Wednesday, August 10, 2011

Fix the economy with more stimulus spending

James P. Hoffa

The debt deal passed by Congress last week looks like a tragic failure to learn the lessons of history.

I'm afraid that too little federal spending will strangle our economy as it did in the early 1930s. Back then, the country was in dire straits after the stock market crashed and banks collapsed. One-quarter of the work force was unemployed, manufacturing fell by half and banks foreclosed on nearly a fifth of the country's homes and farms.

President Herbert Hoover responded to the Great Depression by increasing federal spending, but only by a little. He refused to run a budget deficit and rejected calls for direct federal relief to individuals. The economy remained in a slump throughout his one-term presidency.

Franklin D. Roosevelt took office in 1933 and set in motion a massive stimulus. He ran large budget deficits, increased corporate taxes and made massive investments in people and infrastructure through programs like the Works Progress Administration.

From 1933-37, unemployment fell. The economy grew at the fastest pace in history and America started to climb out of the Great Depression. But then, in 1937, conservatives persuaded Roosevelt to rein in spending. The result, predictably, was a fall in gross domestic product. Roosevelt wisely changed course and increased spending, which got the economy moving and creating jobs again.

I was reminded of that era recently while attending an awards dinner hosted by the Roosevelt Institute, a nonprofit dedicated to the legacy of Eleanor and Franklin Roosevelt. Unfortunately, the Roosevelt Institute is outnumbered by a vast network of corporate-sponsored front groups trying to roll back the New Deal.

Groups like the Cato Institute, the American Enterprise Institute and the Reason Foundation are responsible for the propaganda that President Barack Obama's $787 billion stimulus didn't work. They are wrong.

Government stimulus works, and it is nonsense to suggest that it doesn't.

We are just now learning that the economy was in far deeper trouble than we thought following the meltdown of 2008. Obama's stimulus worked, creating close to 3 million jobs. Unfortunately, it didn't work enough. The Teamsters Union and others pushed for a larger stimulus. Obama's top economic adviser, Larry Summers, is now admitting that the stimulus was too small to pull the economy out of its doldrums.

The Bureau of Economic Affairs recently revised GDP numbers since the crisis. It had thought the economy shrunk by about 5.9 percent in the six months following the 2008 crisis. It actually fell 7.8 percent. Once stimulus money began to flow and the tax cuts took effect in the middle of 2009, the economy began to grow again.

In Michigan, the stimulus increased private income for autoworkers, police officers, airport construction workers, cancer researchers and Head Start teachers. It put more money in people's pockets in the form of tax cuts, and it helped people who had lost their jobs. All those Michiganians were able to buy more in their neighborhood stores. That allowed those stores to hire more workers and pay more taxes.

But now that the stimulus is winding down, the economy is faltering. Cutting the budget is the wrong thing to do. The Economic Policy Institute says the debt deal will cost 1.8 million jobs by 2012. I can only hope that they're wrong and that we remember the lessons of 1938: to change course once we realize we've made a mistake.

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