I've heard many people say that the new deal did NOT pull us out of the great depression of the 30's; rather, it was world war II that finally did. They contend that the taxes necessary for all that government spending was a millstone around the neck of the real economy, dragging it down, and actually prolonging what would otherwise have been a quicker recovery.
All that seems reasonable to me, but if the new deal was burdensome government spending, then surely WW II was government spending raised to the nth power. Wouldn't this just be more of a bad thing?SteveNashville Tennessee[email protected]
You're right. It is called the broken window fallacy.
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What took us out of the depression was the massive cut in wartime government regulation in 1946 by the Old Right Republican Congress. That was one of the biggest booms in our history. Britain didn't do this and their economy did not fully recover from the depression until the 80s under Thatcher.
Surely if governments spending, in the form of war or social spending, the federal debt doubled under GWB, did the size of your wallet in real wealth double between '01 and '09?
and the delayed consumption caused by wartime rationing
I would like to play devil's advocate and ask this:
If the New Deal did not help with the depression, how do you account for the rise in GDP after the New Deal was implemented, and the subsequent recession in the late 30's when the gov't spending was temporarily halted.
This is detailed here:
http://www.ourfuture.org/blog-entry/2009020603/fdr-failed-myth
mugzybrown:If the New Deal did not help with the depression, how do you account for the rise in GDP after the New Deal was implemented,
Two reasons. First the GDP counts government spending as production, when it is really consumption. To get a better picture of the economy subtract government spending from the GDP twice to get the GPP (gross private product). Second, since GDP is calculated by summing up prices and quantities, it's a worthless exercise while the government is engaged in widespread price fixing. Remember the Soviet Union had beautiful economic statistics right up untill they collapsed.
Mugzybrown
Firstly, if GDP figures are going to be used to measure the "health" of the economy, and government spending is part of the GDP figure, then duh! Of course massive increases in government spending are going to give the impression of a recovery. Come on, if GDP is going to be used to measure economy health and government expenditure is supposed to be a solution, then surely we should exclude it from the GDP figures?
So, if one ignores government spending, when did GDP recover? During the New Deal? No. During WWII? No. After WWII? Yes!
Note that after WWII, there was a massive collapse in government spending, it more than halved. Contrast this with 1937 when Roosevelt merely reduced the rate of increase of government spending (which was followed by another recession). After WWII, the GDP figure (including government spending) only dropped slightly and then it quickly soared, this time led by the private sector, not government spending programmes.
The interesting thing about this is, despite a severe collapse of aggregate demand (when government spending was cut after WWII), there was no recession, unlike in '29 and '37. How do Keynesian's explain this (since they beleive collapses in aggregate demand cause recessions)?
In '29, at the cusp of the boom bust cycle, we have widespread malinvestments. In '37, the new deal and various other bad policies have done little more than sustain these malinvestments. During WWII however, these were all allowed to go down the pan. All available capital went towards the war effort. But after the war, when the government massively retracted it's spending, this freed up capital for the private sector. It was then that real recovery could finally take place.
Interesting stuff thanks.
Doing some very basic research, it looks the GDP still increased moderately, subtracting for gov't spending x 2 throughout the 30s, with a slight dip in 1938.
However, using this method, the GDP skyrocketed after 1945
Also,
It's false to make a claim that because the 2nd half of the 1930's had some sort of recovery and considering the FDR's spending & intervention went into overdrive during this time that means that FDR's actions were the reason for the recovery. If you do one action and there are many actions simultaneously going on and there is one outcome you cannot claim it is your action that caused the outcome. The market does have some resilience against government intervention. Considering the bottom was in 1933 because banks and other businesses finally went bust, some level of correction had already occurred. Theory would say that if FDR were to close down the government and let the market run itself freely then the recovery following 1933 would have occurred much faster. His policies only retarded the recovery of the free market which was succeeding to recover on its own.