This piece was first Published in The Hill on August 12, which you can access here.
July’s job numbers show that the strong recovery from the COVID-19 recession continues. This is a victory for advocates of an effective Hamiltonian federal government that small government policies could never have achieved. The addition of 528,000 jobs in July gets payrolls back to where they were when COVID-19 reduced them by almost 23 million in early 2020. The rapid and relatively painless recovery that began in early 2021 is taking place because the federal government did what it needed to do. The Trump and Biden administrations and Congress spent $5-$6 trillion to put cash in the pockets of people COVID-19 put out of work, help businesses at risk of going under, and maintain state and local services until COVID-19 could be managed. Federal spending kept airlines flying, small businesses from closing or being forced to sell out at bargain basement prices, and much more.
This success should be an important lesson in the historic American debate about the role of the federal government. From 2020 to 2022, it spent a river of money that state and local governments could never have raised and spent. This federal action avoided what could have been a very serious depression. Indeed, if President Herbert Hoover and his administration after the Crash of 1929 had done what the federal government did in 2020 and 2021 there would have been no Great Depression. Hoover could have used government money to replace the shortfall in demand created by the collapse of the stock market and the failure of private companies and financial institutions, and that could have prevented disaster. However, he failed to play the government’s strong hand, and the Great Depression came on.
Hoover and his administration had an alibi. They followed the advice of what they believed were the best business and financial minds of the era. Those leaders said cut government spending and wait for the economy to cure itself. Led by Andrew Mellon, Hoover’s hugely wealthy and pedigreed Treasury secretary, they followed this advice and failed to spend money to end the economic bloodbath. As a result, the country got the Great Depression, not the kind of economic resurgence that the U.S. has had in 2021 and 2022.
The danger in 2022 is that those who call themselves “economic conservatives” and champions of small government are advocating policies that would repeat the mistakes of Mellon and Hoover. Mellon and his friends were focused on inflation, not on employment and growth. According to Hoover’s memoirs, Mellon wanted to bring the “high costs of living and high living” down and argued that the way to do this was to “liquidate” (sell) and cut spending on everything. Accordingly, he told the president that the Great Depression would end only when wages and the prices of goods, services, and businesses had fallen so far that “enterprising people (would) pick up the wrecks from less competent people.” What he was saying was that wages and prices should be encouraged to fall until super-rich people like himself and his friends could hire hungry workers cheaply and buy up the businesses, homes, farms, and other assets of ordinary folk for pennies on the dollar.
So where are we now in this historic framework? Unfortunately, Mellon-ism is alive and well among today’s “conservatives.” They worry more about inflation than about unemployment, while most Democrats lean the other way. The Federal Reserve, which is raising interest rates sharply seems to be in the camp of “conservatives” who are more concerned about the toll of inflation than the danger that the higher interest rates it is engineering will lead to a recession and higher unemployment.
Is choosing to fight inflation rather than maintaining a tight job market really the right economic priority? For “conservatives” it almost always is since it makes working people more dependent and pliable. It is in a sense about class and power not economics. Conservatives were appalled during the “Roaring 20s” that working people for the first time could buy cars and homes on credit even though it was good for business. One cartoon during that era had a well-off man saying, “You know how bad things are when your plumber offers you a ride downtown.”
This view, modernized a bit, persists in conservative economic thought in 2022. The sense that it was bad when plumbers could afford cars 100 years ago, is echoed by conservative senators today who are appalled that household help and millions of others who do the most unpleasant work are able to demand and get decent wages because of today’s hot job market.
The goals of government economic policy in 2022 should be to avoid a recession, maintain the strong job market, and bring down inflation by increasing supply and innovation. Slashing government spending and raising interest rates is not what we ought to be doing. The country’s painful experience with the policies of Mellon and Hoover should have taught us that.