Free Markets, Free People
Loser Spouts Off
Bob Shrum, perhaps best known for his masterful performance in shepherding John Kerry’s presidential race to…uh…it’s…conclusion, now sounds off about economic myths.
One of the most stubborn [myths] is what [John] Kennedy denounced at Yale—the notion that deficits are always evil and the balanced budget an inherent public good. This myth is now constantly exploited by do-nothing opponents of Obama’s recovery plan. On Sunday, George Stephanopoulos read a viewer’s complaint to Treasury Secretary Tim Geithner: “How do you justify printing money out of thin air?” Isn’t the inevitable consequence “hyperinflation?” Geithner calmly rebuked the cliché by pointing to the Federal Reserve’s capacity to counter inflation by raising interest rates once the economy is back on track.
Well, he’s cartainly right about that. The Fed can always just raise interest rates. It’s what Paul Volcker did as Fed Chairman in the late 70s and early 80s. If by “back on track” he means that we can have an unemployment rate of 12%, as we did in 1982, and a Fed Funds rate of 14%, then, I guess he’d be right. It certainly got rid of inflation.
After all, cutting spending now would accelerate, not reverse, the downturn, and trigger a spiral of declining federal revenues that could leave budget balancing out of reach no matter how deeply we cut.
And raising short-term interest rates by the Fed at some point in the future would…not?
This is elementary economics.
I certainly wouldn’t contradict that.
In reality, Roosevelt increased spending overall by 40 percent from 1933 to 1934, and the deficit by nearly a third. In the first five years of the New Deal, the gross domestic product rose more than 40 percent. The New Deal faltered not when FDR disdained conservative advice on deficits, but only when he briefly followed it. After Roosevelt drastically cut the deficit in his 1937 budget, the economy promptly tanked. When FDR reversed course, the economy turned around.
In reality, Roosevelt also increased tax rate; the top tax rate climbing from 63% to 79%. No doubt his conservative critics encouraged that, too. In other words, Roosevelt both decreased spending and increased taxes. In addition, there were new Social Security taxes in 1936 and 1937. And a new corporate tax on undistributed earnings went into effect in 1937, too. If only we had some way to know what effect tax increases have on economic growth!
Oh, and the Fed doubled reserve requirements on banks from 1936 to 1937.
I wonder–pure speculation of course–if significant tax increases and contractions in the money supply might have, in some mysterious way, contributed to the economic downturn of 1937-1938.
Sadly, we may never know.
In 1933, FDR blew up a London economic summit that sought to set fixed currency exchange rates, a virtual return to the gold standard that would have hobbled his economic strategy.
In other words, FDR was a unilateralist cowboy who intentionally flaunted international consensus for his own political ends, and, incidentally, reversed course a year later.
There was a lot more stuff going on in 1933-1940 than simply government spending. Not that you’d know it from reading Mr. Shrum’s amusing little article.