History Shows Us How Government Will Respond to Next Downturn
WHY YOU SHOULD CARE
If the past is any guide … don’t hold your breath for a quick or easy fix.
How will the federal government react to the next recession? The safest answer to this question since 1929 has been: “It’ll make it worse, deeper, longer.” But that wasn’t always the case.
Remember the Great Recession of 1921? Between 1920 and 1921, gross national product fell by 24 percent, unemployment topped 15 percent, industrial production fell nearly 32 percent and wholesale prices fell by 20 percent.
Compare this to the milder but hysterically named “Great Recession” of 2007–09, when gross domestic product dropped by 2.4 percent (not 24 percent as in 1921). Unemployment reached 10 percent in 2009, nowhere near 15 percent, and prices fell 2.4 percent (not 20 percent).
Perhaps you don’t remember the 1921 Great Recession because President Warren G. Harding and his Republican House and Senate didn’t try to throw money at it, raise taxes, fix wages or prices or control credit. They did a pretty good approximation of “nothing.” Harding balanced the budget, unleashed no “stimulus spending” and kept interest rates at 5 percent from 1920 to 1921. Result: The downturn lasted just 18 months.
Panic does not become a recession or depression unless the government jumps in to fix things.
By 1923, unemployment was down to 2.4 percent, and real output had recovered — not unlike many of the “panics” in the decades before. The takeaway? Panic does not become a recession or depression unless the government jumps in to fix things.
Herbert Hoover and Franklin D. Roosevelt did a bipartisan tag team of tax, spend and regulate in reaction to the economy beginning to shrink in August 1929 and the collapse of the stock market on Black Thursday, Oct. 24, 1929. Hoover passed the protectionist Smoot-Hawley Tariff Act. In 1929, American exports totaled $5.5 billion but fell to $1.7 billion after 60 nations enacted counter-tariffs.
Hoover hiked government spending, which economist John Maynard Keynes suggested might work. From 1930 to 1931, the federal government’s share of the GNP increased by about a third. Price controls were placed on farmers, and unemployment topped 12 percent after all this fixing. And as a Parthian shot, Hoover enacted the Revenue Act of 1932, reducing tax exemptions, ending the earned income tax credit and hiking tax rates. The top rate rose from 25 to 65 percent. Corporate rates rose from 12 to north of 14 percent, and the death tax — imposed to fund the Civil War — was increased. A 10 percent gas tax was also imposed.
FDR arrived to do more of the same with similar results. He devalued the dollar by 40 percent, seized all gold held by Americans and established federal regulation of prices, wages and work hours. His reemployment agreement suggested a minimum wage, a 35-hour workweek for industrial workers and 40 hours for management.
FDR increased the top tax rate to 79 percent. Excise taxes were placed on alcohol, cigarettes, candy and soft drinks. His Agricultural Adjustment Act gave farmers subsidies, and 10 million acres of crops were pulled out of production, while 6 million pigs were slaughtered — all thanks to the government’s prowess in production planning.
Government spending surged, but so did unemployment while the economy continued to shrink. Never before or since has the government done so much to end a contraction. Never before or since has the recession lasted that long.
How long did the Great Depression last? Civilian unemployment did not fall below the 1929 level of 3.2 percent until 1943. The stock market did not regain its Jan. 1, 1929, level until January 1953. The economy did grow at 8 percent in 1939 after contracting 3.3 percent in 1938.
So what will the feds do in the next recession? What we have learned is that it depends very much on who is running the government.
The Democrats have 20 candidates running for president promising to replay the “reforms” of FDR. Pro-union labor laws. Higher tax rates. More spending. The Green New Deal could cost more than all current federal spending combined, which this year is $4.4 trillion.
This was FDR’s approach, and while it did not lead to economic growth, it did cement the Democratic Party into power in Congress for 60 years. Labor unions were forced onto much of the workforce. Union dues were recycled into Democratic Party coffers. Business, once a robust political player, was neutered as the Securities and Exchange Commission, Federal Communications Commission, Federal Trade Commission and a host of regulatory agencies held a Damoclean sword over businesses, enforcing submission. Between 1934 and 1994, Republicans won control of Congress, the House and Senate, only twice for a total of four years (1946–48 and 1952–54) of the sixty-year period. It was not very good economics, but it was wonderful politics for the Democratic Party.
Democrats today would react to any slowdown just as FDR did because it’s the route to controlling the state, not because they are unaware of the history of economic failure.
In 2012, Barack Obama insisted the George W. Bush tax cuts lapse for those earning more than $450,000 a year. The Congressional Budget Office certified that this would increase revenue by $620 billion over the next 10 years. A nice nest egg to spend on good stuff. But the CBO had to readjust its estimates due to slower growth. They had assumed hiking taxes on “the rich” would not slow growth. By 2017, the 12 revisions showed the federal government losing $3.1 trillion over a decade, not gaining $620 billion.
This suggests that plans by today’s Dems to pay for “everything” with taxes on the rich might not work as planned. (But the politics might.)
And Republican plans in the event of a recession? The Donald Trump Republican party has shown its hand. More tax cuts, less regulation, more energy production, attempts at spending restraint. History shows these tools work pretty well for workers. But before you get too complacent, Trump does have one arrow in his quiver that he borrowed from Hoover: tariffs.
- Grover Norquist, OZY Author Contact Grover Norquist