Historical Fiscal Cliffs

Liars figure and half-truths are all lies.Anonymous Curmudgeon

I'm going to tell you about figures and how they apply to economics. I'm also going to tell you about historical “Fiscal Cliffs”. My intent is to be a reporter as opposed to an opinion writer, and I will try to relate conflicting opinions on issues that are controversial. First some definitions.

A Fiscal Cliff is a common expression that describes a sudden and extreme downturn in the economy. The National Debt is the total financial obligations of the central government of a nation. One could say that while a Recession refers to the economy "falling down," a Depression is a matter of "not being able to get back up."

Common political knee-jerk talking points refer to the national debt by its raw numbers or Gross National Debt and do not take into account national debt as a percentage of the Gross Domestic Product (GDP) or total value of goods produced and services provided in a country during one year.

Certainly it is a half-truth to talk about the national debt without talking about the sheer power of our wonderful country’s economic engine....

If the stock market – which is currently about 16,000 – was to fall by 40 points today, no one would bat an eye. Yet a drop of 38 points in one day in 1929 was considered catastrophic. If you apply for a loan to buy a house, the amount of the loan is compared to your income. The GDP is the income of the US. It's all relative.

As I write in 2014 our country has been through a long period of economic downturn. US total debt in terms of percent of GDP is the highest in 60 years, but is still lower than what it was at the end of World War II. In 1945 US national debt was 113% of GDP, whereas it is now 73% of GDP. In addition, the economies of many of our trading partners where in a shambles at the end of the war, lessening the stimulative effects of trade. Yet by 1960 that debt had been cut in half.

The fear of a fiscal cliff caused the US Business Community to pressure conservative lawmakers for an end to the recent government shutdown standoff.

I have been inspired by family oral history and have researched three fiscal cliffs.

My parents and grandparents lived through both the Great Depression and World War II. The depression is seen by most as having begun in 1929 and lasting until World War II brought almost full employment to the US. In Rural America, a recession began in the early 1920's with a downturn in prices of agricultural products. Regional rural recessions and migration from rural areas is considered one of the factors leading to the Stock Market Crash of 1929.

My parents and grandparents were Democrats or affiliated with the Democratic party. In today's terms they would be called "Blue Dogs" for their fiscal conservatism and wariness of both big government and big business. Although they might have voted for Franklin Roosevelt they weren't fervent fans of his administration.

My father told me cycles of economic boom and bust had occurred in the US since its very beginning. My research confirms that. Herbert Hoover is remembered in a knee-jerk way as a failed President who made missteps that led to the Great Depression. Many would disagree. Until 1929 economic downturns were temporary and self-correcting.

I will call the plunge in the Stock Market of 1929 the first fiscal cliff of our discussion. Although similar panics and economic contractions had occurred, it was one of the most extreme. On October 24th, 1929 the Stock Market dropped by 11%. On October 28th and 29th 25% of value was lost. Imagine the Stock Market today losing 6000 points in five days! In the next 30 months the Stock Market shrunk to 11% of its highest previous value.

Many of the relief efforts of the Roosevelt Administration were actually started in the Hoover Administration. Some opinions list one of Hoover's attempts at recovery to be the Smoot-Hawley Act which was a tariff or tax on imported goods. Other research refutes that assertion. Smoot-Hawley was opposed by Hoover. Many consider it to be one of the worst political and economic blunders in history.

Smoot-Hawley was authored by Senator Smoot and Representative Hawley, both Republicans. They were from rural districts and had been pressured by constituents to enact a tariff in the hope of raising farm produce prices. The tariff was also applied to industrial imports. Smoot-Hawley was opposed by many industrialists and many in the fiscal community. Hoover himself assailed it as obnoxious and a form of extortion, but did sign it into law. Rumors that Hoover could not or would not veto the act were one of the factors in the second of the two-day drops – October 29th or “Black Tuesday”.

Although the balance of trade was at the time only about 5% of GDP, many nations, including our country's largest trading partner Canada retaliated with equal or greater tariffs. Many believe that this tariff had effects on International Banking that deepened and spread the depression.

Unemployment was at 7.8% in 1930 when Smoot–Hawley was passed. Unemployment jumped to 25.1% by 1933. The stock market had begun to recover, reaching to 294.7 but was still 80 points lower than the previous high of September 3rd, 1929. After the enactment of Smoot-Hawley, it dropped back down to 200.

We could call the aftermath of Smoot-Hawley our second fiscal cliff. Think of the Recession of 1937 as our third fiscal cliff.

As the government cut spending in 1937, unemployment rose from 14% to 19%. In other words, 35% more people were out of work in 1937 than in the previous year. The following year the Roosevelt Administration resumed spending at previous levels. As government spending rose, unemployment fell but the long term effects are debatable. I'm going to try to paraphrase the debate about the 1937 recession by calling them the "Keynesian" and "Friedmanite" positions.

Keynesian refers to the theories of Maynard Keynes, the left-leaning Economist whose theories drove the implementation of the Roosevelt New Deal which proposed to raise employment by increasing government spending. Friedmanite refers to the theories of Milton Friedman who espoused fiscal restraint, non-intervention in fiscal matters and low taxes. These are the most celebrated economic theorists of the 20th Century – Keynes by liberals and Friedman by conservatives.

The Keynesians would say that the recession of 1937 proves that the New Deal's spending policies were on the right track and link the economic downturn to decreased government spending. The Friedmanites would say that if the country had stayed the course of more frugality, the economy eventually would have recovered to a level consistent with that of pre-1929.

We currently have a Keynesian vs Friedmanite argument in Alaska. Taxes on oil produced in the State have been reduced with the expressed intent of stimulating production. It is predicted that state revenues will drop before they increase. The Friedmanites believe the revenues will increase as production increases over time and the Keynesians think the taxes should have remained as they were and that revenues will remain low as long as the taxes are low.

Some would point out that economic recovery after World War II was driven in part by the Marshall Plan - which provided for the rebuilding of European economies devastated by the war. Many have suggested that the United States needs a "domestic Marshall Plan" to upgrade existing infrastructure. Most agree that the US lags far behind other industrialized countries in infrastructure. There seems to be agreement across political lines that the need exists and the private sector cash is available, but many also agree that the government permitting process is an obstacle. Perhaps reform of the permitting process is something that could get bipartisan support.

It is my hope that this report will whet the appetite of those who can do their own research and I highly recommend further research.


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