August 2, 2012
Does increased federal spending shorten recessions?
By Perry Willis

What causes recessions, and what can cure them?

People used to think that economic growth depends on increased production.

To have more you must make more!

But when producers fear risk, they make less. Recessions follow, and can only end when producers regain their confidence.

John Maynard Keynes
John Maynard Keynes (pronounced Kaynz) proposed something different in 1936. He said recessions are caused by reduced consumer spending, NOT reduced production.

Keynes argued that increased "government" spending could substitute for the "missing consumer."

The politicians loved this idea. It gave them an excuse for more spending!

But Herbert Hoover and Franklin Roosevelt beat Keynes to the punch. They started testing his idea during the Great Depression, before Keynes even proposed it. So what happened?

Herbert Hoover
Franklin Roosevelt

The Hoover-Roosevelt Experiment

Many people think the Great Depression was caused by President Hoover's do-nothing free market policies. But in fact . . .

Hoover was the FIRST president in U.S. history to DO SOMETHING to fight a recession.

The economist Bryan Caplan lists 21 of Hoover's aggressive actions.

Even more surprising . . .

Hoover was the true creator of the "New Deal" approach for which FDR later claimed credit.

Rexford G. Tugwell
Rexford Guy Tugwell

Roosevelt aid Rexford Guy Tugwell actually confessed this years later . . .

"We didn't admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started." (Source: Paul Johnson, A History of the American People – New York: HarperCollins Publishers, 1997, p. 741)

Even FDR himself agreed that Hoover had intervened; he just pretended to disagree with the interventions. Roosevelt constantly condemned Hoover's meddling during the 1932 presidential campaign, saying . . .

"The doctrine of regulation and legislation by 'masterminds' ... has been too glaringly apparent at Washington during the [Republican administrations]."

Roosevelt also condemned Hoover's big spending, promising instead . . .

  • "immediate and drastic reductions of all public expenditures"
  • "abolishing useless commissions and offices, consolidating bureaus and eliminating extravagances"
  • "reductions in bureaucracy"
  • Implied tax cuts
  • And a "sound currency to be maintained at all hazards."

Our schools don't teach us that Roosevelt said these things. Instead, we're taught that . . .

  • FDR's heroic interventions saved the free market from itself.
  • FDR's success repudiated Hoover's supposed do-nothing policies.

But this is all myth. Here's what really happened . . .

  • The depression became Great under Hoover & FDR's mutual "guidance."
  • It lasted more than a decade.
  • Prosperity never returned under either Hoover or Roosevelt.
  • The economy only recovered after the new 1946-Congress reduced the Hoover-Roosevelt interventions and spending following WWII

Even FDR's own economic team knew that the Hoover-Roosevelt interventions had failed. Here's what FDR's Treasury Secretary, Henry Morgenthau, admitted to Congress in May, 1939:

"We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong ... somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises ... I say after eight years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!"

The Verdict

Henry Morgenthau

The Great Depression was the first time politicians DID SOMETHING to shorten a recession.

Politicians spent billions testing the idea that "government" spending can stimulate the economy.

Instead of making the recession shorter, it grew worse and longer. In fact, it became the deepest and longest downturn ever. That's why they call it the Great Depression.

So doesn't that suggest an answer for our question: Does increased "government" spending shorten recessions?

But there's also more recent evidence from the Great Recession that started in 2007 . . .

The New Evidence

Look at the following chart created by Professor Mark Perry . . .

  • Consumer spending has risen steadily since mid-2009.
  • It's now higher than it was before the recession started.
  • But economic growth remains sluggish, and unemployment remains above 9%.

If declining consumer spending causes recessions, then rising consumer spending should cure recessions.

But that hasn't happened.

Even worse, Federal spending has risen too. So . . .

If Keynes was right, then the economy should be booming, driven by increased spending from both consumers and the Feds!

So what are you inclined to think now?

Filed under Wealth & Poverty
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