Over at The New York Times, Reason contributor Bruce Bartlett frets that it's beginning to look a lot like 1937—and not just because the Giants are killing it in the National League. In '37, federal spending was cut in absolute terms, taxes were raised, bank reserve requirements were raised, and the Fed tightened the money supply. The result was a slide into recession that extended the Depression years. Bruce (whose work I often disagree with but always benefit from reading), is worried that Obama, conservatives, and everyone else are pushing for big budget cuts, which might stall the so-called recovery in 2011:
Given President Obama's endorsement of large budget cuts, the only question now appears to be how much fiscal policy will tighten and how fast. If it is back-loaded and mainly involves cuts in transfer programs, the impact on growth may be modest. But if – as I suspect Republicans will demand – the spending cuts are front-loaded and involve reductions in government consumption and investment spending, the impact could be severe.
While it's unlikely that the Fed will repeat its error of 1936-7 and raise reserve requirements or the federal funds rate, it has already begun de facto tightening by moving from monetary stimulus to a more neutral stance. Moreover, with interest rates on Treasury bills hovering near zero, there is little it can do to stimulate growth on the monetary side.
Let's leave aside for the moment any and all questions about the causes of catastrophe in the 1930s (though if you're interested in that topic, go here and here). Precisely who is calling for actual budget cuts right now? The correct answer is zero. That's certainly true in the near term and all the trims (believe 'em when I see 'em) are from future increases in spending. The two budgets that are being debated remain Obama's, which grows federal spending from about $3.8 trillion this year to $5.7 trillion in 2021, and Paul Ryan's, which grows it to $4.7 trillion. Even factoring in the current arguments over the debt limit, nobody is talking about taking this year's budget and cutting from it. That's why they keep yapping about "deficit reduction," which will take place somewhere down the road, at the intersection of Bushwah and Malarkey.
The reality is that no one in DC is talking about what would pass for austerity around any kitchen table in this sweet land of liberty. Faced with an incredible, long-term mismatch between revenue and expenditures, even "the adults" are still living in a land of denial, expecting to spend far more than they earn forever and ever amen.
Contra Bruce, there's a strong case to be made that government austerity is precisely the tonic our sick economy needs. But whether you agree with that, there's currently next to no chance that we'll ever get a chance to find that out. If the first step of getting out of a jam is to use basic descriptive language, well, we're not even talking yet.