We've all learned, either from our parents and grandparents, or by studying US history, that the Great Depression of the 1930s, which followed the stock market crash of 1929, was a devastating economic slowdown that destroyed businesses and banks, wiped out savings, and created widespread privation. By the time FDR became President in 1933, unemployment had risen to 25%, and the images of long breadlines remain a cultural memory to this day.
What we remember less well about the 1930s is that a combination of New Deal policies, along with Congress's authorizing in 1936 a long-promised cash bonus for veterans of the first world war, led to a very rapid recovery for about the length of FDR's first term (1933-1937). US GDP grew at an astonishing 9% rate during that period, and unemployment fell from 25% to about 14% - still bad, but a marked improvement. In 1937, however, Congress shifted more toward a balanced budget (tightening fiscal policy), while at the same time the Federal Reserve pulled back on what many had regarded as excessively easy monetary policy. The combination of fiscal and monetary tightening resulted in a sharp recession in 1937-38, which drove unemployment back to 19%. Only World War II pulled the US out of the slump.
The time that has now passed since the 2007-08 financial crisis is about as long as the interval from the Great Crash to the 1937 slump. My fear for the next Congress is that the Republican leadership may be only too eager to re-enact the choices of 1937, and that the coming couple of years, or longer, may see the return of hard times that have never completely gone away.
Let's suppose you're a Republican strategist, mapping out a political strategy for Mitch McConnell and John Boehner for the two years until the 2016 election. As I see it, you have two goals. First, you have to thread the needle between your paymasters, the billionaire campaign underwriters, and your base voters, the Republican and Tea Party rank and file. Second, you have to try to do what you can to set your party up for 2016. How can you do all of that?
Well, you can keep whipping up fear of imaginary threats, of course, which doesn't bother the money people and gives the base an emotional impetus to cling to you. But if you want to look like you have actual policies, then your best bet is the old right-wing promise to strangle government. So you pass a budget that represents a big drop in taxes and an even bigger drop in government spending. It's really an austerity budget, but of course you don't call it that. You talk about government intrusion, crowding out of private investment, or whatever other economic fables you think you can sell. Politically, you essentially dare President Obama to veto your budget, threatening that if he does, you might not end up authorizing any spending at all. It'll be tricky what with the way the President was able to stick you with the blame for the last government shutdown, but hey - that didn't hurt in the 2014 midterms, did it?
So you pass your austerity budget. At about the same time, the Federal Reserve is likely to continue reducing its monetary stimulus. If the Fed starts making noises about returning to its monetary easing, you go back to threatening audits or changes in the Fed's governance or mandates. The result is a combination of monetary (money supply and interest rates, the domain of the Fed) and fiscal (taxes and spending, the domain of Congress) tightening, just like in 1937. The most likely economic result is a sharp recession, and if you're really lucky, you can even get deflation to take hold. Deflation would simultaneously worsen the recession and allow you to crow about how you've rescued the strength and integrity of the dollar. (Never mind that deflation would push millions of people that are just about holding on in spite of carrying a little too much debt right over the edge).
If you're McConnell and Boehner, it's particularly important to implement your austerity budget and get the recession rolling within the next few months, because the real point of the whole exercise is to create an economic mess that you can blame on President Obama in the run-up to 2016. If you can get things to be bad enough, you might be able to get the misery you've created to carry your party to victory in 2016.
In spite of Republicans' claim to be the party of business, friendliest to the economy and most likely to enact policies that lead to prosperity, we know that they're the party of the owners of the biggest businesses, and the rest of us can go hang. Wanting to hold political power, and not worried so much about anything else, they don't seem likely to lead us on a path to any economic boom. Quite the opposite - I'm afraid we're in for a period of austerity and recession, and the economic results won't be pretty. If we aren't careful, the political results won't be, either.