A reader, no doubt trying to play “gotcha,” sent me an email, subject line: “Dr. Paul Krugman.” The reader writes, ” ‘The effects of federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover…’ Dr. Paul Krugman, New York Times, 11-10-2008.” End of email.
Krugman’s actual point was that Hoover’s tax increase was one of the drags on the economy inherited by Franklin Delano Roosevelt. And although the New Deal put millions to work and alleviated suffering, it never deployed enough stimulus needed to fill the demand hole left by the Great Depression. Krugman writes:
And F.D.R. wasn’t just reluctant to pursue an all-out fiscal expansion — he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections.
At least both men were honest in their fealty to old economic orthodoxy, the demand that the budget must be balanced. Back in those days, the income tax mostly was paid by high earners. Today’s so-called budget hawks, such as Mitt Romney and Paul Ryan, want to further reduce taxes on the super-rich, which are already at 80-year lows. In addition, timing is everything. When Hoover raised taxes as well as cutting spending, the economy was in a severe contraction that affected everybody. Today, GDP and corporate profits have recovered to new highs. The super-rich have seen their share of national income actually increase.
Also, Hoover wasn’t presiding over a massive soft global empire and Military-Industrial Complex. The Army was the 16th largest in the world. Hoover didn’t hand off two long-running wars that could ultimately cost $6 trillion. Major corporations didn’t receive hundreds of billions in corporate welfare and spend hundreds of millions lobbying Congress to keep the status quo. Hoover got a raw deal from many historians. He enacted aggressive policies in an attempt to fight the Depression, some of which went on to be big successes in the New Deal. But he couldn’t get his mind around providing relief to individuals and states ruined by the collapse, or the urgent need to get off the gold standard. He was overwhelmed by the magnitude of the crisis, and for good reason the old order was discredited for decades. All the attempts to rewrite history now won’t change this.
So you got me. We need a major stimulus, not the stealth fiscal austerity that is holding back job creation. It needs to be focused on jobs, education, research and infrastructure that can take us into the 21st century (not just “road and bridges”). We must address the trade deficit. Here’s what we don’t need: To repeat FDR’s mistake of 1936-37. So the sequester, the so-called “fiscal cliff,” must be repealed. And, with the toffs doing very well, they can afford the long-expected expiration of the Bush tax cuts and a return to Clinton-era rates.
And Don’t Miss: Zeitgeist failure || James Howard Kunstler
Today’s Econ Haiku:
The arena scores
A deal that’s not just decent