Depression lessons

According to Mark Twain (supposedly), history doesn’t repeat itself, but it frequently rhymes. He was right. Donald Trump, for example, rhymes with Mussolini. The decline of organized labor in recent decades rhymes with its decline in the 1920s. And the coming depression will rhyme, in many respects, with the Great Depression.

For decades, in fact, it has been clear that the political economy of neoliberalism 'rhymes' with the political economy that caused the Depression. In addition to (and in part because of) the analogous collapses of organized labor, economic inequality skyrocketed in both eras: in 1929 the richest 0.1 percent of families in the US-owned 25 percent of all wealth, which is almost exactly the same amount as today. Real wages in the last forty years have stagnated or even declined, as in the 1920s. What these trends, coinciding with an explosion of debt, have indicated is a dangerous weakness in aggregate demand, which has heralded an eventual collapse of markets.

Now that markets are imploding (although from an unforeseen trigger, the coronavirus pandemic), we can observe history rhyming yet again: the fiscal policy responses today, especially by states, mimic those of the Great Depression.

It is of interest to consider government policies in that earlier period, for there may be lessons to heed as states and the federal government confront our own generation-defining economic cataclysm. While political officials don’t always learn from the past, at least activists and the public can.

The most striking fact about the fiscal policy of states in the 1930s is that they consistently underfunded unemployment relief, even in the years when many of them, far from being strapped for cash, had budget surpluses. This is a paradoxical and frequently forgotten fact: US states ended the Depression in a much stronger financial position than when it began.

The reason is simple: it was in these years that states discovered the sales tax, and came to rely on it (together with taxes on alcohol, tobacco, gasoline, and soft drinks) for the majority of their revenue. By 1940, they had doubled the amount they collected in 1930. And yet even the wealthiest states, such as Illinois, continued to plead poverty as an excuse not to adequately fund relief for the unemployed.

It is also noteworthy that states typically preferred to enact regressive forms of taxation such as the sales tax rather than raise taxes on property, individual and corporate incomes, estates, and the like.

The very agenda of austerity, which was a near-religion for states and municipalities in the 1930s (except insofar as Franklin Roosevelt’s New Deal counteracted it), was not the “economic necessity” authorities claimed it was.

Excerpted from: 'Learning from the Great Depression'.

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