For someone who’s surrounded himself with a good deal of brand-name economic talent, Barrack Obama doesn’t seem to get it. Deficits are fine during recessions; government spending is a must, though priorities can be argued. What must not be done is raise taxes in order to try and keep deficits palatable. If news reports are correct, Obama is about to break that very fundamental rule, raising taxes on upper incomes and business.
As Tim Geithner himself stressed in his confirmation hearings, the Great Depression was elongated by the FDR government’s desire to try and ratchet back spending too soon, pushing the economy back into depression before animal spirits had fully recovered. Here is the WSJ’s account, from its Real Time Economics blog:
12:21: Sen. John Ensign quizzes Geithner on the Great Depression, perhaps looking to challenge the Fed official’s view. “Do you think the New Deal is what brought us out of the Depression?” Ensign asks. Geithner proceeds to cite the consensus of historians and economists, but is stopped and asked for his own view. Geithner responds, “I share the belief that it was only when we had in place” very substantial stimulus, stabilization of the banking system and a change in the exchange-rate regime that we were able to get out of the Depression. “We got there later than we should have as a country” due to efforts to pull back too soon before a recovery, he says.
Ensign isn’t finished and starts asking about 1937 and the “depression within the depression.” Geithner says the record shows “a bit of an early shift toward restraint before growth was strong enough. It underscores the importance of doing a lot soon and staying with it.”
Then comes a question about the effect of tax increases in 1937, perhaps Ensign’s effort to suggest that tax increases are counterproductive. Geithner gets out of a potential trap: He says he has more familiarity with monetary policy and the financial system than with taxes and spending, and repeats his point about pulling back stimulus too early.
Seems pretty cut and dried to me that worrying about the deficit amid the “greatest economic downturn since the Great Depression” is the wrong way to atone for a lousy stimulus bill.