That 1937 Feeling All Over Again

(Editor’s Note:  Starting today, this blog now has a new category called Notes & Reposts.  It will be used to reference other articles and websites that support past and future articles appearing in this blog.)

Federal Reserve Chairman Ben Bernanke, an expert on the Great Depression, once promised that the central bank would never repeat its 1937 mistake of rushing to tighten monetary policy too soon and prolonging an economic slump.  Back in 1937, the U.S. economy had been growing rapidly for three years, thanks in large part to government programs aimed at ending the deep recession that began in 1929.  Then the central bank clamped down hard on lending, and federal government spending dropped 10 percent. The economy contracted again in 1938. The jobless rate soared.

Full employment is one of the Fed’s prescribed goals, and it is clearly falling short. Government spending cuts are making matters worse.  Friday’s employment report showed a net loss of 37,000 government jobs last month.  State and local governments with balanced budget rules had little choice but to cut jobs in order to make ends meet.  The federal government has no such restriction, but its spending outside of defense fell at a 7.3 percent annual rate in the second quarter, crimping economic growth.

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