Why less government spending would mean less economic trouble
Many economists say deficit spending is crucial to keeping the economy moving. But history tells a different story.
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This aspect of the government’s power-grab has been especially important because by continuing to pump funds into dodgy mortgages, the government is preventing the necessary restructuring of the housing-construction industry and the mortgage-credit sector, propping up unqualified and underwater borrowers and ill-managed and even insolvent lenders. These short-sighted actions create great potential for a second round of the housing crisis.Skip to next paragraph
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Since the early 20th century, periods of national emergency – real and imagined – have triggered sharp increases in government power, scope, and cost.
The first five episodes were World War I, the Great Depression, World War II, the upheavals associated with the civil-rights revolution and the Vietnam War, and the post-9/11 events associated with the war on terror and US engagements in Afghanistan and Iraq.
We are now in another such critical period, springing from the housing bust, financial debacle, and recession.
In their embrace of Keynesianism, many economists have concluded that even though the New Deal’s hodgepodge of policies never brought about full recovery, World War II did, as the economy expanded to produce munitions and enlarge the armed forces. Huge, deficit-financed government spending, they argue, finally wiped out the lingering mass unemployment.
The truth, however, is really quite simple. In 1940, after eight years of New Deal pump priming, the unemployment rate remained about 10 percent even if, unlike the Bureau of Labor Statistics, we count people enrolled in federal emergency work-relief programs as employed. The gigantic buildup of the armed forces, primarily by conscription, then pulled the equivalent of 22 percent of the prewar labor force into the military. Voilà, unemployment disappeared, as it was bound to do regardless of any wartime Keynesian fiscal policies.
Looking to the World War II model of how to deal with today’s economic crisis is nonsense. Whatever else the war might have accomplished, it did not produce conditions that we may properly describe as genuine prosperity.
Government spending – whether on our current armed forces and their more than 800 foreign bases or on “green” energy and other government-favored projects – does not produce prosperity. It only diverts resources, as it always has in the past, from the genuinely productive private economy and bulks up an already bloated government.
Robert Higgs is senior fellow in political economy at The Independent Institute, Oakland, Calif., editor of The Independent Review, and author or editor of more than a dozen books, including “Crisis and Leviathan: Critical Episodes in the Growth of American Government.”