Economic History Holds the Answers

Originally Posted on the Huffington Post

It took the United States 10 years to recover from the Crash that ended the stock speculation of the late 1920s. It may take longer to emerge from the aftermath of the housing crash of 2007 because today’s politics makes it impossible to imagine a massive spending program like the one that finally ended the Depression.

Yes, World War II in its economic dimension was a stimulus program plain and simple. The great economic surge in the U.S. between 1940 and 1945 came from producing 300,000 military aircraft, 2,700 Liberty ships, aircraft carriers, battleships, 88,000 tanks and self-propelled guns, 2.4 million trucks, millions of bombs and billions of bullets, and more billions of dollars worth of food and clothing to supply 13 million American soldiers. It was largely financed by purchases of government bonds by the Federal Reserve, America’s way of printing money. What the Nation got for this was victory, full employment, and a boost to the economy that lasted well into the 1960s.

Today’s “Great Recession,” painful as it, is not as dreadful as the Great Depression. Three years after the Crash of 1929 unemployment stood at 24 percent. Frederick Lewis Allen in Since Yesterday, his classic book on the lost decade of the 1930s, conveys the utter confusion of political and business leaders in the face of economic catastrophe. The Crash “blew into thin air” $30 billion of wealth, a share of the Nation’s wealth in those days far larger than the share blown into thin air by the collapse of housing prices since 2007, and nobody knew what to do about it.

Allen’s book is no panegyric to Franklin Roosevelt, the New Deal or the Democratic Party. He is sympathetic to Herbert Hoover, who he sees as the unlucky Republican president who presided over a debacle that no one understood.

Hoover worked himself to the bone to find a solution, and suffered because he could not do so. He was no hard-hearted reactionary. He cared about people, having skillfully managed vast humanitarian efforts in Europe after World War I, and along the Mississippi after the great flood of 1927.

He tried all the conventional economic cures that the Republican Party still believes in today. He got Congress to pass “a reduction in individual and corporate income taxes.” He cut public spending wherever he could. The government maintained a budget surplus well into 1932.

He and the “Big Men” of business urged “confidence.” They told the public over and over again in 1929, 1930, 1931 and 1932 that everything would be all right if the government would just let the private economy alone. But the Depression deepened until in 1933 Hoover and the business titans admitted that they had no answers. The disappearance of all that speculative wealth was not followed automatically by a recovery. Nor was the disaster amenable to small measures and happy talk, and that was all the Republicans had in their repertoire.

It should be obvious on the basis of this history that the hangover from the vast destruction of housing wealth since 2007 will not be cured by a repeat of the policies that failed Hoover, and the cheery hope that business investment is waiting in the wings for a friendlier administration.

The United States needs the economic equivalent of World War II to put people back to work. A large infrastructure program financed by Federal Reserve — a QE3 that encourages real investment instead of just pushing down interest rates and filling the coffers of banks — is what I think we ought to be discussing.

The Fed bought government bonds in vast quantities from 1941 through 1945 to finance the war. It would be no different if the Fed now purchased a few trillion dollars worth of new infrastructure bonds collateralized in most cases —- as World War II bonds were not —- by a flow of user fees. And this time Americans would get assets far more useful and durable than tanks, war planes, Liberty ships, and uniforms.

The pity is that the Republican Party ignores the economic history captured in Lewis’s readable classic. It wants to bet the country’s future on policies that Hoover himself knew had failed. This is the definition of reaction and it is very dangerous as Allen sensed as he watched Hitler rise to power in Germany because he promised action.