In spite of data indicating that the U.S. economy has been modestly rebounding, there is growing fear that we are simply in a lull on the way to worse times ahead. That fear, rooted in history, is the product of both legitimate concern and ugly political opportunism.
For now, the sea of data is sending mixed signals: on the negative side, employment is weak and showing few signs of strengthening, consumers are spending at a reduced pace, states are facing severe budget problems, and credit remains tight. On the plus side, corporate earnings are soaring, job loss has slowed, production and productivity are up, the financial system has stabilized, and GDP has been expanding for almost a year.
What keeps the positive data from trumping the negative is the specter of another pullback hence the term double dip. The most memorable and troubling precedent is 1937. The first term of President Franklin Roosevelt's New Deal brought substantial improvement over the dire conditions of 1932 and 1933. Unemployment fell from 25% to a still high 14%, but fear subsided, confidence returned, and public expectations were of better days ahead.
But that expansion was the result of massive government spending and intervention. Sound familiar? By 1936 the appetite for continued spending was waning. In running for re-election, FDR promised to maintain the recovery while downplaying his concerns about inflation. Once elected, however, his Administration began to decrease government spending and tighten credit. And to pay for the deficits that had grown from 16% of GDP in 1933 to 40%, taxes were increased. The combination of higher taxes, tighter credit and a leveling off of government spending plunged the country back into a recession in 1937.
The other memorable double dip was in the early 1980s. After the election of Ronald Reagan in 1980, the economy recovered from a recession but was still hobbled by double-digit interest rates and inflation. Then Federal Reserve Chairman Paul Volcker waged a relentless assault against inflation by keeping rates sky-high, which dampened consumer spending and curtailed investment. As a result, inflation ebbed, but the economy was plunged into recession once again before rebounding after 1982.
These precedents and 1937 especially form the backdrop for the discomfort with the shape of the current recovery. Growth over the past several quarters has been the product of government spending and easy money provided by the Federal Reserve rather than hiring and spending by businesses and consumers. The shifting political sentiment against more spending, along with the prospect that some of the Bush tax cuts will expire thus raising taxes mirrors 1937, and uncomfortably so.
But as my wiser professors used to tell me, history doesn't repeat itself; historians and economists repeat each other. The comparison with the Great Depression is overplayed. There aren't Hoovervilles of tens of thousands of homeless in city parks. On the flip side, while the economy has stabilized, it hasn't recovered as robustly as it did in the mid-1930s, which means that even if there is a second dip, its consequences will be less dire. Or to put it another way, things aren't so good that a double dip will make them appreciably worse. There also hasn't been as much government spending proportionally as there was in the 1930s, nor has there been as much intervention as there was under Volcker. Contrary to popular perception, government is not as enmeshed in the economy as it was in either the 1930s or the early 1980s.
But with midterm elections looming, the double-dip debate is roaring without respect for history. The Democrats can use the risk of a double dip to call for more spending, while the Republicans can use it to call for reduced spending and tax cuts. The double dip fits each party's narrative: more government is the only thing standing in the way of another downturn; less government is the only thing standing in the way. Each can cherry-pick history to support the claims.
The politics of the double dip do us no economic favors. It's a phrase better suited to ice cream than as a catchall for a critically challenging economic future that the U.S. seems unable to confront. In fact, the hardening partisan lines prevent most policymakers and much of our public discourse from dealing with the structural changes that are upon us. Today's system is so complicated and so entwined in a global context that what politicians say matters far less than the competitiveness of our businesses, the strength of our innovation and our ability to spend productively for the future. Those are hard questions with no easy answers. So instead we focus on the thumbs-up, thumbs-down issue of the double dip. And no matter who wins the argument, we are losing because of it.