This is a comment that I have heard a few times in the past few weeks regarding the issue of austerity. The Tea Party forced the GOP to embrace austerity, and we know that when FDR mistakenly listened to Treasury Secretary Morgenthau in 1937 and cut back on expenditures, the economy entered a rapid decline. The lesson, of course, is that austerity can impose a terrible cost on an economy that has not yet recovered.
As most Pileus readers will undoubtedly note, 1937 may be rich in lessons. As we know, the Federal Reserve imposed significant increases in reserve requirements. FDR’s rhetoric (remember that delightful phrase from the state of the union: “In spite of our efforts and in spite of our talk we have not weeded out the overpriviledged”) and efforts to introduce confiscatory tax rates created extreme regime uncertainty. As for fiscal policy, I am uncertain that there are great lessons to be learned.
I was updating some data I have generated on per capita domestic spending. The figures exclude defense spending, not because defense isn’t important but rather to get a sense of the trend line absent international crises, wars, etc. The figures are adjusted for inflation (all presented in 2005 dollars) and the raw data is drawn from the typical sources (e.g., OMB Historical Tables, Census Bureau population figures). These figures are presented graphically below.
The most striking thing about these figures is how miserly the New Deal was by contemporary standards. The peak level of New Deal domestic spending in the 1930s was $809 per capita. This occurred after the “War Springs conversion” when FDR embraced active fiscal policy. The much cited austerity occurred after 1936, when per capita spending fell from $658 to $580. Remember, these figures are in 2005 dollars. In other words, the change in fiscal policy reduced federal domestic spending by approximately 21 cents per day per person.
A second striking thing about these figures is now much federal domestic spending per capita has increased overtime. Many look longingly to the good old days when the Gipper told us that government was the problem, not the solution. During his watch, domestic spending per capita increased from $4670 to $4951 (once again, in 2005 dollars). Once again, to place things in perspective, per capital domestic spending in 1988 was 6.12 times greater than the peak for the 1930s, in inflation adjusted dollars.
Moving forward, this year, the federal government’s per capita domestic spending is $7936. This is 9.81 times greater than peak per capita spending during the New Deal. Even if per capita spending were reduced to the levels of the last year of the George W. Bush presidency ($7066), it would be 8.73 times the New Deal peak (and for those who would rather look to more contemporary examples, 2.57 times greater than the peak of Great Society spending ($2746 per capita, 1968).
It is difficult to determine what the fiscal policy lessons of 1937 are when domestic spending per capita has increased so dramatically in the intervening decades. The biggest lesson is one that is often ignored. As much as many love to wag their finger at Lyndon Johnson or FDR, the levels of spending they engaged in was miniscule by today’s standards. Critics may label any reduction in current spending as an exercise in austerity, but one wonders if we have any idea what austerity would really look like.
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