March 18, 2011
In his willingness to compromise with the Republicans in Congress and in his unilateral budget cuts, President Obama may be falling into the error FDR committed in the midst of the Depression. Worried about deficits and influenced by cautious advisors, he cut back on spending in 1937 which, along with tightening by the Fed, brought the recovery to a halt. He repented before long, and the economy improved even before the war took the curse from deficit spending.
Even though the current recession — technically it’s over, but no one believes that — isn’t as deep as that of the thirties, Obama’s challenge is, by some measures, greater. Another war isn’t an option. The deficit and debt were out of control before the recession began, thanks in no small part to the Bush wars and tax cuts. The economy is structurally weaker now; manufacturing, the obvious base for a recovery, has been gutted by foreign competition and outsourcing.
The President faces an opposition as wedded to the past as in the thirties and he doesn’t have much support for such measures as public works, even if he were inclined toward them. However, public spending is necessary, even if unpopular, and despite the worries — perfectly legitimate but for now secondary — about the deficit and debt. The clear solution is to wind down the wars much more rapidly than planned and spend the savings on infrastructure, research and other useful projects. That probabaly would stimulate the economy more than the wars and would create a base for further expansion.
I know, I’m practicing economics without a license, but some things seem obvious. For (I hope not misplaced) support, I appeal to the experts:
Today, no serious economist holds the view that war is good for the economy. The economist John Maynard Keynes taught us how, through lower interest rates and increased government spending, countries can ensure that the peacetime economy operates near or at full employment. But money spent on armaments is money poured down the drain: had it been spent on investment—whether on plants and equipment, infrastructure, research, health, or education—the economy's productivity would have been increased and future output would have been greater.21
We need to focus on survival, with luck on prosperity, and forget about hegemony.
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