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  • Does 'Austerity' Work?

    Remember the Great Depression of the 1920s? If not, that’s because it didn’t happen. The recession of the early ‘20s quickly ended after spending and taxes were cut dramatically. It provides a clear lesson in “austerity” that President Obama should heed.

    In 1920, newly elected President Warren Harding inherited a very sharp downturn from his predecessor, Woodrow Wilson. According to Cato economist Jim Powell, the downturn was “almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933 that FDR would later inherit. The estimated gross national product plunged 24 percent from $91.5 billion in 1920 to $69.6 billion in 1921. The number of unemployed people jumped from 2.1 million to 4.9 million.”

    Unlike President Herbert Hoover, who dealt with the initial downturn precipitating the Great Depression, President Harding knew that the market would best recover if left to do so on its own. He loosened government’s inflexible grip and gave the economy the breathing room it needed. He cut spending sharply, from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922.

    At the same time, Harding took the advice of his Treasury Secretary, Andrew Mellon, and steeply slashed tax rates. The top income tax rate went from 73 percent to 24 percent. The bottom rate went from 4 percent to 0.5 percent.

    These combined cuts resulted in economic recovery in 1922, only a year-and-a-half later. Gross national product (GNP) rebounded, and unemployment fell to 2.8 million. The cuts fueled an explosion of growth and prosperity through the rest of the ‘20s.

    Powell notes that “GNP expanded year after year without inflation. Productivity improved, and real wages increased. The stock market tripled. There was a dramatic expansion of the middle class.” The unemployment rate was as low as 1.8 percent in 1926!

    The policy lesson of the 1920 downturn becomes even more accentuated in light of the mistakes and mismanagement of policy during the 1930s, which enabled the 1929 downturn to become a decade-long depression. The contrast could not be clearer: Government meddling is counterproductive to economic growth.

    Lamentably, thus far with our current troubled economy, lawmakers have decided to pursue policy decisions closer to those of Presidents Hoover and Roosevelt than those of President Harding. The results are as predictable as the severity and duration of the Great Depression were avoidable.

    The real lesson is that government “austerity” leaves room for private-sector growth. It’s not too late to pursue it.

    Posted in Economics [slideshow_deploy]

    6 Responses to Does 'Austerity' Work?

    1. Reasonable Views says:

      The cost of not following the austerity plan are visible in the results of the past decade. For at least 10 years, we've responded to recessions with expansions in federal (and when possible state) spending. The first time, we didn't want to accept a small recession and got slow growth and rising debt. The second time, we got no growth and huge debt. Now, when we really need to follow the austerity prescription to right things, there is a chance of a 3rd spending binge which will ensure the growth does not return in the near future.

      Looking at income and job growth in the post WW2 era backs up Mr. Weinberger's article and shows why the present course is so dangerous http://bit.ly/noJpIs

    2. Tom says:

      I'm a believer… but liberals would argue that the downturn in 1929 was the result of the free market gone unchecked. Any comments on that?

    3. steve h says:

      Austerity has never worked. Why do you want to bring back Hooverism? You don't have to go back to the 20s – look at more recent decades. The best times for GDP growth and job creation was under Dem economic policies and the Repub policies alwasy took us into recession. All you have to do is look at the facts and numbers – they don't lie.

    4. titus pullo says:

      The downturn of 1929 was precipated by the Federal Reserver which started a policy of devaluing the dollar to help their friends at the bank of england inflate their WWI debt away..this gets a little complicated but the world after the great war didn't go back to the gold standard..but something really stupid called the gold exchange standard..nations didn't have to anchor their currencies to gold but to the gold of other "prime nations"..England wanted to return to the leader of world finance and hence wanted to peg their pound to gold..BUT..they paid for much of WWI by printing money..so they either had to deflate their money supply (not a popular thing to tell the public..you won the war.. but now you have to pay for it with a recession)…or have the other "prime" currency inflate..increasing the value of the pound without having to really pay for it..

      The unintended consequences of the Fed's easy money policy was a boom in long term assets (like farm equipment) and of course the stock market….just like the dot com or subprime meltdowns…

      Collidge I think saw it coming but didn't feel he had the authority to rein in Ben Strong at the Fed ..

    5. William says:

      The government downsize pre-dated the 1920 depression and tax revenues increased in 1921.

    6. Pingback: Those Who Cannot Learn From History…Are Doomed! « American Elephants

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