Opinion

Dark parallels of 2013 and 1937

Will 2013 be 1937? This is the question many analysts are posing as the stock market has dropped after the US election. On Nov. 16, they noted that industrial production, a crucial figure, dropped as well.

In this case, “1937” means a market drop similar to the one after the re-election of another Democratic president, Franklin D. Roosevelt, in 1936.

The drop wasn’t immediate in that case; it came in the first full year after the election. Industrial production plummeted by 34.5%. The Dow Jones Industrial Average dropped by half, from almost 200 in early 1937 to less than 100 at the end of March 1938.

It’s hard to imagine stock indexes dropping by half today, or unemployment rising past 15%, as they did in the “depression within the Depression.” But the parallels are visible enough to be worth tracing.

* Pre-election spree that sets records. In the old days, federal spending amounted to about 19% or 19.5% of gross domestic product. That ratio was so reliable that economists took it as a given, the American normal, from which divergence was unnatural and temporary. By the old 19% rule, federal spending would have dropped back once the worst of the 2008 economic crisis passed. That didn’t happen.Even in 2012, when the crisis was long past, the government went on a spree, spending the equivalent of 24.3% of the economy.

In 1936, a similar barrier was breached. Up until 1936, federal spending flowed at smaller levels than the spending by states and towns combined, with wartime being the exception. Roosevelt slowly ratcheted up the outlays, and in 1936, Washington spent more than the states and towns. This shift was dizzying for a country based on the principle of federalism, of strong states.

* Fearsome attack on the status quo. In his first news conference on Nov. 14, Obama went out of his way to make clear his tax increases would fall on the rich: “What I’m concerned about is not finding ourselves in a situation where the wealthy aren’t paying more or aren’t paying as much as they should.”

Roosevelt was also ferocious, telling the old guard: “I should like to have it said of my first administration that in it the forces of selfishness and of lust for power met their match. I should like to have it said of my second administration that in it these forces met their master.”

* Fallout from first-term legislation. Obama signed his health-care act in 2010, postponing much of its enforcement until 2013, after the election. Roosevelt’s equivalents were threefold: Social Security, the Wagner Act and a new Federal Reserve law, the Banking Act of 1935, all passed well before the election. In all three cases, the full effects of the laws weren’t felt until after the election.

Benjamin Anderson, the chief economist at Chase National Bank in the 1930s, tried to capture the problem of the big-government president by titling one of his books “When Government Plays God.” His advisers warned him to suppress the title, arguing it might offend. Anderson shifted to the more banal: “Economics and the Public Welfare.” But Anderson’s phrase still reverberates: A government that “plays God,” or at least “plays powerhouse,” can spook markets and employers, whatever the decade.