Ben Bernanke's prepared remarks to Congress this week -
1. “The federal debt held by the public (including that held by the Federal Reserve) is projected to remain roughly 75 percent of G.D.P. through much of the current decade.”
2. “A substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery.”
3. “Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.”
Or in simpler English: the deficit isn't going up, you don't cut spending during an economic recovery and premature austerity makes the deficit go up; not down.
Besides being the Fed Chairman, and having no axe to grind politically, Bernanke, who was nominated by George W. Bush, is a well-known student of the Great Depression.
Part of what he learned about the Great Depression was the 1937-1938 Recession.
By the spring of 1937, production, profits, and wages had regained their 1929 levels. Unemployment had fallen from 25% to 14%. Then in 1937, government spending was slashed and taxes increased. The result? Unemployment jumped from 14.3% in 1937 to 19.0% in 1938. Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels.
The Roosevelt administration and Congress then reversed course. The result? By the beginning of 1941 - almost a year before Pearl Harbor - the American economy was firing on all cylinders.
A lot of people think World War II brought us out of the Great Depression. But men going to war actually created a labor shortage. We lionize Rosy the Riveter. But Rosy wasn't just working on military manufacturing lines. Women were widely employed all over the economy including banks.
Again, I will repeat, the deficit is not a problem. People get scared of its size and don't like when it is expressed as a % of GDP. But debt is relative to wealth. We should know that because we all at one time or another have shopped for mortgages. A person making $100,000 can't afford a $1,000,000 mortgage. But a person making $750,000 can.
During the Eisenhower administration the debt-to-GDP ratio was 75%. What did Ike do? He built the greatest construction project in American history. The Interstate Highway system. What did Ike not do? Increase taxes and cut government spending.
The GOP in the 1950s were not Mad Men; but they are today. They are on the wrong side of history and economics.
March 2, 2013