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House and Senate Democrats are preparing to release another very costly legislative response to COVID-19. No cost estimate is available quite yet, but we know that it’s likely to rival the $2.3 trillion cost of the Phase III bill, the CARES Act, which passed Congress in March. Although all the details of the Democrats’ legislation haven’t been released, it will likely include $1 trillion in funding for state and local governments, bailouts for pension funds and the U.S. Postal Service, expansion of food stamps and the earned income tax credit, universal basic income, and an “essential worker bill of rights.”
In January 2020, the Congressional Budget Office (CBO) projected that the budget deficit would eclipse $1 trillion. Congress had continued to pass discretionary spending deals that busted the budget caps established by the Budget Control Act of 2011. The latest discretionary spending deal busted the caps by more than $320 billion over two years. Mandatory spending continues to grow on autopilot, unchecked because few in Congress have the political will to address entitlement programs.
The CBO has revised its projections for the budget deficit after Congress’s legislative responses to COVID-19. As of April 24, the projected budget deficit for FY 2020, which ends on September 30, is expected to be $3.7 trillion, more than triple the March projection. The deficit as a percentage of gross domestic product (GDP) is projected to be 17.9 percent, up from CBO’s projection in January 2020 of 4.6 percent. This will be the largest federal budget deficit as a percentage of GDP since World War II. These eye-popping facts don’t include House and Senate Democrats’ next desired phase.
The share of the debt held by the public as a percentage of GDP has already skyrocketed. In January 2020, the CBO projected that publicly held debt would be 80.8 percent. The latest projection from the CBO shows a dramatic increase in publicly held debt, to 101 percent. Also the largest since 1946, the year following the end of World War II.
Sadly, House and Senate Democrats want to continue spending. In a recent interview reported by The Hill, Senate Minority Leader Chuck Schumer (D-N.Y.) said, “We need Franklin Rooseveltian-type action and we hope to take that in the House and Senate in a very big and bold way.” He later added, “The people like McConnell and McCarthy and even [President] Trump who say, ‘Let’s wait and do nothing,’ well, they remind me of the old Herbert Hoovers. We had the Great Depression -- Hoover said let’s just wait it out. It got worse and worse.”
Whoa, boy. First, Schumer acts like Congress has done nothing to address COVID-19. That’s simply not the case. Congress has spent insane amounts of money to address the pandemic and related economic disruptions caused by governors who shut down their economies. Of course, America is beginning to enter the reopening phase, but the pace at which the economy recovers is an open question.
Second, Schumer’s characterization of President Herbert Hoover’s response to the Great Depression is revisionist nonsense. Hoover, who took office in March 1929 and served only one term, is often described as a “laissez faire” president. However, his administration did actually intervene to a great extent, especially for the time. “Far from being a bystander, Hoover actively intervened in the economy, advocating and implementing policies that were quite similar to those that Franklin Roosevelt later implemented,” writes Dr. Steven Horwitz, an economist and professor at Ball State University.
One of the most well-known examples of Hoover’s intervention in the economy is the Tariff Act of 1930, championed by Sen. Reed Smoot (R-Utah) and Rep. Willis Hawley (R-Ore.). The bill raised tariffs -- or taxes paid on imports into the United States -- on more than 20,000 imported goods. Against the advice of more than 1,000 economists, President Herbert Hoover signed “Smoot-Hawley,” as the bill became known, into law.
Horwitz also notes that Hoover’s response extended into other areas, including spending, agriculture, wage policy, and taxes. In each of these policy areas, Hoover massively increased the size and scope of the federal government, increasing spending by 48 percent, propping up wages, and increasing taxes. Anyone who has a basic understanding of economics knows that these are not the actions of a laissez faire president.
In Hoover’s own words: “Two courses were open to us. We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and to the Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put that program in action.”
In fact, much of what President Franklin D. Roosevelt did after taking office in March 1933 was based on the actions of Hoover. Rexford G. Tugwell, who served as Roosevelt’s secretary of commerce, said that “practically the whole New Deal was extrapolated from programs that Hoover started.”
