Are New Spending Cuts Repeating 1937?

Worries about the dire consequences of prematurely tightened belts

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"The world's rich countries are now conducting a dangerous experiment," writes David Leonhardt dramatically in The New York Times. "They are repeating an economic policy out of the 1930s --starting to cut spending and raise taxes before a recovery is assured--and hoping today's situation is different enough to assure a different outcome." He covers the debate on whether or not this is a wise move, asking whether the private sector "make up for the withdrawal of stimulus." He says there's "good evidence" to lean either way.

While the "laissez-faire economists, Congressional Republicans, German leaders" and others who insistently oppose spending may not realize "how much worse" economic conditions could become, that doesn't mean their concerns about deficits are unfounded. "In an ideal world," Leonhardt writes, "countries would pair more short-term spending and tax cuts with long-term spending cuts and tax increases. But not a single big country has figured out, politically, how to do that."


  • Lessons of History  "Sometimes, if first you don't succeed try, try again is bad advice," comments economist Mark Thoma. "Balancing the budget before the economy was ready to stand on its own didn't work last time we we trying to exit a severe recession, so why try the same thing again? The time to address budget issues will come, but that time is not here yet."
  • No Kidding  Berkeley economist Brad DeLong looks at Leonhardt's quote from expert Adam Posen, which says that "the chances we're going to come out of this O.K. are still larger than the chances that we aren't." Responds DeLong: "I think that Adam Posen has a different definition of 'OK' than I do. A jobless recovery and prolonged unemployment above 8% is, to my way of thinking, definitely not OK."
  • Partly Senate's Fault, Partly Trends  Jonathan Chait argues that "there's a strong chance the United States would be acting were it not for the unusual rules of the Senate which allow the minority party to block action." Some other public opinion trends don't help either. That said, "it's not clear that even aggressive American action could succeed in the face of worldwide contraction."
  • This Might Not Be as Risky as It Seems  "If monetary policy is sufficiently accommodative," counters Tyler Cowen, another economist. "I do not see that we are risking a 1937-8 repeat.  In 1936-7," he explains, "monetary policy was not just insufficiently expansionary, it was absolutely draconian." In this case, "as the stimulus is pulled away, there is a reasonable chance that the Fed will be more accommodative." He's unsure "why we are discussing this issue without placing monetary policy at the center of the analysis."
This article is from the archive of our partner The Wire.