All the attention on the federal debt ceiling, deficits and debt may be a mistimed priority as some commentators and historians argue U.S. policymakers should focus instead on stimulating consumer demand to get economic recovery into full gear.
"Most people realize that a failure to raise the debt ceiling could be catastrophic," says Millsaps College historian Robert McElvaine, who is author of The Great Depression: America, 1929-1941. "But the drastic cuts in federal spending that some Republicans are demanding in exchange for an increase in the debt ceiling would be a repeat of the mistakes that prevented a full recovery in the 1930s and then caused a secondary collapse in 1937. Enacting these cuts is the most likely scenario in which the current recession could become a new depression."
"The easy thing now might be to proclaim that debt is evil and ask everyone — consumers, the federal government, state governments — to get thrifty," writes David Leonhardt, economics reporter for the New York Times. "The pithiest version of that strategy comes from Andrew W. Mellon, the Treasury secretary when the Depression began: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,' Mellon said, according to his boss, President Herbert Hoover. 'It will purge the rottenness out of the system.' History, however, has a different verdict. If governments stop spending at the same time that consumers do, the economy can enter a vicious cycle, as it did in Hoover’s day."
Leonhardt says the current debate over spending whites out the tale of the economic tape, with declining consumer spending on cars, housing and consumer goods and services.
"The Federal Reserve Bank of New York recently published a jarring report on what it calls discretionary service spending, a category that excludes housing, food and health care and includes restaurant meals, entertainment, education and even insurance," Leonhardt says. "Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover."
Liberal-leaning Washington Post columnist E.J. Dionne says the lingering debate over "a normally routine increase in the nation's debt limit with a crusade to slash spending" has cast a shadow on America's credit worthiness and its political competence. Worse, Dionne said, it has deflected attention from the "most obvious problem" citizens want fixed — unemployment.
"The best way short-term to drive the deficit down is to spur growth and get Americans back to work," Dionne asserts. "Has anyone noticed that Americans with jobs can provide for their families, put money into the economy — and, oh yes, pay taxes that increase revenues and thus cut the deficit?"
McElvaine concludes: "'History doesn't repeat itself, but it rhymes,' Mark Twain is said to have remarked. To the extent that our current history sounds like the 1930s, it is because of the lack of sense on the part of politicians. We know better than to slash spending and allow the rich to become even richer in a weak economy, but we're set on doing it anyway. If there is a new Great Depression, it won't be without rhyme, but it will be without reason."