In the years since the Great Depression economists of all stripes have come to a consensus about what happened. Wild speculation produced a crash. That led to intense stress on the banking system. The Federal Reserve (as primary villain) was unwilling and unable (because of the gold standard) to provide support. So the banks failed, and the rest of the economy collapsed. National income was down a massive 60% by 1932.
The collapse originated in the US and was much worse here than elsewhere. Germany, still paying World War I reparations, was a special case and fared badly. It is important to remember that without the 1929 crash, Hitler would have remained a curious side-show.
Recovery in the US took a full decade. There was a serious blip in 1937-38 when Roosevelt dialed back on stimulus and a GDP slowdown followed. International trade dwindled in the 30’s, as many countries instituted protectionist barriers. The US wasn’t fully out of the depression until the second World War.
Fast forward to the crash of 2008. The banking system was again central, because mortgage-backed securities brokers had become unregulated de facto banks. (Why should businesses earn nothing on cash when mortgage-backed securities paid real interest and were rated “just as safe”?) When the deteriorating economy led to large-scale mortgage defaults, the mortgage-backed securities collapsed in value and trillions of dollars of supposedly safely-banked assets disappeared.
People running things had fortunately learned the lessons of 1929, and stepped in immediately to keep the banking system afloat and pump money into the economy to prevent a depression. That stopped things going from bad to worse—very painful but not a depression.
Crisis and Recovery
Even at the beginning, however, something strange happened in this country. At the very end of his presidency, George Bush did the right thing (for once) and in the face of disaster introduced legislation to keep the banks afloat. Despite advice of economists, his own party refused to support him—claiming to fight socialism. However 172 Democrats and 91 Republicans did support the bill, and by a 263 to 171 vote helped pull the country back from the brink.
The episode seemed odd at the time. But with the start of the Obama presidency and the new Congress, it quickly became clear what had happened. That had been a transitional moment. The old Republican party that at least cared (conservatively!) about the well-being of the country was no more.
The new Republican party, more and more a creature of the Koch machine, had only one goal—cutting taxes on the small group of ultra-rich backers who now owned the party. That translated immediately to a surprising position. Mitch McConnell (always quick to know which way the wind was blowing) later summarized it as “The single most important thing we want to achieve is for President Obama to be a one-term president.” Private statements of position were even stronger. There would be no cooperation on anything—even on recovery from the recession. Obama wouldn’t give them the tax cut, so it was scorched earth. Republicans at the time trotted out ideological objections to stimulus—which the current Republican enthusiasm for both presents and deficits shows up for the hypocrisy it was. Everything that kept the country going had to be passed over Republican opposition.
Even with a Democratic majority, that limited what could be done as stimulus. At the same time the Kochs founded and funded the Tea Party as an apparently populist, anti-spending front group. Slow growth plus anti-establishment rhetoric plus an unprecedented dose of Koch money (enabled by Citizens United) helped Republicans gain control of the House. Keeping the country poorer was a rousing success!
After Obama was reelected Republicans doubled down on slowing the recovery and preserving the remaining pain. Their ploy was a commitment to balanced-budgets (today of course demonstrated to be bogus), including even a proposal for a constitutional amendment. On that basis they deliberately blocked any further stimulus or social programs (such as Obama’s State of the Union proposals for community colleges and daycare)—starving government to sow discontent for the election. By 2016 they had held the country hostage to their tax cuts for the full six years they controlled Congress.
Trump wasn’t their chosen candidate—too much of a loose cannon—but he would do. He was an even better populist front than the Tea Party. He didn’t even notice the irony in his “slowest recovery” claims. Pence was their guy all the way, and Trump picked a cabinet full of other Koch people. On tax cuts there was no problem managing Trump. He already believed anything good for himself was good for the country. The tax cut plan is now here. It is worth more than $1B for Trump himself, and is everything the rich donors could have hoped for.
You have to hand it to the Koch machine. All the distributed power in the power in the American political system has now been centralized and controlled. Local, state, Congress, the Presidency, the Supreme Court—the Koch organization has money in all of it. More to spend than the Republican party itself, and all under strict control. A few hundred fabulously wealthy people are running the USA for their benefit.
That’s where we are.
For the tax cut, what’s on the table is an astonishing giveaway of the country to the richest few. The asserted benefits to the middle class are nothing but after-the-fact propaganda. There is no logical or historical justification for claiming that upper class tax cuts produce jobs. Business tax cuts, while they sound good, are actually no better. Businesses hire people because of opportunities, not cash on hand. With today’s low interest rates the cost of capital is not a big barrier to new opportunities, so tax cuts will end up going to the investors.
This is not really a stimulus package, and it’s a myopic approach to our real problems in any case. One reason the recovery hasn’t helped everyone is that the Republicans’ past financial lock-down has prevented whole categories of problems from being addressed. The economy is changing and issues such as skills mismatch, automation, educational opportunity and even infrastructure aren’t addressed just by throwing money at the private sector.
There’s another problem too. All that tax cut money will now be chasing investment—a dangerous invitation to speculation. And we’re incurring new large deficits to pay for it at the wrong time in the business cycle. The country is out of recession, and large deficits in good times are bad. When our speculative bubble comes to an end, it will be all the harder to find the stimulus money to get up off the floor.
There is also a real question about who’s going to be around to help. Remember the disastrous Federal Reserve behavior in 1929 and the unanimity it took to get back from 2008. Janet Yellen may not be retained as Federal Reserve Chairman when her term expires next February. One prominent candidate to replace her has no specialist background in economics and opposed all stimulus after 2008 out of an unsubstantiated fear of inflation. Trump has not chosen his nominee, but it’s something to worry about.
Too many pieces from 1929 are coming back together. The ultra-rich are getting their tax cuts. By all evidence there is little interest in learning from the past and even less in looking out for the lot of the rest of us.