What history says about Romney Ryan economics

The Republican party claims cutting taxes, regulations and the size of government will bring back prosperity.    Here are some easily documented historical facts useful in evaluating the Romney/Ryan plan:

The formula of cutting taxes, cutting regulations and cutting the size of government as an economic growth tool has has been widely advocated by Conservatives in most democratic countries for the last 100 years, and from time to time a Conservative government gains sufficient control to implement the policies.  The results have not been good.

In the United States it is the formula the Republican party in the United States rode into power in 1919.  Republicans controlled both houses of Congress from 1919 to 1933 and we had Republican Presidents from 1921 to 1933.  Their business friendly, low tax policies produced bubbles in stocks and housing, followed by a financial crash in 1929 and the Great Depression.  By the time Republicans were ushered out of power in 1933 unemployment was around 25%, millions of Americans had lost their life savings as thousands of banks collapsed, millions more had lost their homes to foreclosure and the Government had gone from a balanced budget with no debt to large federal deficits.

Democrats controlled Congess for most of the next next 62 years.  Then in 1995 Republicans again advocating cutting taxes, regulations and the size of Government took control of both houses of Congess.  They held control until 2007.  We also had a Republican President from 2001 through 2007.    The period of Republican domination started with a growing economy and a shrinking National Debt.  By the time voters brought Democratic majorities back in 2007 the national debt was skyrocketing, and the economy was caught up in the downward spiral that culminated in the Financial collapse of 2008 and the Great Recession, and once again lots of people lost big chunks of their savings, lost homes to foreclosure, and lost their job.

Comparing these two Republican orchastrated financial collapses is instructive.  Unlike 2007, when the Republicans were being shown the door by the voters just as the collapse began, the Republicans continued to control both houses of Congress and the Presidency between 1929 and January of 1933.  President Herbert Hoover was convinced that the private sector would pull us out of the downturn, so continued with the Republican polices that reduced the influence of government, lowered taxes and eliminated regulations.  It didn't work.  The circumstantial case is strong that a big part of the reason the recession that followed the 1929 crash turned to a depression rather than a bad recession was because of the Republican policies.  It appears voters made the connection - for the 47 years from 1933 to 1980 Democrats controlled both houses on Congress for 38 of those years out of 47 years.

Beyond the historical evidence from US history, the Romney/Ryan plan ignores economic studies that have looked at the effect of cutting government.  The International Monetary Fund commissioned a study that looked at 173 times in the last couple decades where developed countries cut government spending.  They found that in a situation like we are currently in, with very low interest rates, cutting government spending causes a drop in GDP and a rise in unemployment.

Britain, the country whose economic system is most like ours, bought into something very like the Romney-Ryan plan when they elected a Conservative government in May of 2010.  The Conservative governing philosophy, like Herbert Hoovers in the 1930's, has been to rely on the private sector to drive economic recovery through lowering taxes, and cutting government and regulations.  Instead of recovery, GDP growth has turned negative and Britain has been in recession for the last three quarters (the last quarter was surprisingly bad according to the BBC).   

Supporters of the Romney/Ryan campaign cite the "Reagan" recession in the early 1980's as evidence their plan will work.  It is a false comparison.  Unlike our current economy, the slowdown in the early 1980's was not a product of a private sector financial collapses, it was caused by high interest rates.  The Federal funds rate, which is currently effectively 0%, was 20% in June of 1981.  The recession was a product of the fact neither business nor consumers could afford to borrow money at rates above 20%.  When inflation cooled off, the Fed lowered interest rates and suddenly business and consumers could afford to borrow and expand and the economy took off. 

In short the recovery in the early 1980's was in an environment of interest rates falling from historically high levels coupled with low consumer debt.  That recipe is not available to us right how.  We have historically high consumer debt and interest rates have hovered at near zero for a couple years.   The current conditions could not be more different.

If Mr. Romney and Mr. Ryan get elected, and do what they say they are going to do, history is pretty clear there is a high likelyhood we will be back in recession within a year, and at risk of a serious depression.