The job market softened slightly in July, and the stock market panicked, which is worrying. The risk now is recession, not inflation, because the latter continues to fall.
The country badly needs a strong labor market to accommodate slowing consumer demand, mismatches in the labor force and new technologies that are transforming work. Growth also needs to be fast to meet dangerous challenges from Russia, China and Iran that will demand American resources.
The U.S. could grow faster, as it did during the Civil War and both World Wars, if the political taboos about government spending are suspended.
During World War II, for example, the U.S. pulled out the stops and sent the Soviet Union 400,000 jeeps and trucks, 14,000 planes, 13,000 tanks and tons of food and fuel. It sent much more to Great Britain and other allies and still had plenty to arm itself.
A similar effort is needed now to avoid a recession, upgrade defense industries, help the private sector absorb new technologies, push employers to educate and train the workforce and make domestic investments to lower underlying costs. What holds us back is ideological and political opposition to “government spending.”
How can faster growth be financed?
During World War II, the U.S. issued a river of public debt and President Roosevelt’s Treasury secretary ordered the Fed to buy that debt at 2 percent or less, which it did. This spending built whole new industries: aluminum for warplanes, shipyards that produced hundreds of “Liberty Ships,” and farms that churned out huge amounts of things needed for victory.
Very old economic beliefs are holding needed government spending back today. In the late 1600s, New Englanders understood that credit institutions were needed to develop the continent’s huge resources. Belief in gold and silver, however, slowed the development of such secure institutional credit.
Alexander Hamilton, George Washington’s brilliant Treasury secretary, set up the first Bank of the United States in the 1790s to escape inflexible dependence on gold, silver and foreign coinage. Thomas Jefferson opposed Hamilton based on beliefs about government spending similar to those that hold us back today.
President Andrew Jackson, 50 years after Jefferson in the 1830s, attacked Hamilton’s system by ordering the government to refuse paper money for purchases of government land. This led to a financial meltdown (“panic”), falling land and farm prices, and a long depression.
Jackson also dismantled the Second Bank of the United States leading to decades of financial and economic chaos. His policies forced credit-dependent small farmers to sell their properties cheaply to rich people who still had gold and silver.
The Federal government issued “Greenbacks” — in effect government-backed credit money — to finance the Civil War. “Hard money” advocates in 1873 again set out to take those paper Greenbacks out of the system by requiring payments in gold and silver. This again caused falling prices and a long recession.
The late 19th century was a period of financial instability and generally falling prices. Small farmers and businesses were crucified, per William Jennings Bryan’s famous speech, on “a cross of gold.”
The next major financial panic in 1907 scared JP Morgan and Wall Street so much that it led to the creation of the Federal Reserve Bank in 1913. The Fed was designed to provide lendable funds (“reserves”) to banks so they could continue lending.
In 1928 and 1929, however, the Fed’s leaders were afraid that providing reserves to banks would lead to inflation and force the U.S. off gold. A descending spiral of falling prices, failing businesses and unemployment — the Great Depression — followed.
President Hoover believed that reducing government spending would encourage private investors, but it did not. Prices and wages continued to spiral down from 1929 into 1933, and unemployment rose to 25 percent.
Hoover’s belief in cutting government spending to incentivize private investors is essentially the argument the debt hawks make in 2024.
Franklin Roosevelt’s New Deal changed course. After some hesitation, it used government debt to pay for public works and direct employment programs and support farm prices so that by 1935 growth resumed. Much greater government borrowing and spending during World War II from 1940 through 1945 led to 8 to 18 percent annual growth, near full employment and middle-class prosperity that carried over into the 1950s, as the COVID infusion of government debt has been doing recently.
Faster growth based on government and private borrowing and investment could again avoid a recession. It also would give the U.S. the resources it needs to face down Putin, Xi and the mullahs and supercharge domestic prosperity.
Slowing growth and unemployment is exactly what the U.S. does not need, but “conservatives” and the Fed have not learned from the 300 years of U.S. economic history staring them in the face.
Paul A. London, Ph.D., is the author of “The Competition Solution: The Bipartisan Secret Behind American Prosperity” (2005). He has served as a senior policy adviser and deputy undersecretary of Commerce for Economics and Statistics, a deputy assistant administrator at the Federal Energy Administration and Energy Department and a visiting fellow at the American Enterprise Institute.
