The lesson of 1937: Stimulate now, or pay later

Inflation hawks want Obama to cut off the spigot. Why aren't they focusing on the real deficit-buster: Healthcare?

Topics: How the World Works, Great Recession, Federal Deficit, Inflation,

Noam Scheiber writes that Michael Phillips’ Wall Street Journal article, “Policy Makers Seek to Learn From 1937′s Stalled Comeback” is “useful.” I’m not so sure. Let’s look at the first sentence.

A few months ago, Obama administration officials were sounding the alarm about another 1929. These days, it’s 1937 that has them in a sweat.

Well, no. A few months ago, Obama administration officials were already worried about repeating the mistakes made by FDR, the Fed, and Congress in 1937, when premature monetary and fiscal contraction strangled a nascent recovery from the Great Depression and precipitated a deep recession. On June 18, Christina Romer, chair of Obama’s Council of Economic Advisers, authored a piece in the Economist that spelled out the problem in detail: “The Lessons of 1937.”

Granted, it is impressive how quickly we’ve moved from worrying about reliving the Great Depression to fearing that we might shortcut our recovery from the worst financial crisis since the Depression. But the Obama administration has been consistent from very early on in warning that it would be foolish to precipitously change course, guillotine the stimulus, and start fighting inflation while unemployment is still rising and consumers are still hoarding cash. In today’s New York Times, Cornell economist Robert Frank makes an excellent case for why, if anything, the federal government needs to be shoveling more cash to local and state governments, not less.

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In opposition, the Wall Street Journal quotes inflation hawk Allan Meltzer, a political economist at Carnegie Mellon University.

Ms. Romer is “sending the absolutely wrong message – that we can’t do anything to worry about inflation until the recovery is locked in because of concern for unemployment … The reason economists and central bankers have two eyes is so they can do two things at once.”

(Really? Our possession of two eyes enables multitasking? Seems to me that if you look at two different things with your two eyes at the same time you get cross-eyed, lose focus, and spark a splitting headache.)

The inflation hawks would have a better case if inflation was actually threatening, or if the bond-market vigilantes were shunning Treasuries. But it’s not, and they are not, while at the same time, real downside pressures on the economy remain strong. (For an impressive dismantling of last Friday’s rosy report from the NAR on existing home sales, which pushed stock market indices to new heights for 2009, see the Big Picture.)

Yes, in the long run, big deficits are a problem, though, as Paul Krugman observes in his blog today, “we’re not looking at something inconceivable, impossible to deal with.” But a double-dip recession is also a big problem, and we need to be constantly mindful of the fact that economically stimulative deficit spending now can reduce deficits later, thus avoiding the necessity of painful budget-balancing measures, whether they be tax increases or spending cuts or both.

Robert Frank:

More important, there are good reasons for believing that stimulus spending will make people’s future tax payments lower, not higher. Yes, government borrowing adds to the national debt. But if the stimulus also hastens the downturn’s end, it will accelerate the growth of future incomes and tax revenue. In that case, the net effect would be to reduce future taxes, compared with what they would have been without the stimulus.

Finally, after rereading Romer’s cogent analysis of 1937 in the Economist, I am reminded of one healthcare-reform-related point that we have completely lost sight of as we get distracted by the big lies about death panels.


The fundamental source of long-run deficits is rising health-care expenditures. By coupling the expansion of coverage with reforms that significantly slow the growth of health-care costs, we can dramatically improve the long-run fiscal situation without tightening prematurely.

Where are all the inflation hawks in the healthcare debate? Healthcare costs have been rising at a much faster rate than inflation for decades. If we are seriously concerned about dealing with long-term deficits and the economic security of Americans, healthcare reform is the critical issue. And you don’t need to go all the way back to 1937 to figure that out.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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