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Obama should focus on jobs, not deficit

By Julian E. Zelizer, Special to CNN
  • Pressure is building for Obama to focus on cutting federal spending, Julian Zelizer says
  • He says with jobless rate of 10 percent, creating jobs has to be the priority
  • Zelizer says Franklin Roosevelt cut federal spending too soon, sparking a recession
  • He says the 1937 recession led to big Democratic losses in Congress

Editor's note: Julian E. Zelizer is a professor of history and public affairs at Princeton University's Woodrow Wilson School. His new book, "Arsenal of Democracy: The Politics of National Security -- From World War II to the War on Terrorism," will be published in December by Basic Books. Zelizer writes widely about current events.

Princeton, New Jersey (CNN) -- Regardless of the outcome of the health care reform effort, the difficult issue of cutting the federal budget deficit is likely to move front and center in 2010.

The size of the deficit is causing great concern in Washington. While most economists say the deficit should normally hover at around 3 percent of the Gross Domestic Product, it has now reached almost 10 percent. With each piece of positive economic news, such as the recent fall in unemployment claims, pressure will grow to shrink the deficit.

The Wall Street Journal reported that the White House is considering using some unspent TARP money for debt reduction while Chief of Staff Rahm Emanuel is pushing for spending cuts if Congress raises taxes.

In next year's State of the Union address, the president is planning to focus on deficit reduction as a priority above programs to create jobs, according to Politico. Apart from any worry the administration might have about the economic dangers of large deficits, the Democrats are concerned that the issue troubles many independent voters who would be crucial to limiting the number of Republican victories in the midterm elections a year from now.

While President Obama will inevitably need to work on deficit reduction, it is crucial that he not start too soon. Right now, unemployment must be Issue No. 1 for the federal government. The rate of unemployment, which is over 10 percent, is unacceptable. As New York Times columnist Bob Herbert noted, "Families struggling with job losses, home foreclosures and personal bankruptcies are falling out of the middle class like fruit through the bottom of a rotten basket."

If Obama moves to cut government spending too soon, he could easily make things worse for the economy and create a dangerous situation for his presidency.

"Right now unemployment must be issue number one for the federal government."
--Julian Zelizer

President Franklin Roosevelt, to whom Obama's situation has often been compared, learned this lesson all too well. After the Democratic landslide victory in 1936, which left FDR with huge majorities in both chambers of Congress, Democrats anticipated a clear legislative road ahead.

Many liberals were also convinced the worst of the Depression was over and that the economy was on solid ground. While there were some voices warning about overconfidence, few expected a severe downturn.

In April 1937, the president called for spending cuts and a balanced budget. Treasury Secretary Henry Morgenthau, who had been pushing for balanced budgets unsuccessfully, was elated. Morgenthau said that "the patient might scream a bit when he was taken off narcotics," but it was time, he said, to "strip off the bandages, throw away the crutches" to determine whether the economy could "stand on its own two feet." The cuts took place in June, with many focusing on public works.

But then the situation turned bad. During the summer and fall of 1937, the economy suffered a devastating recession. Corporate profits fell. Stock prices plummeted. Industrial production declined. Unemployment increased. "We are in for a rather bad winter," Adolf Berle, who held several positions in the Roosevelt administration, lamented.

As FDR tried to downplay the state of the economy, his critics lambasted him. Liberals blamed the spending cuts as well as anti-inflationary policies implemented by the Federal Reserve.

Businesses and conservatives used the recession to attack the regulatory measures that the New Deal had imposed on business, claiming that tax, labor and monetary policies had created great uncertainty for business. Roosevelt's critics talked about the "Roosevelt Recession."

The administration was slow to respond. Historian William Leuchtenburg recounted that at one lunchtime meeting, Morgenthau said "As I see it, what you are doing now is just treading water ... to wait to see what happens this spring." Roosevelt responded: "Absolutely."

Conditions only deteriorated. The welfare rolls were exploding and many states and cities ran out of money to provide assistance. Roosevelt finally acted in April 1938 when he agreed to an emergency spending appropriation of more than $3 billion to stimulate the economy, which most considered a modest response given the much bolder proposals being made

During the 1938 midterm elections, the administration suffered significant loses. The administration threw its weight behind several candidates, and only one of eight won. The conservative coalition of Southern Democrats and Republicans grew vastly in size. Republicans picked up 81 seats in the House and 8 seats in the Senate.

There were many reasons for liberal losses, including opposition to FDR's plan to increase the size of the Supreme Court, but the state of the economy was central. The conservative coalition would bottle up domestic legislation for the remainder of FDR's presidency.

While 1937 is not 2009, the so-called "Roosevelt Recession" should serve as a powerful reminder to this administration that focusing too soon on deficit reduction could have dangerous effects on the economy and negative political consequences for the president in the rest of his term.

Knowing when is the right time to cut spending remains a difficult challenge for economists, but there are many respected voices who agree now is not the time. The good news is that some members of the administration remember their history.

Budget Director Peter Orszag recently told National Public Radio that deficit reduction had to be accomplished, but "done in a way that avoids the risks of 1937 -- where you pulled fiscal support away from the economy too quickly and threw the economy back into a recession." But Emanuel's comments suggest there are divisions in the White House.

The pressure to move faster will intensify after the health care debate is done and the midterm elections approach. The president will need to be cautious about not repeating Roosevelt's mistake.

The opinions expressed in this commentary are solely those of Julian Zelizer.