Deficits vs. Stimulus

During the Great Depression (FDR’s, not Obama’s), the Keynesian approach to restore prosperity was to “prime the pump” by massive government spending for the “alphabet agencies” of the era such as the W.P.A., P.W.A, T.V.A., A.A.A., and several other bureaucratic creations.

These were supposed to provide “relief, recovery and reform.”

The objective historical fact is that these were disasters of monumental proportions.

By 1940, unemployment still approached 20 percent and the economy was barely limping along.

Fortunately for FDR, World War II intervened and putting the nation on a completely government controlled war effort put everyone to work one way or another.

Putting 14 million people in military uniform didn’t hurt either. Apologists for the Liberal Keynesian approach have always contended that the FDR administration didn’t spend enough, fast enough to restore prosperity.

The reality is that the deficit spending of the New Deal lengthened and intensified the suffering of the Depression and delayed economic recovery.

From 1948 to 2008, there were only 39 months where unemployment exceeded 8 percent. Since Obama was inaugurated, there have been 43 months of unemployment over 8 percent! Are we supposed to believe that more deficit spending will restore prosperity?

Yes, if it’s allowed to work to fruition.

If not, we could get 1937 all over again. That’s when Roosevelt was pressured into calling the economy “recovered” and turned too early to deficit reduction.

Spending was cut, tax rates were increased, and the Federal Reserve sold bonds (taking money out of the economy) to raise interest rates.

The economy double dipped, and it took World War II to pull us out.
We now have a slow, weak, sputtering recovery – one typical of those caused by financial crisis.

Through bailouts and stimulus spending we have halted the decline and provided enough support to make significant, though insufficient, gains.

We are not, however, out of the woods. We could “kill” our economy by well-intentioned but ill-timed cuts, and we could be rocked by shocks from the Eurozone, where the “austerity” approach is visibly failing, or from China where growth has also begun to slow.

We still need a further boost to demand, to employment, to consumer spending. and we can do it sensibly through expenditures on infrastructure like roads and bridges, on our over-stretched educational system, and on the kind of technological research that results in industry leadership.

Clearly this is the time to invest.