The Corner

Any Economic Recovery Will Likely Be Ephemeral

Columnists and reporters need to fill daily news quotas. Thus, each ebb and flow of the stock market, the GDP, the data on housing starts, and so on receive massive discussion. Historians, however, care more about long-term results, and it’s too early to discern any pattern for economic recovery in the Obama administration. Yes, housing prices are up slightly this month, and GDP is now up as well. But unemployment is still trending downward, and the uncertainties on taxes, health care, cap-and-trade, and sensitive foreign diplomacy all make short-term reports of limited value.

Many have compared the current economic crisis to the Great Depression, and it is useful to study FDR’s statistics on recovery to understand the problem with relying on short-term data. Unemployment, for example, was 21.4 percent in May 1934 and dropped to 13.2 percent by May 1937. That impressed many pundits and voters. But in May 1939, unemployment was back up to 20.7 percent. Why? FDR had raised taxes, introduced a new corporate tax, enacted a minimum-wage law, and granted unions unprecedented federal support to organize during the late 1930s. When those government interventions took hold, the economic recovery was thwarted. In fact, capital goods in May 1937 had almost returned to 1929 levels, but in May 1939 capital goods stood at a mere 59 percent of 1929 levels.

The key issue here is economic philosophy. FDR believed that massive intervention (followed by high taxes) would lead to economic recovery. Obama has a similar belief. They are wrong, and thus any short-term recovery we see during 2009 and 2010 is likely to be ephemeral. By contrast, Ronald Reagan and Calvin Coolidge believed that cutting tax rates and reducing federal intervention was the recipe for economic recovery, and both saw economic recoveries during the first terms of their presidencies. Economic growth during the 1920s and 1980s was, in fact, spectacular. When people are unshackled and allowed to be free, they can accomplish much. When that belief takes hold again in the United States, we will likely see a serious recovery.

Burton Folsom Jr. is a professor of history at Hillsdale College and author of New Deal or Raw Deal?: How FDR’s Economic Legacy Has Damaged America.

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