Politicians Need a History Lesson to Not Repeat It
The Great Depression started as a recession in September of 1929. There are many opinions as to how the recession became a depression but most agree that inaction by the Fed contributed to the decrease in money supply and the increase in public fear which led to drastic cuts in spending. Price deflation then created the environment for substantial decreases in income and employment.
After Franklin Roosevelt (FDR) took office in 1932 and implemented the massive spending plan know as the New Deal the nation's Gross Domestic Product (GDP) went up and unemployment went down. Coincidentally, the country endured a horrible drought during this time (known as the Dust Bowl) and the president was labeled a socialist by his opponents. Sound familiar?
There are those who will tell you that the New Deal was a failure and that the Great Depression endured for fifteen years including the entire FDR administration. This is not true. When FDR took office unemployment stood at 25%. Three years later it was 11%.
In spite of the success of the New Deal, which included creating the Social Security Administration, a new wave of conservatism was sweeping Congress in 1936 that pushed FDR to decrease spending and increase taxes in an attempt to balance the budget. Sound familiar?
The result was the recession of 1937-1938. Unemployment went back up to 19%. The recession was short lived but the economy never really revived until the massive spending program known as World War II began late in 1941.
More recently one doesn't have to look hard to find examples of cuts in government spending during economic recessions that have had the opposite of the intended effect. Great Britain is a little more than a year into spending cuts. Retail sales have plunged and incomes are down. Germany's austerity program was less aggressive than Britain's and initially appeared successful as they experienced some economic growth in 2010, however, since then their economy has worsened.
The moral of the story is this. When consumer spending dives for an extended period the government should increase its spending to make up for it. This is the basic Keynesian approach. Spending should only be cut back when consumer spending recovers.
Let's hope we are not doomed to repeat history due to our ignorance of it.