STOCK MARKET WATCH - Thursday, 5 January 2012

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52. 2012 As 1937 Redux?

http://www.slate.com/blogs/the_reckoning/2012/01/04/_2012_as_1937_redux_.html

One might hope that soon, as the tweedle-dee and tweedle-dum of the GOP race narrows the field, that a smaller number of candidates actually viable in the general election will start speaking something close to sense on economic policy. Iowa's results have not helped. Mitt Romney, who might otherwise begin a move toward the Obama-rich voters of the American center, will have to continue pandering to the "austerity now!" crowd on the right since he barely bested Rick Santorum and really only just beat libertarian Ron Paul, too.

Why, with all the talk of America's need to get its spending under control, would radical austerity be a problem? The answer can be structured in many ways, but today we'll go with a historical lesson, circa 1937. In that year - the fifth of Franklin Delano Roosevelt's presidency, the US economy had finally matched its size in 1929, the year the stock market bubble popped and the world cascaded into the Great Depression. (The US economy today still has a way to go before it claws back the losses since 2007, but that's another story).

Back in 1937, the deleveraging process was even longer and harder in every measure than it is today. By 1937, modest growth had returned, and while unemployment remained stubbornly high at just under 10 percent, that was down from a peak in 1932-33 of 25 percent.

At this point, both the Fed and the Roosevelt administration—giving in to orthodoxies that still haunt US economic thought—made terrible, independent errors. FDR acceded to Treasury advisors who declared the recovery self-sustaining and pushed for spending cuts. FDR, by now in complete control of the congressional agenda after a landslide reelection in 1936, duly cut government spending by 10 percent in an effort to balance the federal budget. The Works Progress Administration (WPA), which had employed three million in 1936, was sharply curtailed, as were other “emergency programs.”