Exploring fiscal cliffs of the past

“Liars figure and half-truths are all lies.”

— Anonymous Curmudgeon

Certainly it is a half-truth to talk about the national debt without talking about the sheer power of our wonderful country’s economic engine.

I’m going to tell you about figures and how they apply to economics. And about three historical “Fiscal Cliffs.”

Common political talking points refer to national debt by its raw numbers or Gross National Debt and do not consider national debt (the total financial obligations of government) as a percentage of the Gross Domestic Product — total value of goods produced and services provided in a country during one year.

Our country has endured a long period of economic downturn. U.S. total debt in terms of percent of GDP is the highest in 60 years, yet lower than what it was at the end of World War II. Then, national debt was 113 percent of GDP, now it is 73 percent of GDP. The economies of many of our trading partners were crippled at the end of the war, lessening the stimulative effects of trade.

Yet by 1960, U.S. debt had been cut in half.

Fear of a fiscal cliff (sudden and extreme downturn ain the economy) caused the U.S. business community to pressure conservative lawmakers for an end to the recent government shutdown standoff.

Cycles of economic boom and bust have occurred in the U.S. since its very beginning. Herbert Hoover is remembered in a knee-jerk way as a failed president who made missteps that led to the Great Depression. I disagree. Until 1929, economic downturns were temporary and self-correcting.

The Stock Market Crash of October 1929 is the first fiscal cliff. Although similar panics and economic contractions had occurred, it was one of the most extreme.

Between Oct. 24 and 29, about 36 percent of the value of the Stock Market was lost. Imagine the Stock Market today losing 6,000 points in five days! In the next 30 months the Stock Market shrunk to 11 percent of its highest previous value.

Many consider the Smoot-Hawley Tariff Act of 1930 to be one of the worst political and economic blunders in history. It was a knee-jerk response to a rural/farm recession, which had begun in the early 1920s and in more than one way contributed to the Great Depression.

It was the second fiscal cliff of the time.

Smoot-Hawley was authored by a senator and a representative from rural districts who had been pressured by constituents for a tax on imported goods to raise farm produce prices. Smoot-Hawley was opposed by many industrialists and fiscal experts. Hoover opposed it, but did sign it into law. Rumors that Hoover would not veto the act were considered a factor in the Stock Market Crash.

Many nations, including our country’s largest trading partner, Canada, retaliated with equal or greater tariffs. The tariff had effects on International Banking that worsened the depression.

Unemployment was at 7.8 percent in 1930 when Smoot-Hawley was passed, but jumped to 25.1 percent by 1933. The stock market had begun to recover, but after Smoot-Hawley it dropped precipitously.

The Recession of 1937 was our third fiscal cliff.

The government cut spending in 1937, unemployment rose from 14 percent to 19 percent. The following year the Roosevelt Administration resumed spending at previous levels. As government spending rose, unemployment fell, but the long-term effects are debatable. I’ll simplify the debate by calling them the “Keynesian” and “Friedmanite” positions.

“Keynesian” refers to John Maynard Keynes, whose theories drove the implementation of the Roosevelt New Deal, which proposed to raise employment by increasing government spending. “Friedmanite” refers to Milton Friedman, who espoused fiscal restraint, non-intervention in fiscal matters and low taxes. They are the most celebrated economic theorists of the 20th Century — Keynes by liberals and Friedman by conservatives.

The Keynesians say that the recession of 1937 proves that New Deal spending policies were correct and link the economic downturn to decreased government spending. The Friedmanites say if the country had stayed the course of frugality, the economy eventually would have recovered to pre-1929 levels.

Currently there is a Keynesian versus Friedmanite argument in Alaska. Taxes on oil produced in the state were reduced with the intent of stimulating production. Forecasts are that state revenues will drop before they increase.

The Friedmanites believe the revenues will increase over time as production increases, and the Keynesians think that revenues will remain low as long as the taxes are low.

Economic recovery after World War II was driven in part by the Marshall Plan — which provided for the rebuilding of war-ravaged European economies. The United States needs a “domestic Marshall Plan” to upgrade existing infrastructure.

There is agreement across political lines that the need exists and that private-sector cash is available. But many contend that the government permitting process is an obstacle. Reform of the permitting process is something that could get bipartisan support.

It is my hope that this article will whet the appetite of those who can do their own research. I highly recommend further research.