The Recession of 1937 has become all but an illustration of why spending cuts are bad in a recession. Austrian economist Jonathan M. Finegold Catalan writes, “In 1937 the deficit stood at $2.2 billion, as compared to a deficit of $4.3 billion in 1936. However, it is also noteworthy that, while the deficit was half as much as that of the previous year, total government outlays decreased from $8.2 billion to only $7.6 billion.” Initially, it seems as if the avid government spenders are correct. Though, lets look further. Finegold goes onto say that, “1935 — a year considered one of recovery — total government outlays measured $6.4 billion, less than during both 1936 and 1937. In fact, looking back to the years from 1933 to 1935, government spending peaked at $6.5 billion in 1934.” So if federal outlay reductions were so minimal, why the big reduction in the deficit? In 1936, the Social Security Act and the “Soak the Rich” tax went into effect. The top marginal income tax rate was raised to 79 percent from 63 percent. This was part and parcel of FDRs Second New Deal, which was even more controversial than the first. Finegold adds, “Government receipts — money received through taxes — increased from $3.9 to $5.4 billion between 1936 and 1937. In other words, high government spending did not result in a high annual deficit because the government collected a far greater amount of tax money that year than in all previous years of the Great Depression.” So what did bring on the Recession of 1937? Finegold points to three significant and controversial laws upheld by the Supreme Court: the Social Security Act, the Wagner Act and the National Labor Relations Act. The Wagner Act replaced the previously voided National Industrial Recovery Act which exempted labor unions from anti-trust prosecution and forming cartels in key industries which drove wages and prices up higher than they otherwise should have been through collective bargaining. Finegold states, “It is also important to consider Friedrich Hayeks Ricardo Effect theory. This is the tendency for entrepreneurs to replace labor with capital-goods while the productive structure lengthens due to increases in real wages....but union activity largely disallowed entrepreneurs from replacing labor with capital goods, while real wages were rising astronomically.” mises.org/daily/4039
Posted on: Tue, 11 Mar 2014 13:56:47 +0000
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