addressed.

It is hard for many Americans to think about trillions and trillions of dollars of debt, since they equate their own household budgets with that of the entire country. But since consumers aren’t spending and business is not hiring, the only alternative is to have the government pick up the slack. Republican tax cuts sound attractive, but those cuts also create deficits, witness the Reagan and Bush years where the deficits and debts ran rampant creating most of today’s fiscal woes.

Currently, the deficit hawks are winning the argument and the stimulus programs are in jeopardy, which worries economists who are convinced we may be back on the road to a renewed recession. This is no means an easy call, but it is important to remember what happened in 1937 when FDR gave up government spending in favor of deficit reduction.

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