The '80s and the '20s: We can profit by being cautious, not cringing
MANY older readers who remember the Great Depression still tend to fear a repeat of those days. Whenever the economic outlook gets a bit hairier, one can be sure there will be a letter in the mail about the '30s. I don't happen to believe that events ever repeat themselves exactly, but I do wish the generations that have matured since the 1920s had some of that folk memory to make them a bit more cautious.
In two recent issues of the weekly Smith Barney, Harris Upham Portfolio Strategist, political commentator Kevin Phillips has written about the similarities and dissimilarities between the 1980s and, not the '30s, when things were slowly being put together again, but the 1920s. Mr. Phillips notes President Reagan's admiration for the political culture of the '20s -- in the person of Calvin Coolidge and the policies of governmental nonintervention in business. Business was also fashionable in the '20s, and he sees a parallel there with today's yuppies, who find personal economic achievement more important than involvement in the social goals of the 1960s and early '70s.
As in the 1920s, the nation also has an uneven prosperity. Then, the prosperity was concentrated in the Middle Atlantic states, the Great Lakes (automobiles), and the Pacific Coast. Today, it's more a matter of both coasts doing well, while the farm states, the ``rust belt'' area of the Midwest, and the energy-driven Southwest are having severe slumps.
Finally, he notes that the 1920s were the decade of multiple tax cuts -- five of them. He concedes that the parallel is imperfect, but the question is how much of the 1986 tax reform ``represents a future source of real strength for the economy and what part represents a repeat of the late 1920s go-go mentality.''
Dissimilarities between the two periods are strong, however, and it is clear that ``learning the lessons of history'' is not a rote exercise.
When the depression began, the Federal Reserve countered by shrinking the money supply. During the mid-1980s, we have had a generous increase in the money supply. Second, Republican administrations in other deflationary periods have tried to maintain the external value of the dollar. The Reagan administration first talked up the dollar, but since 1985 it has been talking it down.
Some of this difference is probably due to the Republican strength today being in formerly populist areas of the country. ``Indeed,'' writes Phillips, ``this time the Republican administration in question, instead of having Pennsylvanian Andrew Mellon as Treasury secretary, has a Texan -- a man from the part of the country most worried about commodity deflation and collapsing banks.''
Other major differences are the Reagan administration's fidelity to free trade, as opposed to the Smoot-Hawley Tariff of 1930, and Mr. Reagan's acceptance of large budget deficits. But it is clear that not all policies aren't working very fast or effectively to resolve America's major trade weakness.
The political cultures of the two periods are similar, and at least some of the economic challenges are similar (such as major parts of the nation being in virtual depression while other parts prosper). But the economic approaches to their solution are not following the mistakes made in the past.
Whether current policy is responding to today's challenges is a separate question -- but one thing is certain: We're not seeing an exact rerun of history.