Biden Gang: This Generation’s Smoot-Hawley?

Will history judge today’s national leaders in the same way that it has judged former Senators Reed Smoot and Willis C. Hawley – as well-intentioned but misguided policymakers who helped send the economy further into the ditch?

Smoot and Hawley? They sponsored legislation, which President Herbert Hoover signed in mid1930, which raised tariffs on more than 20,000 imports to record levels, inciting a global trade war that cut U.S. exports and imports by about two-thirds and made the Great Depression, which had already started, that much greater.

Today, the economy continues to struggle its way out of the Great Recession of 2007 to 2009. Unemployment is 9.1 percent, the economy created just 54,000 jobs in May, and the growing numbers of downbeat news stories do nothing for consumer confidence.

The enormous budget deficits of recent years – triggered mostly by the recession, federal bailouts, and the 2009 stimulus bill – has triggered public alarm and prompted both political parties to display their budget-cutting bona fides.

Beyond the politics, many lawmakers (particularly Republicans) seem to believe that immediate spending cuts will trigger more economic growth, which sets conventional economic wisdom on its head. Mainstream economists generally believe that a weak economy needs more fiscal expansion, not contraction, and that the federal government can increase demand by cutting taxes and increasing spending in the short term.

Having said that, we do face a serious long-term budget problem – not spurred by the recession, bailouts, and stimulus legislation but, instead, by rising health care costs and the retirement of baby boomers, the combination of which will greatly increase spending on Medicare, Medicaid, and Social Security.

A smart economic policy calls for short-term stimulus and long-term deficit reduction. Specifically, policymakers should enact legislation that would include more tax cuts and spending for, say, another year or two, and also include a long-term deficit reduction plan that would take effect in, say, 2014.

Unfortunately, Republicans are demanding immediate and significant spending cuts as their price for providing the needed votes to enact legislation to raise the federal debt limit. If the debt ceiling is not raised, the government defaults for the first time in its history, which the Treasury Department estimates would happen in early August.

Vice President Biden is presiding over negotiations with bipartisan congressional leaders to craft a package of cuts, which could total as much as $1 trillion, some of which might even target current-year spending.

Washington is consumed with two problems – high unemployment and big deficits. At the moment, policymakers are focused on addressing the latter. If they cut deficits too quickly and by too much, as seems possible, they will weaken the economy and make the jobs problem worse.  All of that will do nothing for their historical reputations.

A decade or two from now, the nation may well view Biden and company as this generation’s Smoot and Hawley.

On Posted on