Third, it is amazing that so-called progressives still latch on to Roosevelt like he is deserving of some kind of sainthood. Folks, Roosevelt did not save America from the Great Depression. History books tell us otherwise, but history books are simply wrong. The author of the story in The Hill only tells us, “Hoover famously, and wrongly, predicted a rapid economic recovery in 1930. Instead, the Great Depression lasted until 1939.” There is nary a mention of why the Great Depression lasted so long.
Economist Thomas Sowell has explained that the economy was on the path to recovery after the stock market crash of 1929. "[The unemployment rate] hit 9 percent in December — but then began a generally downward trend, subsiding to 6.3 percent in June 1930,” Sowell wrote, citing analysis conducted by Richard Vedder and Lowell Gallaway in their book, Out of Work: Unemployment and Government in Twentieth-Century America. “Economic intervention by the Hoover administration interrupted the recovery and led to a deepening of the depression.”
Sowell blames Smoot-Hawley for initially hurting the recovery from the stock market crash. He rightly wrote that Roosevelt made it worse. This is also the conclusion of two economists, Harold Cole and Lee Ohanian, who, in 2004, published research finding that Roosevelt’s New Deal prolonged the Great Depression by seven years, including the recession of 1937.
“The main lesson we have learned from the New Deal is that wholesale government intervention can -- and does -- deliver the most unintended of consequences,” Cole and Ohanian wrote. “This was true in the 1930s, when artificially high wages and prices kept us depressed for more than a decade, it was true in the 1970s when price controls were used to combat inflation but just produced shortages.”
The Great Depression may be too distant for some to understand. We do, however, have more recent experience with recessions and failed attempts at stimulus in the United States. In 2009, Congress passed the $836 billion American Recovery and Reinvestment Act, which was supposed to stimulate the economy. One may recall that the Obama administration claimed in January 2009 that unemployment would not reach 8 percent with a stimulus package. Yet, the unemployment rate reached 10 percent in October 2009 and remained above 8 percent through August 2012. The unemployment rate did not reach the pre-recession low of 4.4 percent in May 2007 until March 2017.
The recovery from the Great Recession was slow. Annual economic growth in 2010 was only 2.56 percent. After the 1982 recession, America saw 4.6 percent growth in 1983 and 7.2 percent growth in 1984. The recovery should have been greater, but the extreme intervention in the economy, particularly in President Obama’s first term, through excessive regulation and spending, slowed the recovery.
The counterargument is, of course, that the recession was deeper than thought, but the response was not limited to fiscal policy. The Federal Reserve took unprecedented actions, such as quantitative easing and buying troubled mortgages, to lessen the impact. Some would even claim that the 2009 stimulus bill was not large enough to counter the impact of the recession. That cannot be proved.
We also have the experiences of countries like Japan, which experienced a “lost decade” in the 1990s that was related to bubbles in its economy, particularly in real estate. As Dan Mitchell of the Cato Institute explained in a 2009 congressional briefing, “[H]ow they mishandled their approach to the bubble is very similar to the way we’re mishandling approaches with bailouts today. But what Japan did in the 1990s to try to help their economy is they had one Keynesian stimulus program after another. And they focused a lot on infrastructure. I’m surprised that all the Japanese islands aren’t covered in concrete now. But what happened? There was no positive effect on the economy.”
Japan passed stimulus bill after stimulus bill to try to boost employment. Columnist and author Amity Shlaes wrote, “Between 1992 and 2000, the Japanese launched 10 stimulus packages that included public works. The Land of the Rising Sun became the Construction State. Other worthy issues, such as consistent tax reform, lagged. In fact, fiscal reform overall was postponed.”
Of course, the circumstances that led to the Great Depression, the Great Recession, and Japan’s “lost decade” are each unique and each different from the crisis that the United States currently faces. The situation in which we currently find ourselves is not caused by a moral hazard in the economy; it was caused by state government-mandated shutdowns of large parts of our economy.
If Congress continues to respond to COVID-19 with massive spending programs, including direct assistance to individuals and businesses and infrastructure, there will be consequences. Those consequences could mean a long economic recovery like what we saw in the aftermath of the Great Depression and the Great Recession and what Japan experienced in the 1990s. If House and Senate Democrats have their way, we may be entering into our own lost decade.