Will cutting government spending cause the recession to stay?

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Forums > All Posts > Will cutting government spending cause the recession to stay?

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2011-01-23 11:17 AM

LLBarry
Beverly, MA
Posts: 299

"The recent mid-term elections were a citizen referendum for reductions in the size and scope of the federal government. But can federal spending and the budget deficit actually be reduced substantially without sending gross domestic product (GDP) into a tailspin and increasing unemployment to extraordinary levels?...

The period 1945-1950...[where] Despite repeated warnings by most mainstream economists that cutting government spending at the conclusion of WW 2 would bring back the Great Depression, the Congress dramatically lowered government spending between 1945 and 1950. ...Despite the massive economic transitions from wartime to domestic production, GDP actually increased ...rom $223 billion in 1945 to $244.2 billion in 1947 and then to $293.8 billion by 1950. And despite millions of returning servicemen and women, the unemployment rate averaged a very low 4.5% between 1945 and 1950. Economic disaster? Hardly.

History, of course, never repeats itself exactly and 2010 is not 1945. But one thing is clear: Cutting back federal government spending and annual deficits in the immediate post-World War 2 period did not hamper the economy; far from it. Indeed, as government spending and wartime price controls receded, the private market economy expanded strongly and unemployment stayed reasonably low." See article.

While this happened in Kenya, our situation is not the same. However, I do feel that we are in too many wars and that these wars are pulling up down in our econoy advancement. What do you feel here?

2011-02-03 08:18 PM

Devin334
Alexandria, VA
Posts: 1

About the Department of Defense and the Budget.

We spend

2011-02-04 06:12 PM

Schmidt
Colorado Springs, CO
Posts: 1058

The post WW II period is a favorite of those that want to knock Keynesian economic theory. Just citing that five year period, 1945-1950, without taking into account the bigger economic picture and other factors influencing the GDP and government spending is intellectual dishonesty.

As many economists will point out, in the immediate period prior to 1945, government expenditures for Word War II were huge amounting to 43.6 percent of the GDP in 1944. The war time economy included rationing and price controls. Rationed and scarce items included tires, automobiles, shoes, nylon, sugar, gasoline, fuel oil, coffee, meats and processed foods. There was a pent up consumer demand for these and other consumer goods that was released in the period immediately following the war. Many of the factories that manufactured goods to supply the war effort were converted back to peacetime consumerism. The women that worked these factories went back to becoming home makers while the returning soldiers took their place in the factories.

In addition, the G.I. Bill provided college or vocational education and different types of loans for returning veterans to buy homes and start businesses. By the time the original G.I. Bill ended in July 1956, 7.8 million World War II veterans had participated in an education or training program and 2.4 million veterans had home loans backed by the Veterans' Administration (VA).

All of these factors kept unemployment low, but it was also the start of the baby boomer generation and the demand for new homes stimulated a building boom...and along with it all the consumer products that go into a new home.

The U.S. underwent a kind of golden age of economic growth from 1945 and continuing to 1973. This growth was distributed fairly evenly across the economic classes, which some attribute to the strength of labor unions in this period—labor union membership peaked historically in the U.S. during the 1950s, in the midst of this massive economic growth.

The progressive income tax contributed to this shared prosperity. The top marginal income tax rate during this five year period, 1945 - 1950 was 91 percent on income over 200,000...91 percent. That kind of number would bring out the wrath of the conservatives in today's political climate. Yet yes we had prosperity with very high marginal tax rates...it wasn't a job killer. And unlike today, the middle class of America shared in this prosperity...the gap between the rich and poor was small in comparison to today.

There are other factors affecting this growth, but I think I've hit the big ones. But be careful of the conclusions you draw from cherry picking a period of time. Kaboom and I discussed this very topic a while ago in other postings.

2011-02-05 10:35 PM

Schmidt
Colorado Springs, CO
Posts: 1058

Another point that we tend to forget or gloss over. The US economy after World War II was largely driven by DOMESTIC spending...private and government. That money was spent to buy US made goods and services. We didn't import as much...in fact we were major exporters with factories in Europe decimated by the war. Everyone spent money...the poor, the middle class and the rich...and much of it circulated within the USA...not in China or Japan or Saudi Arabia.

Kaboom, Chipper and I had a discussion last summer on the issue of how spending stimulates the economy. See our forum posts on Stimulus Story.

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