Saturday, February 6, 2010

History Is About To Repeat Itself

     I hate to say this, but Barack Obama is about to blow his last chance to end this recession anytime soon. I say this because history is about to repeat itself.
     One year ago Obama signed a stimulus bill authorizing $787 billion dollars to beef up an economy which was suffering badly because of the credit crisis inherited from the Bush Administration. It was not enough. The President was still in the “honeymoon” stage with Congress, and that was his best chance to make a difference.
     Now he is beginning to get concerned about the federal budget. He should, of course, be careful what he spends money for, but the idea of cutting back the total is a bad one.
     While the number of jobs created by the stimulus is questionable, it has undoubtedly kept people on the payroll who would otherwise have been laid off. But the money will soon run out, and new jobs have not been created fast enough.
     The hardships from this recession have been somewhat mitigated by legislation passed during the Great Depression –unemployment compensation, social security, etc. George Santayana said, "Those who cannot remember the past are condemned to repeat it.” Here are a few statistics that bear remembering. The following timeline shows the order of economic events during the Great Depression. Notice the effect that deficit spending had on economic growth:
Year       Tax ReceiptsFederal SpendingGNP GrowthUnemp. Rate
1929---------3.2< Great Depression Begins
19304.23.4-9.48.7
19313.74.3-8.515.9
19322.97.0-13.423.6
19333.58.1-2.124.9< New Deal begins in March
19344.910.8+7.721.7
19355.39.3+8.120.1
19365.110.6+14.116.9
19376.28.7+5.014.3< Recession begins in May
19387.77.8-4.519.0< Recession ends in June
19397.210.4-7.917.2

     Even though the New Deal had been in place only nine months by the end of 1933, spending increased 10.8% for the year. As a result, GNP went from -2.1% to +10.8%. The unemployment rate dropped over three percentage points. As spending increased in 1935 and 1936, GNP continued to rise, and unemployment fell.
     For the fiscal year 1937 a harassed FDR decided to submit a balanced budget. Notice what happened to the indicators: the increases in GNP dropped and unemployment immediately shot back up.
    In 1938 the government began to borrow money to finance the Lend/Lease program. Because of the tremendous increase in war production, the economy took off and never looked back.
     Over the years of the Great Depression, Roosevelt’s average growth rate of 5.2% was even higher than Reagan’s 3.7% growth during his so-called “Seven Fat Years.”
     Also worth noting is the astonishingly quick recovery experienced by Sweden. In 1932, the Swedish Finance Minister decided to run large deficits in order to offset the effects of the Great Depression. Within two years Sweden had spent itself out of the depression.
    Budget hawks are advocating a quick return to the balanced budgets of the Clinton years. According to Einstein, insanity is doing the same thing over and over again and expecting different results. Don’t let the inmates run the asylum.

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