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Learning from the Great Depression

A homeless family of seven walks along U.S. 99, bound for San Diego, where the father hoped to enroll in welfare because he once lived there. They walked from Phoenix, Arizona, where they picked cotton, 1939. Photograph Source: Dorothea Lange – Public Domain

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% of families in the U.S. owned 25% 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: U.S. 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. It was hardly unavoidable that governments would—as they did—deeply cut spending on such services as public health, sanitation, education, libraries, and transportation. Instead, they could have collected more taxes from corporations and the wealthy, as liberals, labor unions, Communists, and various popular organizations advocated.

In retrospect, such progressive policies seem both just and economically wise, in that they would have increased purchasing power among lower-income groups and thus expanded markets, incentivizing businesses to invest. But the political power of business groups like Chambers of Commerce, Real Estate Boards, and the National Association of Manufacturers ensured that more regressive fiscal policies were enacted and large proportions of the unemployed were left to fend for themselves.

In short, governments made choices; they were not forced to act as they did. They chose to rely on sales taxes instead of something more progressive; they chose not to spend budget surpluses on relief programs for the unemployed; they chose to cut spending on institutions that disproportionately benefited the working and middle classes.

If any of this sounds familiar, it’s because governments are making the same choices today (as they did following the Great Recession).

New York, for example, is cutting billions of dollars in aid to schools and Medicaid, and is sure to make further cuts in the coming months. Even as he pleads poverty, Governor Andrew Cuomo has rejected out of hand the idea of raising taxes on the ultra-rich, which could generate tens of billions of dollars in revenue for the state.

Other states are following the same playbook, making significant cuts without committing to raising taxes on the wealthy.

In the end, what the Great Depression and its solution in the colossal spending for World War II showed is that ultimate responsibility rests with the federal government. A mobilization of society’s resources on the level of the 1940s—under the auspices, say, of a Green New Deal—would not only solve the coming economic crisis but lay the foundation for sustained prosperity.

Nevertheless, states are not without their own resources, which they have an obligation to tap in order to mitigate the burden on the most vulnerable.

Let us, for once, avoid making the present “rhyme” with the past and instead set foot on a more enlightened path.

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Chris Wright has a Ph.D. in U.S. history from the University of Illinois at Chicago, and is the author of Notes of an Underground HumanistWorker Cooperatives and Revolution: History and Possibilities in the United States, and Finding Our Compass: Reflections on a World in Crisis. His website is www.wrightswriting.com.

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