A few things jump out. First, our national debt:gdp ratio is way lower than it was after World War 2. If deficit spending to get us out of recessions is so bad, then why didn't we have a catastrophic recession after World War 2? Second, Carter had the lowest deficit in history yet he still had huge stagflation problems. Yes, the national debt is very important, but it is ok to go into periods of large deficit spending (as long as they are not too long).
Now, take a look at federal spending as a percent of gdp:
As you can see, Reagan actually increased federal spending when compared with Carter. Sure he cut taxes but at the cost of massively increasing the deficit. So again, many neo-hooverites arguments with regards to the Carter/Reagan policies and their economic effects do not hold. Secondly, even with all the massive spending that Bush did, he only increased spending as a percent of gdp by 2%. This is not that much. Obama's stimulus increases it another 0.5%. This is not that big of a deal when compared with the grand scheme of things. It's also only a temporary spending program to get us through the crisis. After that we can ramp spending down as seen during Clinton years and post-WW2. The sky is not falling. The good old USA will be fine. We will be over this in a year or two. Don't do anything crazy like sell your stocks lock in your losses and buy gold.
Comments (6)
"If deficit spending to get us out of recessions is so bad, then why didn't we have a catastrophic recession after World War 2?"
If it isn't so bad, why did the Great Depression last so long? Harding inherited a depression from 1920-21 that was as bad as the one Hoover got but did nothing. The result? Economic recovery in a year and the start of the Roaring 20's. As for after WWII, it would be because the private sector was allowed once more to be free and and the economy shifted back to producing things that consumers actually need and its labor force increased. And anyways, if you look at GDP, it actually dropped a lot after the war: http://wiki.dickinson.edu/images/3/3b/Gdp.jpg
"So again, many neo-Hooverites' arguments with regards to the Carter/Reagan policies and their economic effects do not hold."
Umm... what neo-Hooverites? If you mean the people who think these "bailouts" and "stimulus packages" are pointless, then you're mistaken. Those people aren't "neo-Hooverites." Hoover was a pretty big interventionist when it came to the economy. He said that "laissez-faire was a thing of the past... launched public works projects, raised taxes, extended emergency loans to failing firms, hobbled international trade, and lent mney to the states for relief programs." (Thomas E. Woods in Meltdown, page 99) FDR himself accused Hoover of being the biggest spending peacetime administration in history and berated him for trying to consolidate control in Washington as soon as possible.
"The good old USA will be fine. We will be over this in a year or two."
Yes it will because the market will do it on its own.
@evilgoalie30 - Because we expanded the money supply by 14% in response to the 1920 downturn. From 1920-1921, we did stupid austrian/ron paul/sound money policies and deflated the money supply by 15%.
http://inflationdata.com/inflation/images/charts/Annual_Inflation/inflation_and_recession_chart.htm
This is proof that standard monetarism works. Expand the money supply in response to deflationary recessions. When that doesn't work, do keynesianism. We have already expanded the money supply by lowering interest rates to zero. Now we need to do keynesianism.
A very intelligent post. Very refreshing to hear people out there that are inciteful and not given to loud beer belly pragmatism that I read most of the time on xanga. I think the president's approach is superb. After eight dismal years we finally have a president. I saw your coment on yankeedaddy's site. Keep up the excellent work.
Loenmere
@errolmartins - Thanks!
@ElDuderinoCA - Sorry it took me so long to respond. Been busy.
"Because we expanded the money supply by
14% in response to the 1920 downturn."
No, it was because Harding slashed taxes, drastically reduced government spending, decreased our debt, and began deregulating businesses. The increase in money supply, which would continue past the depression (Murray Rothbard calculated that the money supply increased 66% from 1924 to 1929) set in place the 1929 crash by keeping prices at what they were instead of allowing them to fall (big bubble).
"From 1920-1921, we did stupid Austrian/Ron Paul/sound money policies and deflated the money supply by
15%."
Which was necessary given how much the Federal Reserve inflated the money supply. "During and after World War I, the Federal Reserve had been inflating the money supply quite substantially, and when it finally began raising the discount rate (the rate at which it lends to banks) the economy slowed as it began its readjustment in line with Austrian business cycle theory."
"This
is proof that standard monetarism works. Expand the money supply in
response to deflationary recessions. When that doesn't work, do Keynesianism. We have already expanded the money supply by lowering
interest rates to zero. Now we need to do Keynesianism."
If that worked at all, why did Japan not recover until a decade and a half after its economy tanked in 1989? The Japanese did everything you've been recommending: increase the money supply, cut interest rates, greatly increase public works spending, other government spending increases, government lending to businesses, and bailouts (and sometimes nationalization) of some banks. All this did was put it into debt in excess of 200% of GDP.
Read this: http://article.nationalreview.com/?q=MWI2OWUyOWE2NmZjMmQ2ZTg5YzIzZjczY2I2Mzg2N2Q=
and Meltdown.