I probably am not going to do justice to this question since I intend this to be a short post. But I have been thinking about this issue for some time.
People like to draw historical analogies and figure out how what’s occurring today rhymes with what occurred in the past. We certainly saw that during the US election campaign in 2008 when people were comparing Barack Obama with Franklin Roosevelt (despite the fact that Obama faced a situation more akin to Herbert Hoover). And we saw the same kind of historical parallelism to 1994 during the healthcare debates in the US.
This an exercise fraught with peril because every historical episode is unique; if you are looking for exact parallels, you are likely to overlook the less obvious but more important parallels. For example, right now, a lot of people hearken back to the government shutdown fiasco of 1995, looking for clues as to how to solve the debt ceiling fix. It’s a pretty good parallel. However, the problem with that analogy is the economy. Then, the US was four years into a decade-long upturn. Unemployment was lower, inflation was higher. Consumers were much less indebted and the housing downturn was limited to Massachusetts and California.
In my view, a better parallel is the early 1930s, during Hoover’s presidency. Here’s what Wikipedia says about the Smoot-Hawley Tariff Act of 1930:
The Tariff Act of 1930, otherwise known as the Smoot–Hawley Tariff (P.L. 71-361) was an act, sponsored by United States Senator Reed Smoot and Representative Willis C. Hawley, and signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels.
The overall level tariffs under the Tariff were the second-highest in U.S. history, exceeded by a small margin only by the Tariff of 1828 and the ensuing retaliatory tariffs by U.S. trading partners reduced American exports and imports by more than half.
Many economists have opined that the tariffs caused or contributed to the severity of the Great Depression…
At first, the tariff seemed to be a success. According to historian Robert Sobel, "Factory payrolls, construction contracts, and industrial production all increased sharply." However, larger economic problems loomed in the guise of weak banks. When the Creditanstalt of Austria failed in 1931, the global deficiencies of the Smoot-Hawley Tariff became apparent
U.S. imports decreased 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports decreased 61% from US$5.4 billion to US$2.1 billion, both decreases much more than the 50% decrease of the GDP.
If you look beyond the specific issues of Smoot-Hawley or the debt ceiling fiasco, the macro backdrop is similar: global credit crisis, large drop in GDP, dropping money supply aggregates, flirtation with consumer price deflation, large asset price deflation, incipient sovereign debt and banking crisis in Europe, fragile recovery (people felt recovery was coming in 1930). My point is that it’s as if people somehow think that we are out of the woods and are willing to risk a global depression.
I think Ross Douthat has it right:
For months, Republican leaders used all the tools at their disposal — the anti-spending intensity of their base, the White House’s desire for a deal, the specter of dire consequences if the debt ceiling wasn’t raised — to leverage their way into a favorable position. Despite controlling just one house of Congress, they spent the spring and summer setting the agenda for the country: not whether to cut spending, but how deeply and how fast.
But last week, the Republican offensive suddenly collapsed in disarray. In the space of a few days, a party that once looked capable of pressing the White House into a deal that would have left liberals fuming found itself falling back on two less-palatable options instead: either a procedural gimmick that would try to pin the responsibility for raising the ceiling on President Obama, or a stand on principle that would risk plunging the American economy back into recession.
What went wrong? It turns out that Republicans didn’t have a plan for transitioning from the early phase of a high-stakes political negotiation, when the goal is to draw stark lines and force the other side to move your way, to the late phase, in which the public relations battle becomes crucial and the goal is to make the other side seem unreasonable, intransigent and even a little bit insane.
So, if the US defaults, who gets the blame? Recent polls show 71% shun GOP handling of the debt crisis. Default will be blamed on Republicans. No default and a weak economy will be blamed on Obama and the Democrats. Either way, the risk of a serious fall in output from overly large cuts is there. If I had to make parallels, I still say this is Hoover’s time, not Roosevelt’s and certainly not Clinton’s.