The Fiscal Cliff: Have We Been Here Before?

As we all know, the U.S. government is only a few days away from going over the fiscal cliff.  The fiscal cliff consists of a combination of mandatory spending cuts and tax increases.  Forbes estimates that the total in tax increases and spending cuts will siphon around $500 billion out of the economy in 2013 (Forbes estimates the spending cuts will be $109 billion).  That is a huge chunk of change and might be enough to cause the U.S. economy to go back into recession.  The key word being,"might."

Franklin D.Roosevelt, 1933 (3)

As a history buff, I wondered if the United States had been in this predicament before.  At some point in our past, did the federal government massively ramp up its budget in reaction to a severe economic downturn?  Did the president and Congress (perhaps fearing that the U.S. debt was too high to be sustainable) subsequently cut spending by a significant amount while at the same time raising taxes?

The answer to that question (or questions) is yes.  From 1933-1936, President Franklin Delano Roosevelt, working with Congress, spent heretofore unheard of amounts of federal money (at least during peace time) in an effort to ameliorate the effects of the Great Depression.  By 1937, the U.S. economy had improved markedly.  Some (perhaps even Roosevelt) believed that the depression was over.  Unemployment was still around 14% but was significantly lower than at the height of the crisis (when it may have been as high as 25%).  As important, factories were producing more than they had in 1929.  Roosevelt and Congress responded by cutting federal spending significantly.  In that same year, the U.S. government started collecting a new payroll tax to cover future Social Security payments (1).  Sound familiar?

The payroll tax increase and spending cuts almost certainly had a hand in derailing any gains the U.S. economy had made since 1933.  During the 1937-1938 "recession," the stock market tanked, production dropped off significantly, and unemployment went to 20% (2). 

The U.S. economy has changed markedly since 1937, and the Great Recession was not nearly as severe as the Great Depression.  Nonetheless, I think we can learn something about the ramifications of going over the fiscal cliff by looking at the causes of the 1937-1938 "recession."


1. McElvaine, R. S. (1984). The Great Depression: America, 1929-1941. New York: Times Books.
     pgs. 75, 297-298.
2. Ibid., 298-300.
3. Photo of Franklin D. Roosevelt.  Photographer is Elias Goldensky.  The photo was taken on Dec.
    27, 1933.  It is located on Wikimedia Commons and is in the public domain.