Recall that in 1938, spending was roughly equal to what it had been five years earlier. Today, federal spending is 39 percent higher than it was five years ago; to achieve spending reductions equivalent to 1937-38, we would have to cut about $600 billion out of our budget over the next two years. Receipts are actually lower than they were five years ago; since the big drop-off in fiscal year 2009, they have only produced nominal annual increases.
The Paul Ryan plan produces a real spending decrease of 2 percent from FY 2013 to 2014, but after that, spending increases annually. Spending five years from now would be 13 percent higher than it is today — less than Washington currently projects, and less than needed to maintain all of our current spending commitments — but also more than the 4.5 percent increase during the mid-’30s. That’s not offered as a defense of the Ryan plan; it is just meant to illustrate that even plans accused of being radical differ from what occurred in 1937 and 1938.
On the monetary side, the Fed might not have loosed everything in its arsenal, but it hasn’t shown much willingness to abandon its zero-interest-rate policy either. Two rounds of quantitative easing and more subtle moves such as Operation Twist signal a continued dedication to maintaining an expanding monetary base.
In short, if Ben Bernanke were to start talking about the need to raise interest rates, or if Congress were talking about massive tax hikes or real spending cuts (as opposed to slowing the rate of projected growth), we’d have some cause for concern. As it stands, the economy really may fall victim to the European recession, which itself has a multitude of causes (note to future policy wonks: don’t structure an economic system to achieve political goals). But American fiscal and monetary policy seems determined not to follow the trend from 1937-38.