Some leading fiscal observers would have you believe the ghosts of 1937 are hovering over Washington’s budget debate, with prospects that policymakers will repeat FDR’s mistake in shifting course and pushing for a balanced federal budget before the economy is strong enough to absorb the contraction.
“Will the U.S. Repeat the Great Mistake of 1937?” the website DailyFinance asked over the weekend. Meanwhile, New York Times columnist (and Princeton economist) Paul Krugman has launched a veritable campaign of late against what he views as Washington’s “turn to austerity,” noting that it invokes “memories of 1937.”
The question of whether the fragile economy, which is growing but still faces risks of a return to recession, needs another jolt of fiscal stimulus is a legitimate one. What’s not legitimate – indeed, what seems far-fetched – is any comparison between today’s policymaking and FDR’s turn to austerity.
In 1937, Roosevelt put the brakes on New Deal spending, cutting enough to turn a deficit of 2.5 percent of Gross Domestic Product that year into a deficit of just 0.1 percent in 1938 (that is, practically a balanced budget). The move was premature and the result was a serious recession.
As for today, let’s be clear. What’s happening in Washington is a far cry from what is happening across Europe, where governments, in the true spirit of FDR’s effort of 1937, are taking steps to reduce their short-term deficits.
Today in Washington, the only issue is whether (1) to further stimulate the economy by further extending unemployment benefits and COBRA health insurance to jobless workers and providing more fiscal relief to states, letting short-term deficits rise in the process, or (2) providing those measures but offsetting the short-term costs with compensating spending cuts or tax increases.
Nor, despite the widespread rhetoric, do current efforts to prevent short-term deficits from growing worse seem terribly serious to begin with.
Yes, as negotiations continue over pending stimulus legislation, deficit-conscious lawmakers have managed to whittle down the additional aid Congress may provide for unemployment and COBRA benefits and fiscal relief.
At the same time, however, the drive to offset the costs of stimulus measures seems strangely inconsistent. Some of the same lawmakers who express concerns about soaring deficits are working to limit the tax increases that would pay for additional spending. Consider, for instance, the fate of two proposed tax increases.