Separating the Short-Term From the Long-Term In Fiscal Policy

TW: I will keep pounding the table on this over and over. Republican bloody shirt waving on the deficit amidst a VERY serious demand contraction is wrong-headed. Put aside the hypocrisy of their ignoring deficits during the W. Bush administration and put aside their advocacy of tax cuts regardless of the fiscal consequences; contracting spending now would lead to a depression. Of that I have no doubt.

The Great Depression was "great" partially because it was a double-dip depression. The economy tanked in late 1929 very deeply then began recovery in 1933. But then amidst tremendous pressure to "stop the growth of government, end socialist initiatives and balance the budget", FDR contracted spending in late 1936 and 1937. At that point the depression came back.

Krugman did the work to pull-out some very old polling from 1937 and sure enough the numbers appear familiar. There is no doubt timing the withdrawal of stimulus will be tricky as inflation is a real concern but just because it is a concern does not mean fiscal contraction should be blindly implemented.

From Paul Krugman at NYT:
"There’s an interesting counterpoint between Christina Romer’s [piece] on the lessons of 1937 and the poll results, which are alarming some commentators, showing that a majority of Americans give deficit reduction a higher priority than rescuing the economy.

...From Romer: 'As someone who has written somewhat critically of the short-sightedness of policymakers in the late 1930s, I feel new humility. I can see that the pressures they were under were probably enormous.'

My version of that admission is the statement that we owe the Japanese an apology: their stop-go policies in the 90s, the reluctance to reform banking, are a lot easier to understand now.

What I wonder is: if you had polled Americans in 1936-37 about economic policy, what would they have said? I’m pretty sure they would have been very against deficits — yet FDR’s attempt to reduce the deficit was both economically and politically disastrous.

The point here, I think, is that most people don’t know much about macroeconomics. Hey, most members of Congress don’t know much about macroeconomics — and recent discussions suggest the possibility that many macroeconomists don’t know much about macroeconomics. Voters do, however, notice results.

So the moral for Obama is, of course, to ignore this poll, for the sake both of the economy and of Congressional Democrats — Blue Dogs included.

Update: From the Roper Center:
Gallup Poll [December, 1935]
Do you think it necessary at this time to balance the budget and start reducing the national debt?
70% Yes/30 No

Gallup Poll [May, 1936]
Are the acts of the present Administration helping or hindering recovery?
55% Helping/45 Hindering

Gallup Poll (AIPO) [November, 1936]
DO YOU THINK IT NECESSARY FOR THE NEW ADMINISTRATION TO BALANCE THE BUDGET?
65% YES/28% NO"