There is plenty of shouting across the national aisle, false certainties on both sides, with Tea Partiers and their fellow travelers insisting that government spending is destroying the country, and some progressives insisting that public spending on social services and entitlement programs can never be a bad thing. Once again, the nation is embroiled in a false dichotomy of extreme views, with the real business of line-drawing lost in the process.
The real economic debate, the one we’re not having, is the one over what, precisely, are the costs and benefits of particular kinds of spending under particular economic conditions. Under what conditions and in what forms does government stimulus spending help or hurt an ailing economy? Does the apparent political inevitability of directing spending toward lower rather than higher short-term multiplier effects (funding too many languishing programs and too few shovel-ready projects) undermine it’s utility as a stimulus strategy? And, a historical favorite, did government stimulus spending end or prolong The Great Depression?
I’ll offer some thoughts on the last question: As this timeline (http://www.huppi.com/kangaroo/Timeline.htm) demonstrates, economic growth was very robust from 1934-1937: In 1933, when FDR took office, the freefall in GDP was brought to an almost complete halt, dipping only 2.1% (after falling 31% over the previous 3 years). In 1934, GNP rose 7.7%, and unemployment dropped about 3%. In 1935, GNP rose another 8.1%, and unemployment went down another 1.6%. In 1936, GNP rose another 14.1% (a record growth rate), and unemployment dropped another 3.2%. In 1937, GNP rose another 5%, and unemployment fell another 2.6%.
According to one argument, the one that 2008 Nobel Prize Winning Economist Paul Krugman subscribes to, Roosevelt, seduced by these years of phenomenal success in his program of economic recovery, was persuaded to reduce spending and focus on balancing the budget in 1937, driving the nation back into recession. According to the counterargument, it was the spending itself which resulted in the 1937 economic downturn.
But the one piece of evidence that seems to be most consistently disregarded is the one upon which virtually everyone agrees: WWII definitively ended The Great Depression. And just what was it about WWII that accomplished this feat? The fact that it was the most massive public spending project in world history, with enormous deficit spending in the production of heavy industrial equipment that kept getting conveniently blown up and needing to be replaced, a stimulus package far larger than any that could otherwise have been politically accomplished. And one whose success, along with the foundation laid by New Deal policies, set the nation on a path of decades of enormous economic growth.
Those who argue that it wasn’t New Deal spending, but rather WWII, that ended The Great Depression are not demonstrating with their evidence that government stimulus spending is inefficacious, but just the opposite, and that it needs to be truly massive to be truly effective.
Okay, folks! Have at it. I’ve invited professional economists to join this discussion; I hope I have some takers.