Mike Johnson, little known before, is Speaker of the House and the country has had two weeks to digest his views on cultural and economic issues. He opposes abortion, same sex marriage and LGBTQ rights. He says the Bible shapes his world view. He was a leader of efforts to keep Donald Trump in office after the Jan. 6 storming of the Capitol and the terrorizing of his colleagues.
Johnson’s view on spending and debt are especially important because a government shutdown is looming. Longer term, government spending and debt will be big issues leading up to the 2024 election as they have been for decades. We know already that Johnson wants to cut spending for schools in low-income areas and funding for the IRS. More areas of the federal budget are in his sights and those of the Republican Caucus.
The origins of Johnson’s views on spending and economic policy go way back. Throughout the 19th century and indeed prior to the Stock Market Crash in 1929 and the Great Depression that followed, most economists believed the federal government should have a very modest role in the economy. There were sharp debates during the 19th century about the tariff, hard vs. paper money, gold vs. silver, but when private sector financial crises and collapsing speculations threatened the economy as they frequently did, there was no support for a view that the government should step in directly to support individuals and businesses as it did during the recent financial and COVID crises.
The U.S. and most other countries in the 19th century still were overwhelmingly agricultural. By the early 20th century, however, countries were industrializing, and populations were moving from farms to cities and demanding more from governments.
There was an especially dangerous economic crisis in 1907. JP Morgan, as powerful as he was, had to struggle to rally other bankers to stop a financial rout. He succeeded after much effort to get them to buy stock and support weaker financial players, ending the crisis, but this was the end of an era.
The Federal Reserve Bank was created in 1912 and 1913 to play Morgan’s former role and deal with the new reality. It required banks to hold minimum reserves and in effect pooled reserves of the banks in its system so that they could be moved to troubled banks when needed, as “reserve bank” in its name implies.
Massive private lending and spending during World War I and during the Roaring 1920s, however, led to unprecedented waves of speculation in stocks and other assets that the Fed did not manage well. When the Stock Market Crash came in October 1929, it failed to provide banks with lending support to keep them open and money flowing. Moreover, it is not clear that doing so would have prevented the cataclysmic worldwide economic meltdown.
The Crash was followed by waves of bank and business failures and the Great Depression came on. President Herbert Hoover, an experienced businessperson, tried to deal with the crisis in the 19th century way, believing that the private sector would right itself without much government help.
He and his immensely wealthy Treasury Secretary Andrew Mellon, followed the old script, trying to cut government spending from 1929 to 1933 as the Freedom Caucus today would do, but that did not work. Unemployment rose to 25 percent and Hoover left office in 1933, admittedly much deflated without putting forward an alternative economic road map for conservatives.
There were conservatives in the 1930s, however, who recognized the need for more active government policy in a modern economy. The founders of the famously conservative Chicago School of Economics saw that the economy had changed and urged that the government develop policies to deal with the changes. The intellectual leader of this group was a professor at the University of Chicago named Henry Simons.
Simons and a long list of other economists petitioned Hoover and Congress in 1931, ’32, and ’33 in favor of more spending, public works, increased relief payments and other government action. (For lists of these economists see appendices to J. Ronnie Davis, “The New Economics and the Old Economists,” 1971, The Iowa State U. Press).
Simons seminal essay on what a conservative government needed to do was published in 1934. It was entitled “A Positive Program for Laissez Faire” (See this essay in “Economic Policy for a Free Society,” 1948, U. of Chicago Press). Simon’s abhorred New Deal price fixing, economic planning, and some of its regulatory policies, but as the title of his essay suggests he also was critical of the entirely negative Republican attacks on government activism. Simons called instead for a “positive program of economic legislation” including monetary expansion, increased public works spending, aggressive tax measures to reduce income disparities, and policies to rein in powerful corporations, banks and financial manipulators.
Simons, in putting forth this positive program, stands apart from Milton Friedman, who is often seen as the founder of the Chicago School. Friedman was Simons’s student and admirer but supported a more traditional and narrower view of the government’s role. His focus on monetary policy administered by an independent Federal Reserve, has won out in Republican and “conservative” circles over Simons’s larger view of what the government role needs to be in a modern economy.
Simons in 1934 wrote that Communist and Nazi sympathizers — forerunners of today’s anti-democratic “authoritarians” — were “the real enemies of liberty.” They could be defeated he believed only “through adoption of the wisest measures by the state,” and he was not confident that the U.S. government was up to the task. Fifteen years later, during America’s post-World War II heyday, Republicans supported most of what Simons, who had passed away in 1946, would have seen as the “wisest measures.”
There was the GI Bill, supported by both parties, that reduced income inequality and greatly broadened the middle class. The wealthy paid higher taxes. Republican President Dwight Eisenhower pushed through a massive modernization of the U.S. highway system that also played a huge role in post-war development. Social Security and unemployment insurance, opposed by almost all Republicans in 1935, was firmly in place and the social safety net was being expanded.
These government actions in the 1950s and 1960s were built on New Deal foundations. New Deal measures that Simons opposed because they limited competition were gradually put aside. Simons had written in 1934 that Republican policies from 1929 through 1933 had failed “in the discharge of (government’s) minimum responsibilities under capitalism.” Arguably, government fulfilled these responsibilities after WW II, to the deep chagrin of the Republican right wing. The now dormant moderate wing of the GOP was an important player.
What is scary about the new Speaker and the Republican Party in 2023 is how enthusiastically they are recycling 19th century ideas about the government’s role in the economy, and especially about government debt and spending. They are even spreading the view that Social Security, Medicare, Medicaid, and other government programs that Simons and many Republicans would certainly have supported are “socialistic,” could be privatized, and therefore that spending for them should be cut back. This is 19th century economics.
The bottom line is that there is nothing to suggest that a positive conservatism will reemerge as a result of Johnson’s leadership. Henry Simons must be turning over in the grave he shares with the enlightened Republicans of the post-war era.
Paul A. London, Ph.D., was a senior policy adviser and deputy undersecretary of Commerce for Economics and Statistics in the 1990s, a deputy assistant administrator at the Federal Energy Administration and Energy Department, and a visiting fellow at the American Enterprise Institute. A legislative assistant to Sen. Walter Mondale (D-Minn.) in the 1970s, he was a foreign service officer in Paris and Vietnam and is the author of two books, including “The Competition Solution: The Bipartisan Secret Behind American Prosperity” (2005).
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